Daily Archives: April 25, 2012

Technically speaking, the UK economy returned to recession in the first quarter of 2012, according to data released Wednesday morning by the Office for National Statistics. It shrank by 0.2 per cent, following a fall of 0.3 per cent in the previous quarter, thereby qualifying as a recession under the two-quarter rule of thumb used by many economists.  Over the year-to-date as a whole, the economy was flat.

These figures are worse political than economic news.  The Labour opposition will seize upon them as showing that the government’s austerity programme is too strict and is killing off growth. They will renew their calls for a fiscal loosening through a cut in VAT and a slowing of welfare reform.  The governing coalition may also suffer new strains as the Liberal Democrats seek to position themselves as more caring and in touch with ordinary voters than their Conservative colleagues.  While Britain is unlikely to face the political ruptures that have been provoked by austerity budgets in Spain, France and most recently the Netherlands, a weakening of coalition support and cohesion is likely over the next few months.

On the economic front, the gross domestic figures are hardly a shock although they do show a disappointing 0.1 per cent growth across the large service sector and an equally small decline in manufacturing. There are statistical reasons to be sanguine about such small deviations above or below zero when the largest negative contribution to the figures comes from the volatile construction sector.  There will be further disturbances in the coming quarters’ GDP figures because of distortions introduced by the Jubilee celebrations and the Olympics.  Politically sheltered policy makers at the Bank of England are unlikely to be swayed by such ups and downs unless a more sustained trend develops.

During a period of substantial deleveraging by both banks and households, growth is bound to be weak and quarterly figures choppy.  The bigger picture is that deficit reduction is on track (partly due to higher than expected tax receipts), unemployment has started to fall and the latest retail sales figures suggest consumers are spending again.  Provided the recessionary rhetoric at home and the dark clouds over the Eurozone do not choke off the confidence that is beginning to return to Britain’s high streets and board rooms, this should be one of the shortest recessions on record.

Even as Mitt Romney was effectively crowned as the Republican party’s nominee to challenge Barack Obama in the 2012 presidential elections, we received a grim reminder of the deteriorating condition of America’s two bedrock social welfare programmes. It arrived on Monday in the form of non-partisan reports from the trustees of Social Security and Medicare - and what worrisome news it was.

The Social Security programme that supports old age and disability payments is now forecast to exhaust its resources by 2033, three years sooner than estimated just a year ago. Without any action, the trustees calculated that beneficiaries would then experience an immediate 25 per cent reduction in their pensions.

As for the Medicare health insurance plan for the elderly, while its outlook didn’t deteriorate last year, it remains in an even more dismal state than Social Security. Over the next 75 years, using realistic assumptions, Medicare costs are projected to increase from less than 4 per cent gross domestic product to more than 10 per cent of GDP.

Still more depressing than these grisly statistics is the utter lack of progress in addressing so obvious and so cataclysmic a problem. Every day that goes by either brings America’s elderly closer to a huge cut in their benefits or threatens every younger generation with an equally huge bill to pay.

With a presidential election looming in less than seven months time, the two ends of the political spectrum are more polarised than ever over how to address the problem.

Liberals, such as the New York Times columnist Paul Krugman, pooh-pooh all the Chicken Little talk and blithely assume that Medicare will be funded out of general tax revenue. That, of course, would do nothing to solve America’s broader fiscal problems or to halt the country’s march toward claiming an ever larger share of America’s economic resources.

Conservatives, led by Paul Ryan, the chair of the House Budget Committee, want to save Medicare by eviscerating it. Under his original scenario, seniors would be given a voucher with a fixed value; any costs for insurance above that would be their responsibility.

That would raise the share of health care costs borne by seniors from about 25 per cent at present to about 68 per cent. With public opinion polls showing that large majorities even of Tea Party members don’t want Medicare to be cut, I am confident that the American public would angrily reject this proposal if they understood it.

Ironically, for the all the intense emotion, fixing Social Security – the smaller and better funded of the two programmes – should not be too challenging. The Bowles-Simpson deficit reduction commission laid out one of several workable alternatives: to reduce cost-of-living increases, gradually increase the retirement age, extend the payroll tax to higher income levels and reduce benefits to wealthier Americans.

Medicare is tougher, not only financially but morally. With the normal market mechanism of price mostly neutered, little prevents patients from demanding ever increasing amounts of care and doctors from providing it.

In the face of intense public opposition to any form of rationing (recall the reaction to Sarah Palin’s ludicrous accusation that Obamacare provided for “death panels”), policy makers are correctly focused on pulling some of the same tax and benefit levers that the Bowles-Simpson commission recommended for Social Security. That won’t be enough. Equal attention must be paid to the flotilla of ideas emerging from academia and think tanks to address the rapid escalation of health care costs and excessive usage.

In addressing the needs of both programmes, let’s not forget a key principle: just like any pension programme or insurance plan, each cohort of beneficiaries should save as much as possible (via taxation) for its own retirement and medical needs.

Otherwise, America will simply be saddling its children and grandchildren with the responsibility for caring for the rest of us in our old age.

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