Obama treads a difficult path with Chinese tyre tariffs
One aspect of the global trade recession in 2008-09 has been the resurgence of protectionist tendencies as countries have lined up to introduce fresh barriers to trade in goods and services. The pressures for import protectionism in the form of tariffs, quotas and other barriers is largely driven by politics and there is a new example to dissect with the news that the US government is to raise the import tariff on low-grade Chinese tyres following a petition filed by the United Steelworkers trade union, which represents workers at many US tyre factories. Chinese exporters will be subject to 35% import tariffs (taking effect on September 26th) which will decline to 30% in the second year and 25% in the third.
read more...»More ‘Aftershock’ resources
The ‘Aftershock’ section of the BBC website continues to come up with good stuff about causes and effects of the credit crisis and recession.
If you missed the first part of their 3-part documentary series ‘The Love of Money’ you can still watch it on BBC i-player, and it is well worth doing so as it examines the collapse of Lehman Brothers and the consequences for the world’s economy.
Now they have two interactive features examining the way in which national debt has built up during the bail-outs covered by the programme, one focussing on the UK economy, looking at how a total of £1.5trn, or 94% of GDP, has been spent. One of the slides here estimates that in 2014 taxes will have to cover £60bn in interest payments on that debt alone, equivalent to the entire budget for education for the year, or over 50% of the spending on the NHS.
The second looks at the breakdown of bail-out debt around the world, adding up to £10.8trn, and includes an analysis of shrinkage in the global economy and the wealth effect on homeowners and pensioners.
Both could be useful not only in reminding A2 students of the events of the last year and their potential impact on the economy but also introducing AS students to the macroeconomic aspects of The Economic Problem, as resources are going to be very scarce indeed in the next few years, and choices about which needs and wants should be satisfied will be key economic and political debates.
China’s concern over US monetary expansion
As the US effectively prints more money, Chinese officials are expressing concern over the impact that this will have on their economy
read more...»Recession prompts a return to protectionism
Here is an important article by Phil Thornton from Clarity Economics which flags up attempts by a group of trade economists to monitor the growing scale of explicit and hidden forms of protectionism in global trade. International trade in goods and services is forecast to contract by nearly ten per cent in 2009 and across the world, countries are either considering or have already introduced a raft of distortionary import controls. Protectionism is spreading from the purely economic (i.e. changes in import duties, subsidies and quotas) to the financial (linking financial bail outs to national economic objectives) and also affecting the labour market (e.g. changes to immigration policies / points systems) - the rise of ‘new protectionism’ threatens to cause further de-globalisation and increase the risks of beggar-thy-neighbour retaliation that could stall a trade-based recovery.
“Global Trade Alert (GTA), which was launched in June, had identified 67 discriminatory measures by July 8, of which 47 had been implemented with 20 waiting in the wings. Discriminatory measures include rises in tariffs that importers must pay or bans on products. Examples include a ban by Saudi Arabia on imports of cars older than five years and a 39 per cent increase in tariffs on Russian oil exports to Belarus.”
Emerging Leaner, Stronger, Fitter from the Recession
Hamish McRae considers how businesses are responding to the challenges of recession in his Economics Life piece in the Independent this morning. Drawing on a new report from management consultants Arthur D Little he considers some of the strategies that businesses are adopting given the special nature of this downturn. Improving hygiene, fitness and building muscle ahead of the recovery figure prominently and there is a fascinating graphic illustrating some of the priorities of firms at this unusual time.
“Businesses that do survive the present harsh climate will emerge in much better shape. All downturns speed up the process of structural change in the sense that things that were going to happen anyway happen much faster that they would have done. But the speed of this one has been so extreme that the world is cramming a decade of such change into a year or 18 months. As a result a lot of firms that still appear weak right now may emerge in rather good shape when demand returns.”
Improving hygiene: Actions to cope short-term with the implosion of confidence and collapse of demand e.g. rationalising operations and cutting overhead
costs, turning fixed costs into variable costs: 80-90 per cent of business respondents are giving these actions very high or high priority.
Fitness: Keeping talent on board is a very high or high priority for 82 per cent of respondents. Maintaining R&D and innovation expenditures is a very high or high priority for 67 per cent of respondents.
Muscle Building: preparing for the world to come beyond the downturn, for example building stronger relationships with regulators or a high priority to preparing for the low-carbon economy
Arthur D Little Prism magazine
Housing the global economic crisis
Lecture slides from the recent Housing Markets and the Global Financial Crisis presentation at the LSE are available here
Borrow now inflation later - Art Laffer
Steve Evans interviews supply-side Economist Art Laffer - notorious for the Laffer Curve - who typically flags up some of the perceived dangers of government borrowing during a recession. This link takes you to the audio of the interview
Taking the pulse of the global economy
The BBC news website is running a series of articles taking the pulse of the global economy - these will appear during the summer months - a resource that will no doubt be well worth following. Here is the link.
The scaling back of General Motors
General Motors is back on the road only forty days after filing for bankruptcy. This is a good example to use of a failed business that is seeking to reinvent under state ownership itself by dramatically scaling back the size and scope of its operations. The Guardian reports that
” The US government owns 60.8% of the new GM, while Canada’s government holds 11.7% and a union-controlled pension fund has 17.5%. Creditors of the old company, who were owed $27bn (£16.67), were compensated with a stake of just 10% to the dismay of Wall Street bondholders who fought a short, unsuccessful battle for a larger slice. But the transformation has been painful for thousands of employees, parts suppliers and car dealers. Once cutbacks are complete in 2011, GM is likely to have just 38,000 blue-collar factory workers in the US, compared to 113,000 three years ago. The number of GM plants will fall from 47 to 31 and, through a clear-out of senior management, GM’s executive team will shrink by 35%.”
Leaner and meaner? There is chronic surplus capacity in the global car industry and General Motors will not be the only business to realise the burden of diseconomies of scale. Smaller businesses are frequently more nimble and innovative.
King and Chancellor at odds over intervention
Both the Chancellor of the Exchequer and the Governor of the Bank of England gave their Mansion House speeches to the City yesterday, and both addressed the issue of regulation of the banking system. But while the Chancellor emphasised that he had no plans to fundamentally change the regulation system, the Governor called for more powers for the Bank to intervene and prevent excessive risk taking. This is at odds with the approach outlined by Alastair Darling, who referred instead to encouraging a change of management culture in the banks which would encourage bankers to manage themselves more effectively, being “rewarded for long-term success, not for failure”. He seems to suggest that the solution lies more in ensuring that banks are led by Boards of Directors with “the right people of the right skills and the right experience …. and they need to be equipped to ask the right questions.” He also called for an end to short-termism: “Their focus must be on long-term wealth creation and not short-term profits.”
read more...»Barak sees mileage in fuel efficiency targets
Here is a good example of government intervention through regulation
“Under the proposed new standards, manufacturers must reach an average of 39 miles per gallon for passenger cars by 2016, and 30 miles per gallon for light lorries…The increase in mileage is to be introduced gradually, and is expected to add $1,300 to the cost of a vehicle by the time it is fully implemented in 2016.”
In a similar vein, the EU has progressively cut the maximum Co2 emissions per km for all passenger cars.
1. Think about how this type of regulation will affect producers both in the short and the long term.
2. How will this affect consumers? Is it (a) effective (b) does it promote efficiency? (c) Is it equitable?
3. What are some of the possible macroeconomic effects of such an intervention?
Regulation is an alternative to taxation and/or subsidy ... or should we regard it as a complement? Part of a mix of policies needed to address environmental issues and targets?
Truck tariffs and unintended consequences
The USS protects its domestic vehicle market with a twenty-five percent tariff on imported trucks. By contrast, the import tariff on regular automobiles is just 2.5 percent and the tariff on components imported to make trucks is also far less than 25 per cent. Little wonder that foreign companies have over the years made a bee-line for the USA to make trucks and that many car-makers have only put three doors on a SUV so that they can be classified as vans. This guest post by Jim Lawrence on Dani Rodrik’s web site is excellent on some of the unintended consequences of distortionary tariffs.
Obama’s pledge on R&D
“I am here today to set this goal: we will devote more than 3% of our GDP to research and development,”
If Obama succeeds in his aim, the US economy will raise investment in research and development as a share of national income - AS students might consider some of the likely demand and supply-side effects of such an aim. A good article to use when teaching supply-side policies.
The UK of course is some distance below the US levels when it comes to research and development spending.
Recession cuts the US trade deficit in half
There has been a remarkable turnaround in the size of the monthly trade deficit in goods for the US economy. This prompted plenty of useful discussion in our AS macro class today when we revised government policies towards the balance of payments.
Taking up the slack
A super piece here on the US economy from the New York Times which links in with the concept of the output gap and the time lags between an economic recovery starting and when we might expect to see growth and jobs return at a reasonable speed.
Hard Labour for the US Economy
When the biggest economy in the world goes into a deep recession it is inevitable that the scale of the job losses hitting main street America will be enormous. But when over 600,000 jobs are shed in a single month it becomes clear just how severe the labour shake-out has been in the United States since recession started in earnest in the late autumn of 2007. The US labor market has shed four million jobs since Lehman collapsed in September 2008 and the last time the US economy shed as many jobs in a single month was in October 1949.
read more...»Q&A: What is a reserve currency?
This question is in the news at the moment. The Chinese central bank has proposed replacing the US dollar as the world’s reserve currency with a new hybrid currency controlled by a beefed up International Monetary Fund.
read more...»Mexico - a rough deal from NAFTA?
The North American Free Trade Area (NAFTA) includes Mexico, the USA and Canada, and was introduced back in 1994. Whilst the USA and Canada are highly developed countries, Mexico is officially classed as a middle-income country (GDP per head is only around a quarter of that in the USA). Comparative advantage suggests that all countries can benefit from free trade. Many Mexicans, however, believe this isn’t true and that they’ve lost out as a result of their NAFTA membership.
read more...»Infrastructure and Growth (2)
A hat tip to my colleague Jon Mace for spotting this rather good BBC news article that considers the role that investment in infrastructure can have in sustaining and promoting economic growth. It is a good example of how government spending (fiscal policy) can affect both aggregate demand and long run aggregate supply. And it raises important questions about how such projects are funded.
read more...»Imbalances and the Economic Crisis
James Bevan, Chief Investment Officer CCLA Investment Management Limited gave a talk to the Eton College Keynes Society on Thursday - it was full of insight into the causes of the financial crisis and the chances of a sustained recovery in the next year or two.
read more...»Dodgy Thermostats and the Global Crisis
I have attached some notes from an excellent seminar given last night by Stephen King, Chief Global Economist of HSBC to a large group of keen AS and A2 economists. The Egerton Room at Eton College was pretty packed to hear Mr King give a really clear overview of the risks facing the world economy. There are so many moving parts at the moment that no one country can fix the problems - this demands a coordinated response. And there is a real sense that macro-economic policy has lost control. With it the risk of a descent into economic nationalism and a reversal of globalisation can become acute.
Seminar notes:
Stephen_King_on_the_Global_Economy.pdf
Defining our Times
For example, the National Bureau of Economic Research in America defines it as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”. On this basis the US economy has been in recession since the end of 2007.
While for the economist Christopher Dow, recession worthy of the name was one featuring a “clear absolute fall in GDP between one calendar year and the next”, usually but not always followed by a second fall.
David Smith goes on to examine difference interpretations of what constitutes a ‘depression’ and how we will know whether we are in one or not, drawing some comparisons with recessions and depressions from the past – which might make useful reading for those students starting to think about their entry for the RES Young Economist of the Year competition.
Charts used in this blog
US_Charts_0209.ppt
Trade Imbalances - Presentation
One feature of the world economy is the persistent and large scale of trade imbalances. Some countries have huge surpluses and others experience deficits every year. Trade imbalances are one factor behind the resurgence of ‘protectionist’ sentiment and they have consequences for growth, jobs and living standards. I have put together a collection of twenty of the trade data charts that I use regularly in teaching A2 and AS macro - I hope they might be useful for some colleagues when covering trade and balance of payments topics.
read more...»AS Macro: US Economic Recession in Charts
Whilst much of my macro teaching for AS economics tends to focus on current developments in the UK economy, it is always useful to consider the shape of recessions and the consequences for other countries. I have used some of the charts in the accompanying presentation which draws a dozen data series from the United States. Steep increases in unemployment, a sharp decline in car production, asset price deflation and very low business confidence - there are parallels with the UK which help to reinforce the AD-AS model with my students.
Chart presentation
USA_Recession_Feb_09.ppt
Green Shoots?
An article from today’s Telegraph suggets there may be ‘Glimmers of hope on the Horizon’ for the world economy.
read more...»Protectionism is the crack of economics
This is a somewhat arresting quotation from Dallas Federal Reserve president Richard Fisher - who is a former deputy US trade representative. He explains that, if the US recovery package does result in protectionism in US industry, it will give an immediate high that leads to economic death. He is referring to the US government’s $800bn (£567bn) bailout package which includes a policy called “Buy America” meaning that all of the projects financed by the bailout should favour American iron and steel, over imported materials. It could, perhaps, even allow American preference for all “manufactured goods”.
read more...»Risk of protectionism in recession policies
Concerns about protectionism ending free trade agreements, as countries take measures to get their own economies out of recession and back to growth are now taking centre stage – today the EU has expressed concern about Barack Obama’s recovery package because it includes a ‘Buy American’ clause, which seeks to ensure that only US iron, steel and manufactured goods are used in projects funded by the bill. The US Congress is surely likely to feel that the $800bn it is being asked to spend should all be for the benefit of the US economy. The EU Ambassador has expressed concern that, if passed, the measure could erode the US’s global leadership on free trade. Canada’s International Trade Minister Stockwell Day went further: “These protectionist measures, in a time of recession, only make things worse,” he told broadcaster CBC. “It can only trigger retaliatory action and we don’t want to go there.”
Should the US Senate see this as a threat?
Is the US heading for a Depression?
As the above chart shows the last three months of 2008 were a significant step in the wrong direction for the US economy. Official figures showing GDP shrinking at an annualised rate of 3.8%. With many economists predicting the worst US recession since WWII how big is the danger that the US economy will slip into a depression similar to the 1930s?
read more...»
Downturn USA
This video from BBC news is excellent on the broad background to the financial and economic crisis in the USA - Greg Wood in New York looks back at a year of high drama in the American economy, from sub-prime to full-scale recession, as the world’s money motor seemed to stall.
The Fed Reaches the Floor
Ground Zero for US Interest Rates
The official judges on whether the United States is or is not in a downturn (the NBER) are now saying that the USA entered a technical recession at the end of last year. It takes some time for the statistics to provide concrete proof of this – a nation’s GDP data is always three to six months behind the times.
What is clear is that the world’s biggest economy is in serious trouble as the financial crisis spreads to Main Street and millions of jobs are at serious risk. To state that that millions of jobs might go is not an under-statement. Half a million jobs were lost in November alone.
Yesterday the United States Federal Reserve pulled on the monetary policy interest rate lever one last time. It announced a reduction in the federal funds rate to a new level of ‘between zero and 0.25 per cent’ – which means in practice that the interest rate at which the Federal Reserve is prepared to lend to other financial institutions is now at the floor.
Managing confidence and demand
The main aim of lowering interest rates is simple – to drive down the cost of borrowing for consumers and businesses in an attempt to stimulate confidence and demand in the domestic economy thereby helping to stabilise output and jobs during what promises to be a deep and painful recession.
Some students wonder why – if official interest rates are zero – why it is that loans, overdrafts, credit card rates and numerous other interest costs for borrowed money remain positive – often way above the so-called ‘policy rate’.
The main answer is that most loans – be it for a mortgage or an investment project for a company – are for much longer periods of time than the overnight lending or surplus funds between the banks within the inter-bank market.
So a property-buyer or business looking for loan finance will pay a rate of interest equal to the ‘risk free’ interest on government securities (bonds) of similar duration plus a risk premium that the lender requires as an insurance against the loan going bad. In short - the greater the risk of a borrower defaulting on their loan, the higher is the rate of interest charged.
The credit crunch has made lenders more cautious about lending – risk premium spreads have risen in most financial markets. As a result, deep cuts in policy interest rates by most of the world’s central banks have done little to reduce the real cost of credit for personal and business customers. This is one reason why monetary policy can become ineffective as a tool for managing aggregate demand.
Let us head back to the decision of the Federal Reserve to cut official interest rates to zero. Does this mean that there is nowhere else for monetary policy to go to prevent a deflationary depression?
Turning on the taps
Not quite, some of you may have read about the possibility of the US Central Bank taking some highly unusual steps which boils down to effectively printing money to stimulate liquidity in the financial system. This is known as quantitative easing and the easiest way of describing it is to say that the central bank would buy directly different types of existing debt – say long term government bonds or the dodgy debt of the failed mortgage giants Freddie Mac and Fanny Mae – and print money to pay for their purchases. This injection of money into the economic system would boost the money supply and keep interest rates low.
The Federal Reserve could – in principle – buy any outstanding assets held by the private sector of the economy – and print money to pay for them. They could guarantee to buy up fresh government debt issued by the government – for example extra government borrowing to fund President-elect Obama’s fiscal policy recovery programme.
Added to this, Ben Bernanke at the Fed could announce that the central bank expects to keep short term interest rates at super-low levels for the foreseeable future – a strategy designed to embed into people’s minds that the nominal cost of borrowed money ought to remain minimal. One of the problems of the liquidity trap is that – when interest rates are driven to zero – our expectations are that the next move will be upwards and that this could happen swiftly. The Fed needs to avoid this expectation.
Martin Wolf discusses many of these issues in his excellent piece in the Financial Times – available here. He flags up one idea – that the central bank could simply send everyone a cheque with some money to spend – perhaps using some time limited coupons?
So in the weeks and months ahead, keep a look out for some of the key decisions of the US Federal Reserve. As students you are living through an amazing moment in nearly a hundred years of economic history.
And what will the Bank of England do in response to events both here in the UK and also overseas? Is it prepared to go the distance and reduce the BoE policy rate to zero? We will find out in early January or February.
Here are three follow up articles on the latest cut in US interest rates:
BBC news: US rates slashed to nearly zero
Guardian (Chris Payne): The Fed has waved a white flag
Independent: US slashes interest rates to new zero-0.25% range
Telegraph: UK needs negative interest rates, L&G warns
The Times (Gerard Baker): Fed throws out the rulebook
