1 Don’t tell anyone, but the stimulus worked (The New York
Times) The reputation of the stimulus is meticulously restored from shabby to
skillful in Michael Grunwald’s important new book, “The New New Deal.” His
findings will come as a jolt to those who think the law “failed,” the typical
Republican assessment, or was too small and sloppy to have any effect. On the
most basic level, the American Recovery and Reinvestment Act is responsible for
saving and creating 2.5 million jobs.
The majority of economists agree that it helped the economy
grow by as much as 3.8%, and kept the unemployment rate from reaching 12%. The
stimulus is the reason, in fact, that most Americans are better off than they
were four years ago, when the economy was in serious danger of shutting down.
But the stimulus did far more than stimulate: it protected
the most vulnerable from the recession’s heavy winds. Of the act’s $840 billion
final cost, $1.5 billion went to rent subsidies and emergency housing that kept
1.2 million people under roofs. (That’s why the recession didn’t produce
rampant homelessness.) It increased spending on food stamps, unemployment
benefits and Medicaid, keeping at least seven million Americans from falling
below the poverty line.
Mr. Grunwald argues that the recovery act was not timid, but
the administration’s effort to sell it to the voters was muddled and
ineffective. Not only did White House economists famously overestimate its
impact on the jobless rate, handing Mr. Romney a favorite talking point, but
the administration seemed to feel the benefits would simply be obvious.
2 What if the US falls off the fiscal cliff (The Guardian) In
2011, Congress passed the Budget Control Act. It was the seed of what we now
call the fiscal cliff. Here's what to expect: shortly after 1 January, unless
Congress intervenes beforehand, we'll see two things happen: $100bn of
automatic spending cuts, along with the demise of a batch of tax cuts that have
been a crutch for the weak economy – the Bush-era tax cuts that have kept taxes
low for eight years; and Obama's 2% payroll-tax holiday.
Each of these separately – tax hikes or spending cuts –
would not be enough to dent the US economy by much. But together, the spending
cuts and the tax hikes are enormous. The Committee for a Responsible Federal
Budget and the Congressional Budget Office both expect that a recession would
immediately follow if Congress does not address the fiscal cliff.
The spending cuts, for instance, will add up to $100bn
pulled out of the economy by the government, in everything from the defense
budget to Medicare. The idea is to reduce the federal deficit by $1tn over 10
years. The tax hikes will return tax rates to what they were before 2003, which
means the top tax rate for households could be over 39%, according to press
reports.
There is another aspect to the fiscal cliff that neither the
CBO nor Congress can solve for, and it is the biggest: the effect on the
financial markets. Four years after the financial meltdown of 2008, the markets
are at new highs, both in stocks and bonds. The benefit of a strong stock
market has been elusive to regular Americans – who need jobs rather than
boisterous stock portfolios – but it has been a boon for banks and companies,
which have found it easy to finance their operations.
Most insiders expect Congress to reach an agreement on
avoiding the fiscal cliff … at the last moment. That's the way lawmakers have addressed
everything from the passing of the Tarp bank bailouts to the debate over
raising the debt ceiling last year. But there is a cost to this last-minute
thinking, and it is not Congress, but workers and companies, that have to pay
the price.
3 Greek economy may shrink 25% in 2014(The Guardian) The
ailing Greek economy is on the verge of a 1930s-style Great Depression, as the
Athens government predicted a 25% fall in GDP by 2014, putting intense pressure
on the EU to relax the terms on the country's €130bn bailout package. Finance
minister, Yannis Stournaras, said a decline in tax revenues and spiralling
unemployment will deepen the country's four-year recession, which critics of
the EU's stance said could lead to a recession as long and deep as America's
pre-war decline.
"The cumulative reduction (of gross domestic product)
since 2008 is just under 20% and is expected to reach 25% by 2014," he
told a Greek–Chinese business forum in Athens. "The time frame for the
adjustment, the conditions of the real economy should be taken into
consideration," he said. "Otherwise there is a great risk of
prolonging the negative consequences for the economy and society."
The finance minister made the plea after revealing that
while Greece would meet its nominal 2012 deficit reduction targets, its primary
deficit would reach 1.5% of GDP compared to the projected 1% following a sharp
decline in the economy's output.
4 The ‘isms’ of yesterday (Suresh Kumar in Khaleej Times) For
a while, the Reserve Bank of India (RBI) ploughed a lonely furrow. Arguably,
they revel in using blunt monetary instruments like hiking interest rates and
restricting credit to certain sectors. Sadly, these are like broad-spectrum
antibiotics i.e. they kill the good and the bad. The real inflation-propellers in India are
the fiscal and trade deficits. The former is caused by profligate
non-productive expenditure of the government and the latter is fuelled by
galloping gold imports, among other things.
Ultimately, the jury is out across geographies as to whether
such quick-fixes do indeed help. Much of the malaise that we see, stem from
structural and chronic factors that are fiscal / budget deficits made worse by
bloated bureaucracies in all these big countries. The Dubai-Singapore city
state models, on the other hand, represent a refreshingly workable approach. Such city states tend to operate efficiently,
as Singapore Inc. or Dubai Inc., thanks to the absence of political
interference, multiple layers of bureaucracy and hands-on decision-making at
the helm of affairs.
Ultimately, growth,
development and economic progress are agnostic to the obsessions of the 19th
and 20th century i.e. the various ‘isms’ – socialism, communism, statism,
pluralism etc. These dogmas have dogged entire generations with sub-optimal
solutions to what are simpler issues of efficiency and effectiveness in public
services, manufacturing and trade, across the entire economic spectrum.
The ‘isms’ of
yesterday ought to be replaced by robust economic models such as Public-Private
Partnership (PPP) in vital sectors and competitive enterprises of various
corporate forms. These are more equitable and superior to unbridled
capitalistic and public-markets-driven economies. Rather than relying on the
gyrations of the stock and bond markets to initiate economic stimuli,
actionable PPPs deliver results — pro and anti-cyclically. But that’s another story!
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