US economy

9Jun/11Off

Wind direction unchanged by US trade victory over China | Jonathan Watts

Beijing ends subsidies for domestic turbine makers but Washington must be more proactive on renewables if it really wants to protect American jobs

The United States claimed victory this week in a trade dispute with China over wind industry subsidies, but its manufacturers' and unions' celebrations will be short-lived unless Washington matches Beijing's commitment to renewable energy.

The Chinese government has been providing incentives – allegedly ranging from $6.7 million and $22.5 million - to domestic manufacturers that agree to purchase China-made components rather than imports.

US unions have long argued this is an unfair advantage that costs America jobs. They claimed success on Tuesday when the US trade representative Ron Kirk said China has agreed to halt the subsidies.

At first sight, this is a triumph for free market principles and a levelling of the playing field – no bad things for the development of a healthy global renewable industry.

But viewed more broadly, it reflects how China has pushed the US onto the defensive by moving faster and investing more to help the fledgling wind industry compete not just against foreign firms, but – more importantly - against fossil fuels.

The results of strong state support have been spectacular. Turbines are rising up at the rate of more than one an hour in China – particularly along the old Silk Road through the northern provinces of Hebei, Gansu, Inner Mongolia and Xinjiang.

In the past year, China has overtaken the US and Germany to lead the world in installed wind power generating capacity. Though a third of its turbines are not yet connected to the grid, the growth is projected to continue long into the future. By 2020, China plans to expand almost four-fold from the current 42 gigawatts. One influential report suggests it could go considerably further.

This is an extremely lucrative business, but foreign firms – such as General Electric, Vesper and Siemens - feel increasingly squeezed out. This is not their imagination. The Communist Party newspaper, People's Daily reported last week that domestic turbine makers have completely turned the tables on their overseas rivals:

Statistics show that 90 percent of the total installed wind power equipment in China was imported from foreign countries in 2004, while in 2010, Chinese-made equipment accounted for 90 percent of the total wind power equipment in China.

Subsidies undoubtedly contributed to the speed at which Chinese firms like Sinovel, Goldwind and Longyuan rushed into the ranks of the world's biggest wind manufacturers.

But more importantly, they also helped the embryonic wind industry to challenge the dominance of coal because domestic manufacturers were able to secure buyers for their more cheaply produced turbines. Along with feed-in tariffs and other forms of policy support, this helps to explain why the wind sector is now growing faster than the coal sector – exactly what the world needs to reduce carbon emissions.

Chinese officials have yet to comment on the ending of those subsidies, but they may feel they are no longer needed because the incubating job is done. If needed, Mandarins will undoubtedly find other ways to support an industry that the government has identified as vital to the nation's core interests.

In short, renewables, nuclear and hydropower simply have more political backing in China. In the United States, by contrast, the fossil fuel lobby is so dominant that President Barack Obama is still struggling to end state subsidies for oil and coal.

That difference of political and financial commitment is the real competitive advantage of Chinese wind companies. This week's US victory will not change that.

Wind powerChinaRenewable energyUS domestic policyObama administrationUS foreign policyEnergy industryClimate changeUS economyJonathan Wattsguardian.co.uk
8Jun/11Off

US Federal Reserve chairman sends stocks falling with fears over recovery

Ben Bernanke says US economic recovery is slow and uneven but appears to rule out third round of fiscal stimulus

Stock markets have dropped after a speech by the US Federal Reserve chairman, Ben Bernanke, raised fears over the global economic recovery.

Shares fell broadly in London, echoing a late sell-off on Wall Street, after Bernanke appeared to rule out further quantitative easing.

Speaking to bankers in Atlanta on Tuesday night, Bernanke said the US economic recovery was "frustratingly slow" and "uneven" but stopped short of indicating that the Federal Reserve would pump more cash into the economy.

There had been speculation before the speech that the Fed chair might hint at a third round of fiscal stimulus measures, dubbed QE3, following recent weak economic data.

US markets finished down on the news, with the Dow Jones falling 19 points by the close. The MSCI index of Asia-Pacific stocks fell 0.7% overnight, to add to the sell-off. The FTSE 100 fell to as low as 5791 at one stage, a 73 point fall. It was down just under 1% at 13:40.

According to Chris Weston of IG Index, Bernanke's comments have left traders "scratching around" for guidance on whether the world economy is faltering.

Gary Jenkins of Evolution Securities said Bernanke's speech had "something for everyone with the exception of those who might favour QE3".

"He has to be careful what he says about further quantitative easing or it could become a self-fulfilling prophecy. He did say that this quarter's economic activity has been hampered by supply chain disruptions associated with the Japanese earthquake and tsunami, the effects of which are likely to dissipate over the coming months. Other Fed members were also speaking yesterday with much the same message coming through: monetary policy is likely to remain accommodative for some time yet, but further QE is looking unlikely at this stage," Jenkins said.

A "frustratingly slow" recovery

In the speech, Bernanke said the US recovery was clearly being held back by the troubled jobs and housing markets but there were indications that petrol prices would fall and the impact of Japan's nuclear disaster on manufacturing was on the wane.

"Overall the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers," Bernanke said.

A spate of weak economic data was capped by a report last week that showed the US added only 54,000 jobs in May, the fewest since September last year. The unemployment rate in May rose to 9.1%, from 9% in April. The parlous nature of the US jobs market was underlined once more on Tuesday as the labour department reported that businesses had fewer job openings in April with employers posting 3m ads for jobs in April, down from 3.1m in March.

Gavan Nolan, director of credit research at Markit, argued that there were two schools of thought on the economy at present.

"The first believes that recent data weakness indicates that demand is dwindling and the economy is in need of further stimulus. The second is convinced that we are in a transitory phase that will abate once the effects of the Japanese earthquake and higher commodity prices are less acute," Nolan said.

US economyBen BernankeStock marketsEconomicsUnited StatesAlex HawkesDominic Rusheguardian.co.uk
8Jun/11Off

Ben Bernanke criticises ‘self-defeating’ cuts

Federal Reserve chairman tells group of ibankers solution to dilemma is to recognise long-term nature of fiscal problems

Federal Reserve chairman Ben Bernanke has weighed in on the fierce budget battle now gripping Washington, warning deep cuts could be "self-defeating" to the "still-fragile recovery".

Speaking to a group of international bankers in Atlanta, Bernanke said the recovery in the US economy is "uneven" and "frustratingly slow" but should pick up in the second half of 2011.

Bernanke said US interest rates would remain low for some time to come but the government's $600bn (£365bn) "quantitative easing" (QE2) stimulus plan would run out this month as planned.

Aggressive budget cuts "could be self-defeating if it were to undercut the still-fragile recovery," he said.

"The solution to this dilemma, I believe, lies in recognising that our nation's fiscal problems are inherently long-term in nature. Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation," said Bernanke.

The recovery was clearly being held back by the troubled jobs and housing markets but there were indications that petrol prices would fall and the impact of Japan's nuclear disaster on manufacturing was on the wane, he said.

"Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers."

A spate of weak economic data was capped by a report last week that showed the US added only 54,000 jobs in May, the fewest since September last year. The unemployment rate in May rose to 9.1%, from 9% in April. The parlous nature of the US jobs market was underlined once more on Tuesday as the labour department reported that businesses had fewer job openings in April with employers posting 3m ads for jobs in April, down from 3.1m in March.

"US economic growth so far this year looks to have been somewhat slower than expected," Bernanke said. "A number of indicators also suggest some loss in momentum in labour markets in recent weeks," he added.

"The housing sector typically plays an important role in economic recoveries; the depressed state of housing in the United States is a big reason that the current recovery is less vigorous than we would like," he said.

US economyUnited StatesBen BernankeEconomicsDominic Rusheguardian.co.uk
7Jun/11Off

Bernard Madoff’s payroll manager pleads guilty to part in Ponzi fraud

Eric Lipkin admitted that he had doctored documents to show non-existent account holdings, added fake employees to the Madoff payroll and lied to get a construction loan

Bernard Madoff's payroll manager, Eric Lipkin, has pleaded guilty in a New York court after being charged with involvement in the Wall Street trader's multi-billion dollar fraud.

Lipkin, 37, admitted on Monday night that he "worked to deceive auditors". He pleaded guilty to six criminal counts, including falsifying documents and bank fraud, in a hearing in Manhattan federal court. The plea was part of an agreement to co-operate with the US government in its investigation of the biggest Ponzi scheme in US history.

Madoff, 73, was arrested in December 2008 and is serving a 150-year sentence in a North Carolina prison.

Lipkin admitted that he had doctored documents to show nonexistent account holdings, added fake employees to the Madoff payroll and lied to get a construction loan. US district judge Laura Taylor Swain told Lipkin he could face up to 70 years in prison.

Lipkin, the ninth person to be charged with involvement in the fraud, was released on a $2.5m (£1.5m) bond pending his sentencing. He told the court that "I'd like to first apologise to my family, my friends and all the victims in the case."

A Ponzi scheme is a fraudulent investment scheme which pays out returns to early investors using money paid in by later investors.

Prosecutors have obtained guilty pleas from Madoff's former accountant, David Friehling, and a key Madoff associate, Frank DiPascali Jr, who faces as long as 125 years in prison. Five more former Madoff employees await trial before Swain, all of whom have pleaded not guilty.

Bernard MadoffUS economyUnited StatesJulia Kolleweguardian.co.uk
7Jun/11Off

Barack Obama suffers shock poll slump as Mitt Romney draws level

US president in dead heat with rival as ABC-Washington Post poll shows public unhappiness with state of economy

Barack Obama's hopes of re-election to the White House next year took a knock on Tuesday with the publication of a poll showing him in a surprise dead heat with one of his Republican rivals, Mitt Romney.

The bounce in the polls that Obama received after the death of Osama bin Laden in early May has disappeared. The new poll shows public unhappiness with the slow pace of recovery from recession.

Romney's jump to parity with the president is remarkable given that, until now, there has not been much enthusiasm even among Republicans for him.

Only last Thursday did he formally declare that he will be seeking the party's nomination to take on Obama.

During a press conference at the White House with German chancellor Angela Merkel, Obama played down the prospect of a double-dip recession but acknowledged concern about unemployment and petrol prices.

The latest unemployment figures show a jump to 9.1% and Obama said he did not know if this was a one-month aberration or reflected a long-term trend.

"I'm not concerned about a double-dip recession," he said. "I am concerned about the fact that the recovery we're on is not producing jobs as quickly as I want it to happen."

He admitted the economy remained "skittish" and that "recovery was going to be uneven".

Although Obama remains favourite to secure re-election, he could struggle if he goes into next year's election with unemployment still high.

The ABC-Washington Post poll showed Obama and Romney on 47% each among all Americans surveyed, and Romney on 49% and Obama on 46% among registered party members, who are among those most likely to vote.

Another poll published by Public Policy Polling shows Romney in the lead in the early key states of the Republican nomination battle. Romney was widely predicted to take New Hampshire and Nevada but struggle in social conservative Iowa and hardline rightwing South Carolina.

But the PPP poll shows him on 27% in South Carolina against Sarah Palin's 18%. Earlier PPP polls showed him with a 6% lead over rivals in Iowa, 15% in Nevada and 23% in New Hampshire.

Obama has dropped a long way from the heady days after his 2009 inauguration, when he enjoyed poll approval ratings of 70% to 80%. Over the last year, he has been struggling to get above 50%. The death of Bin Laden gave him a modest bounce, to around 55%.

He won in 2008 partly because of a backlash against George W Bush and partly because of his rhetorical skills, backed by a strong campaign organisation and high levels of fund-raising.

But some of the states he took last time were only by slim margins, and he could struggle to repeat victories in states in the west and midwest and in places such as Virginia. He is already building up his campaign team, setting up organisations in many more states than in 2008, and is hoping to double his campaign funding to $1bn.

The ABC-Post poll suggests Romney has solidified his position as Republican frontrunner.

When Obama was matched against other potential Republican rivals, the president enjoyed a lead. Obama was six points ahead of Newt Gingrich among registered voters, nine points head of Tim Pawlenty, 10 points ahead of Jon Huntsman, 11 points ahead of Michelle Bachmann and 15 points ahead of Palin.

As well as unemployment and petrol prices, Americans are expressing concern about the size of the federal deficit, the size of the country's debt held by China and continued falling house prices. Six out of 10 of those surveyed said they did not believe recovery had yet begun.

And 66% said they thought the country was going in the wrong direction economically.

Barack ObamaMitt RomneyUS elections 2012United StatesRepublicansUS politicsUS economyEconomicsEwen MacAskillguardian.co.uk
7Jun/11Off

US warns against light touch bank rules that ‘ended tragically’ for UK

US treasury secretary Timothy Geithner wants global regulations

The US urged other countries to avoid a "race to the bottom" with new financial regulations – and pointed to the experience of the UK to show the dangers of experimenting with "light-touch" rules.

Tim Geithner, US treasury secretary, said the UK's strategy before the banking crisis had ended "tragically".

Taxpayers ended up pouring £65bn into Royal Bank of Scotland and Lloyds Banking Group, as well as nationalising Northern Rock, and were last night sitting on £15bn of losses on their stakes in the bailed-out banks.

"The United Kingdom's experiment in a strategy of 'light-touch' regulation to attract business to London from New York and Frankfurt ended tragically," he said in a speech in the US.

"That should be a cautionary note for other countries deciding whether to try to take advantage of the rise in standards in the United States," Geithner added.

His remarks will be seen as aimed at fast-growing Asian economies rather than the UK, which is now overhauling its regulatory regime – although bankers argue that the new rules on bonuses adopted in the City are tougher than on the other side of the Atlantic in Wall Street.

"As we act to contain risk in the US, we want to minimise the chances that it simply moves to other markets around the world," Geithner said, as he warned of the risks of "regulatory arbitrage" if countries did not agree global rules.

His remarks were made as taxpayers continued to shoulder losses from the bank bailout in the UK. Shares in Lloyds are trading at their lowest level since February 2010, after being the biggest faller in the FTSE on Monday.

The plunge comes amid warnings from tax campaigners that it could take 18 years for the industry to repay all the pain inflicted on taxpayers for bailing out the sector.

Campaigners for the Robin Hood tax – a levy on financial transactions – have conducted an analysis of taxes paid by the financial sector in the five years up to 2007, when the crisis was beginning, to calculate how long it would take the industry to repay the £737bn of extra debt the UK took on to bail out the banks.

If the government was relying on taxation alone, it would take 18 years to repay the extra debt, which is based on figures from the International Monetary Fund, as the industry paid £203bn in taxes in the five years before the crisis.

However, the government could also hope to recoup cash by selling off stakes in the bailed-out banks. While Lloyds is pressing on with the sale of 600 branches to appease EU regulators – sales particulars are expected to be released this week – to begin to raise cash from selling stakes in Lloyds, or RBS, the share prices would need to rise from their current levels.

The average price at which taxpayers bought Lloyds shares was 73p – they currently trade at about 47p – presenting a loss of about £7bn on the 41% government stake. RBS is trading at 41p – some 9p below the average buy-in price for the taxpayer, which causes a £8bn loss on the 84% stake.

UBS, which acts as broker to Lloyds and other analysts such as Credit Suisse, reckons the market is being too harsh on the shares.

António Horta-Osório, the new Lloyds boss who since taking the helm on 1 March has ordered the bank to take a £3.2bn hit for payment protection insurance, will deliver his strategy for the bailed-out bank on 30 June. The UBS analysis urges him to provide a "bridge from the current perception of a company being run for regulators/debt investors to being primarily run for shareholders".

UBS wants Horta-Osório to provide a formal return on equity targets as Lloyds should be able to deliver a higher return for shareholders than rivals. The Portuguese-born Horta-Osório is due to appear before the Treasury select committee on Wednesday alongside the heads of the other high-street banks.

BankingTimothy GeithnerRegulatorsRoyal Bank of ScotlandLloyds Banking GroupTax and spendingFinancial crisisAntónio Horta-OsórioCredit SuisseUBSIMFNorthern RockUS economyJill Treanorguardian.co.uk
6Jun/11Off

Basel III: business as usual for bankers | Carne Ross

Successful lobbying – or blackmailing – by banks means that financial regulation to prevent another crash is too weak to work

It turns out that the global political-economic system is about capital, after all. Capital explains what kind of system we are in; capital explains who runs it.

The global economy came very close to total collapse in the so-called "credit crunch" of 2008-2009; tens of millions lost their jobs; many economies have yet to recover. The meltdown was caused by too much risky lending by banks. There is a simple method to prevent another crisis: make banks hold more capital against their loans. The more capital a bank is required to hold, the less likely it is to fold when confidence collapses.

Nearly two years after the crisis, a long, grinding discussion among the 27 countries of the body charged with proposing new banking regulation finally produced the so-called "Basel III" rules. These rules are complicated but, in general, require banks to hold more capital against their loans.

In theory, all major economies are supposed to phase in the new requirements over the next few years. When the rules were announced, and when the G20 discussed them, the Basel III rules were heralded – by governments and banks – as major step to prevent a recurrence of the credit crunch.

So far, so reassuring, but behind the self-congratulatory rhetoric, a more disturbing picture is evident. It turns out that almost all banks will easily meet these supposedly stringent requirements. Many impartial experts do not think Basel III is sufficient to prevent another credit crunch. Academics from Stanford University and the Max Planck Institute regard Basel III's equity requirements as "dangerously low". And the EU looks like it may fail to implement the Basel rules fully in any case, as its proposed legislation is reported to offer various loopholes for banks to exploit. In the US, banks are already sidestepping the much vaunted "Volcker rule" to limit trading on their own accounts.

Switzerland, which, you might think, knows a thing or two about banking, reveals the weakness of the measures agreed elsewhere. It has unilaterally imposed far higher capital requirements on its banks, worrying that the relatively large size of the banking sector in the Swiss economy renders it especially vulnerable to banking collapse. But hang on a minute – the credit crunch and ensuing global collapse showed that the economy of the entire world, not just Switzerland, is dangerously exposed to bank failure. If Switzerland judges high capital requirements necessary, why don't all governments?

The reason that other governments – the G20, including the US and the EU – have failed to impose sufficient curbs on banks' risk-taking behaviour (which, in fact, risks all of our livelihoods) is simple. Whenever there is a prospect of more stringent rules, banking advocates rise as one to claim hysterically that economic growth will be dramatically cut, costing millions of jobs, just as our economies are struggling out of recession. Or they threaten that their banks will leave London, the EU, the US, or wherever tighter regulation is proposed. Jamie Dimon of JP Morgan Chase, for instance, recently hit both arguments, saying Basel III regulation would stifle US growth, while federal legislation (the Dodd-Frank bill) would drive business out of the US. Similar threats have been made to British legislators.

Neither argument withstands scrutiny. The OECD found that the Basel III rules would have a negligible impact on growth; some estimates suggest they might increase growth. If all countries imposed the same regulations, banks would have to go to the moon to escape them, thus negating shameless threats like Dimon's to quit one country for another.

Of course, these are not the real reasons the banks do not like tighter rules. The real reason is that higher capital requirements reduce banks' profits: the more banks are able to lend, the more money they make.

But these arguments barely need to be aired in public. In the obscuring fog of technical jargon (how many people know what "Tier 1 capital" is?) and subterranean influence-peddling, the bankers have, by and large, got their way. My bet is that even the feeble Basel III rules will be watered down, country by country, through a hundred amendments and delays. The necessary regulation has not been imposed, and will not be. The banks win; we lose. In order to maintain bank profits, the systemic risk to the global economy remains.

So we can see from this that capital – or rather banks – do, indeed, run the world.

Basel IIIBankingRegulatorsG20Economic policyCredit crunchFinancial crisisUS economyGlobal economyGlobal recessionUS unemployment and employment dataUS economic growth and recessionEconomicsUnited StatesCarne Rossguardian.co.uk
6Jun/11Off

D-Day: remembering the backstory | Clancy Sigal

Before the 'greatest generation' ever landed on the Normandy beaches, they had long been casualties of the great depression

They carried all the emotional baggage of men who might die.

– from The Things They Carried, by Vietnam combat veteran Tim O'Brien

The D-Day landings shown in Saving Private Ryan are often cited as gripping realism, including the heavy, waterlogged packs that often dragged bleeding men to their watery doom even before they hit the beach. It's an amazing sequence as we follow Tom Hanks's Captain Miller from Omaha beach to his inland death. What is not, and probably cannot be shown in a movie, is the previous emotional baggage that so many men carried with them into combat. Most of the soldiers in the film, as in the real war, clearly were young men of working-class origin, humping not only entrenching tools and weapons but the psychic burden of the great depression in which they grew up.

Today, we glibly speak of the thirties or the depression as distant categories like the 17th-century thirty years war or the black death. Yet that bruising time, from 1929 to 19 41, is near enough to us for millions of Americans still to be alive as scarred veterans of what probably is the country's greatest trauma of the 20th century. The boys who later became the "greatest generation", of Tom Brokaw's phrase, that fought the second world war were the ones who somehow survived the manmade smashup.

I'm one of them, but was lucky enough to be just a few days too young for D-Day and the battle of the bulge, for which I was trained. My neighbourhood pal, "Aaron", was not so lucky to be sent to front line infantry. We'd grown up bonded as corner rat boys, as the local grandmothers called us. We were dismally average academically and athletically, neither of us "sensitive" or "artistic", except for Aaron's sole passion in playing the clarinet in the high school symphony. Tootling Mozart's clarinet concerto on his pawnshop-bought instrument, he fantasised the impossible, a career on the concert stage as a classical musician. In a way, it was what he lived for.

Back then, most of us boys lived in stuffy one rooms sometimes sharing a bed with one or two others, the alleys stank of garbage, and in the backroom, there was often a wife and mother or grandmother, the true depression victims, sitting in the dark in a kind of depressive shock. But we children, knowing no better, sloughed off much of our pain or deafened ourselves with denial.

On D-Day plus one Aaron had the playing fingers of his right hand shot off in a skirmish, and that was the end of that. He came back from the war seemingly unaffected by his wound, got a job with the government, married – but ended in a mental instititution. Private Ryan couldn't take time to tell us about people like Aaron or delve into the back story of the plebian characters like Horvath, Mellish and Caparzo in Miller's second ranger battalion. But most of them would have suffered a penetrating injury long before coming into the army. We couldn't talk about it because there wasn't then, and isn't even now, a vocabulary to cover PTSD from an economic collapse.

In America, the depression – no jobs, no money, foreclosures and evictions – lasted at least a dozen years, from the late "roaring" twenties until Pearl Harbour (when my mother finally found factory work sewing army uniforms); in Britain, it took even longer. Schools closed, kids were malnourished; you scrounged or you starved; pellagra was rife in rural areas and TB in the cities. Thousands of families – like the Joads in John Ford's adaptation of Steinbeck's Grapes of Wrath – and hundreds of thousands of young people, as in Wellman's Wild Boys of the Road and Scorcese's Boxcar Bertha, roamed the country in jalopies and boxcars looking for work, food, mercy.

The war came as a blessing to many such families including mine.

Suddenly, in the army, what Eleanor Roosevelt called her "lost generation" of depression kids had enough to eat, clothes that were replaced when torn, free of charge, a bed to sleep in, a job with a military occupation specialty number (mine was 745). The jeering phrase GIs used with one another, "Ya found a home in the army!", was more than half true. 

Even before generals like George Patton moulded his draftees into soldiers, the great depression drilled us in a different sort of courage, cowardice and stoicism. You shrug off what's happening around you, keep your mouth shut, move ahead one step at a time, don't ask questions or make waves, just do it, and keep repeating the proto-infantryman's mantra, "Better you than me".

For the men in the unit I later joined, the fourth division, scaling the heights of Normandy's Point du Hoc cliffs under intense fire was a nasty but logical extension of what they'd experienced as "economic casualties" back home. My boyhood friend, Jack, who spent 112 days in frontline combat with the 103rd in wartime Europe, said it best:

"They call us guys the 'greatest generation'. So much crap. Your mother and mine spent more time on a combat line than any soldier, only it was an undeclared war in our homes. You and me, too, we've been at war all our lives."

Now we're back in an undeclared depression (for which today's euphemisms are "slowdown", "recession" etc) that isn't getting better. A whole new generation of young men and women, especially from the deindustrialised, unemployed towns, enlist for war service because there's so little alternative. Who knows? If they don't get killed or suffer an IED-caused TBI (traumatic brain injury), they may – as I did – find a better life in the military. 

Only a cosmic nutcase would suggest that depressions are created to make human cannon fodder for war.

Second world warGlobal recessionUS economyUS militaryUnited StatesPost-traumatic stress disorderUS economic growth and recessionPovertyClancy Sigalguardian.co.uk
6Jun/11Off

We’ve found the flaw, but it hasn’t stopped us from falling

As David Sington's film The Flaw makes clear, a principal reason for the huge growth in personal debt in the US was the lack of growth in incomes

A reader who I hope will remain avid has asked: "What I want to know from you this weekend is this: how come that the slowdown in the British economy is attributed to the cuts, but the US economy is slowing down even without any cuts?"

Well, part of the answer is that although there has been much sound and fury about the cuts in this country – from propagators and opponents alike – they have not yet had much direct impact, other than the depressing effect on confidence that this coalition has managed to produce.

Thus such recovery as was apparent in the recent statistics for gross domestic product in the first quarter – up 0.5% after a fall of 0.5% in October-December 2010 – came from the growth of exports, net of imports, and the tail end of the Brown-Darling fiscal stimulus administered before the present government took over. The real cuts, at a time when we are told that the prospects for real incomes and consumer spending are the worst since William the Conqueror, are just beginning to take effect.

Meanwhile, in the US there is much congressional wrangling about how to attack the deficit, but little action at the federal level, although there is no shortage of nasty news from individual states. Indeed, trenchant critics such as Paul Krugman have consistently argued that the US stimulus has not been large enough.

As Krugman says, the problem in the US is the overhang of private debt, which is acting as a drag on employment. The way that stagnation of real incomes for most in the US provoked a sensational rise in personal debt is superbly portrayed in David Sington's new film The Flaw.

The film takes its title from former Federal Reserve chairman Alan Greenspan's admission to a congressional hearing that there was a flaw in his long-held belief in the perfection of markets. It was while watching this film, with its excellent use of charts – yes, charts – to illustrate the rise in inequality, that I hit upon the answer to something about Greenspan that had puzzled me for many years.

Greenspan, as is well known, is an Ayn Rand-style conservative. Yet during his time at the Fed his emphasis was on growth and employment. He was not an inflation hawk and, while aware of the expansion of a bubble, basically waited for it to burst. He would tell friends: "How can you deflate a bubble without bursting it?" But of course, as economists have pointed out and The Flaw illustrates vividly, the principal beneficiaries of that long period of growth were those at the top of what economists call "the income distribution".

That growth in inequality is increasingly recognised as having made a serious contribution to the financial crisis. Greedy bankers and their financial engineers came to the fore, but a principal reason for the huge growth in personal debt was the lack of growth in incomes, a phenomenon noticeable in the US a long time before it became apparent in this country.

Which brings us back to the ramifications of my reader's question. We have had fiscal and monetary easing on both sides of the Atlantic, and panic among the controllers of footloose international capital about the corresponding public sector deficits. Such panic is fostered by the credit ratings agencies, which, having gone along with the boom, are now happily reducing the ratings of country after country.

Now, the current slowdowns in the US, UK and eurozone are serious, and they are telling us something. The rot may have been stopped, but the condition of what we like to call the advanced economies is still seriously worrying. Precipitate cuts in the deficit can only make things worse. Moreover, the so-called "confidence" effect of such announcements appears to be negative rather than positive. Yet in the long run we know that we all have to live within our means. In the US, this point has been taken on board in a new study by Joseph E Gagnon and Marc Hinterschweiger of the Peterson Institute for International Economics. They argue that as economic recovery in the US is still fragile, serious action on the deficit should be postponed until 2013 to 2015.

In this country, an interesting new book by Christopher Taylor, A Macroeconomic Regime For The 21st Century, ought to be of use to our policymakers. Taylor, after a long career at the Bank of England, where he was a protege of that great economics director Christopher Dow, and where he hired the present Bank chief economist Spencer Dale, is now at the National Institute of Economic and Social Research.

Taylor brings a lifetime of wisdom and experience to his analysis of what went wrong with "the monetarist experiment" – the 1990s synthesis of various economic doctrines, an obsession with inflation targeting, and a neglect of asset prices.

One of his principal conclusions is that fiscal policy, having been relegated to the sidelines until the financial crisis, should in future be accorded a more prominent and long-term role, including the formation of a new fiscal policy committee and an economic policy council to bring more coordination to fiscal and monetary policy. As is becoming increasingly obvious, we cannot rely on monetary policy alone.

US economyUS economic growth and recessionEconomicsGlobal economyEconomic policyWilliam Keeganguardian.co.uk
6Jun/11Off

Does the US deserve its AAA credit rating?

The ratings agency is concerned by the lack of progress made by the US Treasury and Congress over whether to allow the US national debt to increase