July 23, 2017

Preparing for ‘Brexit,’ Britons Face Economic Pinch at Home

Last year’s Brexit referendum was in part a rejection of the economic elite from millions of working people who have suffered declining wages while watching London transformed into a carnival of wealth for globe-trotting financiers.

The prime minister called for the elections on the strength of polls showing her party capturing an expanded parliamentary majority, aiming to solidify her hand as she negotiates exit terms with Europe. But her miserable showing in Thursday’s polls suggest that the same forces that produced Brexit have assailed the government that is supposed to execute it: Many Britons are dissatisfied with their economic lot.

In the dozen years since Vaidas Zelskis entered Britain from his native Lithuania to pursue work as a carpenter, his wages have grown from about 120 pounds a day (about $224 dollars at the exchange rates of the time) to about £180 now, or $233. But over the same time, his usual assortment of groceries have soared from some £50 per week to more like £120.

“The rich people can always afford what they want,” Mr. Zelskis said as he took a cigarette break on a recent morning outside his current job at the Shard, an iconic skyscraper south of the River Thames. “But the middle class really feels it.”

Workers in a part of Victoria Station under construction in London. Britain’s average weekly wages are lower today than they were a decade ago after accounting for inflation. Credit Andrew Testa for The New York Times

Much as in the United States, most working people in Britain have yet to fully recover from the traumatic financial crisis that began in 2008.

Britain’s average weekly wages are lower today than they were a decade ago after accounting for inflation, noted Martin Beck, lead British economist at Oxford Economics in London. This, despite the fact that Britain’s unemployment rate dropped to 4.6 percent in April, a level last seen in 1975.


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“For most people, there hasn’t been a real recovery for years,” Mr. Beck said.

In years past, low unemployment has tended to push up wages, as employers found themselves forced to pay more to compete for a smaller pool of workers. Why this typically enriching dynamic has failed to emerge now is the subject of considerable debate among economists.

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Unions are far weaker than years ago. The gig economy has replaced full-time jobs with part-time and temporary stints, diluting the power of workers to demand higher pay.

A surfeit of global uncertainties — Brexit, President Trump’s threats to dismantle institutions at the heart of the global order — have perhaps made companies reluctant to add costs.

The weaker pound has given a boost to British exports, making them lower priced than European and American competitors. British whiskey, salmon and chocolate have been selling in increasing volumes.

Fish and Scallops are prepared for restaurants at in Brixham, on England’s southern coast. The weakened pound has increased demand for foods that Britain exports. Credit Andrew Testa for The New York Times

But Britain imports more food than it exports. Many of the country’s key export industries — automotive, aerospace and medical devices — draw on suppliers in Europe for components. Even as the weak pound makes the prices of their finished wares more competitive, it also raises their costs.

The economy also faces the loss of top-dollar banking jobs as London’s status as a leading international financial center confronts the challenges posed by Brexit. Roughly one-third of the industry’s business involves handling transactions for clients in Europe. Once Britain is out of the European Union, much of that business may be effectively illegal, requiring that banks satisfy the proclivities of regulators in the 27 remaining members of the bloc.

The financial industry has been lobbying the government to forge a deal with Europe that would maintain the status quo, enabling the money to keep flowing unimpeded. In weakening Mrs. May’s stature, the election may have increased the chances she will soften her line and assent to compromises that would preserve Britain’s inclusion in the European market.

Even so, global banks cannot afford to wait in the hopes that a useful deal will be struck. They are already drawing up plans to move jobs to cities elsewhere in the European Union as they seek to ensure that — whatever comes — they will be able to execute all trades. Britain could suffer losses of 15,000 to 80,000 jobs over the next two years, according to studies.

Investment continues to grow modestly, because major projects take years to plan and execute. But most economists assume it will slow as Brexit separates the Britain from the rest of the European marketplace, undermining the incentive for multinational companies to use Britain as a regional hub.


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“As the outlines of Brexit negotiations begin to take shape, companies are going to be a lot more concerned,” said Peter Dixon, a global financial economist at Commerzbank AG in London. “Even if companies don’t slash investment, they are likely to postpone expansions.”

For now, scrutiny focuses on the increasingly beleaguered British consumer.

Outstanding credit card balances across Britain were nearly 10 percent higher in April compared with a year earlier, the fastest pace of growth in more than a decade, the Bank of England disclosed. That stoked worries that consumers could soon exhaust their sources of cash as their paychecks are effectively diminished by inflation.

“People have been able to borrow to keep consumer spending growing faster than real incomes,” said John Hawksworth, chief economist for PwC UK in London. “There’s a question mark as to how much the consumer can keep the economy going on its own.”

Jennifer Corbin, a 48-year-old mother of five who lives in Wembley, northwest London, already has an answer to that question: Her family is economizing, forgoing their annual summer trip to the Canary Islands, where sunshine is abundant.

“Food, housing, travel. Everything is more expensive now,” she said at the beginning of a recent three-day weekend, as she and her family awaited a train to a coastal destination that was closer at hand — Brighton Beach, at the southern reaches of England.

There, the forecast was for chilly rain, followed by chillier rain.

People relaxed in London’s Green Park last month. Credit Carl Court/Getty Images

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Article source: https://www.nytimes.com/2017/06/11/business/economy/britain-economy-election-brexit.html?partner=rss&emc=rss

Public Health: Soda Taxes Sweep to Victories, Despite Facing Big Spending

The beverage industry spent a lot of money to defeat soda taxes in four American cities Tuesday, but it lost in every one of them.

The victories for soda-tax advocates — in San Francisco, Oakland and Albany, Calif., and Boulder, Colo. — were decisive. Those communities now join Berkeley, Calif., and Philadelphia in embracing plans to tax sugary beverages.

The pro-tax forces had the help of their own deep pockets. The billionaires Michael Bloomberg and John and Laura Arnold donated heavily to the pro-tax campaigns. They didn’t match industry spending, but they got close. Altogether, the Bay Area campaigns cost about $50 million, more than was spent on the state’s Senate race, medical marijuana initiative and gun control measures combined.

The spending may have made a difference. Big donors stayed out of early soda-tax fights, but the beverage industry always fought hard against them, and 40 such measures failed. Mr. Bloomberg, the former New York mayor, donated in the late days of the Berkeley campaign, and he has spent more heavily in the more recent fights.

Howard Wolfson, one of Mr. Bloomberg’s senior advisers, said the victories would encourage Mr. Bloomberg to invest in soda tax initiatives in more cities. He has already put $1 million into television commercials in Cook County, Illinois, where county officials will vote on a soda tax Thursday to help fund spending on public safety.

Volunteers making calls from a phone bank in Oakland, Calif., to urge approval of soda taxes. Credit Jim Wilson/The New York Times

“The tide has clearly turned on this issue, and momentum has swung in our favor,” Mr. Wolfson said. “I am confident in the months ahead more municipalities will seek to implement soda taxes to help their citizens, and we will be willing to help them as they do.”

Soda taxes, originally dreamed up in academic journals, were once dismissed as a fringe idea, possible only in a place as liberal as Berkeley. They are now the law in major American cities.


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The measures have been advanced by economists and public health experts looking for methods that might combat obesity, diabetes and tooth decay — maladies all linked to soft drink consumption.

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But soda taxes are new enough that the evidence that they have much impact on health is still unclear. Early research from Berkeley and Mexico, which passed a national tax in 2014, suggests that such taxes can increase prices and reduce purchases of sugary drinks. Measuring their health effects will take longer.

In the Bay Area communities, advocates used health arguments to sell the measures, focusing on childhood obesity as a particular public health risk. But that has not been the strategy everywhere. In Philadelphia, Mayor Jim Kenney sold the tax as a way to fund popular prekindergarten expansion. In Cook County, the tax is being described as a way to pay for police in the Chicago area. Future initiatives are likely to be tied to local political preferences and needs.

The American Beverage Association, an industry group, has vowed to fight soda taxes wherever they appear. The group’s president, Susan Neely, has described the communities that voted this week as unusually liberal and health-conscious. Wins there, the group argues, are not predictive of sentiment in the rest of the country. She said the industry shared health advocates’ goals of reducing obesity, but not the means.

But public sentiment on sodas may already be shifting. Though the public remains divided on taxes, often seen as a nanny-state intrusion, more and more Americans are turning away from the beverages. Sales are down, and many people say they are actively avoiding the products. Anti-soft drink advertising is likely to appear in major American cities. The declining public image of the beverages will create new challenges for the industry, even if it doesn’t keep losing soda tax fights.

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Article source: http://www.nytimes.com/2016/11/10/upshot/soda-taxes-sweep-to-victories-despite-facing-big-spending.html?partner=rss&emc=rss

Fiscal Policy: The Trump Administration Could Test Whether Deficits Help the Economy

Here’s a surprising conclusion you reach when you start to game out what economic policy will look like in Donald J. Trump’s administration: While many details of his policy agenda are likely to be staunchly opposed by the left, Mr. Trump appears likely to enact a fun-house mirror version of what many liberal economists have advocated for years: Keynesian fiscal stimulus.

Mr. Trump did not run a campaign with many detailed proposals, but he promised to cut taxes significantly, rebuild and expand infrastructure and maybe increase military spending. Together those moves would most likely increase the budget deficit substantially. That risks increasing interest rates and inflation, which could dampen the pro-growth effects of any tax cut and government spending.

If that turns out to be the policy reality of the next few years, it would be a real-world test of an argument liberal economists have made for years: that higher deficits could help end an era of “secular stagnation” and spur faster growth. Somewhat higher inflation would actually be a feature, not a bug, of the policy approach.

The most detailed policy proposal the Trump campaign issued was on tax policy. It broadly tracks the priorities of a Republican Party that will control both houses of Congress.

So expect major tax cuts, which will especially benefit wealthy Americans and businesses. Mr. Trump’s plan included cutting the rate on the highest earners from its current 39.6 percent to 25 percent and cutting the corporate income tax rate from 35 percent to 15 percent.


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Of course any actual changes to tax policy will depend on the results of laborious negotiations with Congress — no campaign policy proposal is ever enacted exactly as written. But Mr. Trump’s proposal is similar to a proposal by House Republicans, and it is quite clear this is the direction Congress will want to go.

Mr. Trump has often cited his experience as a real estate developer and promised he would radically increase spending on public infrastructure. He even said at one point in the campaign that he would double the $275 billion infrastructure plan that Hillary Clinton proposed. He specifically cited infrastructure spending again early Wednesday morning in his victory speech in New York.

Some version of this infrastructure policy has a good chance of being enacted. Republicans in Congress are generally on board with the idea of spending on roads, bridges airports and other projects; opposition to such a proposal during the Obama administration has been more tactical than ideological.

TV monitors displaying results of the the United States presidential election at an outdoor cafe in Athens. Credit Louisa Gouliamaki/Agence France-Presse — Getty Images

Even if the details of a Trump infrastructure plan take a different form than the one that left-of-center economists have advocated as a cure for persistently slow growth, the result in terms of the macroeconomic effects should be similarly positive.

But then there are the tax cuts. In the simplest math of fiscal policy, lower taxes plus more spending equal higher budget deficits. Mr. Trump resorted to vague hand-waving about any spending cuts to offset those changes, promising instead that faster growth would prevent the deficit from rising.

Most hardheaded analysis — including from those sympathetic ideologically — suggests this is wrong. The conservative-leaning Tax Foundation, for example, estimates that Mr. Trump’s tax plan would reduce federal revenue by about $12 trillion over the next decade, and faster growth would offset only about $2 trillion of that.

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Assuming that those forecasts are right and that Mr. Trump’s tax and spending plans sharply increase the deficit, the open question is what it means for the economy. For the last few years, the world has suffered from a chronic shortage of demand, depressing inflation and interest rates worldwide.

If those conditions persist, a Trump administration may have some room to expand deficits without triggering a spike in interest rates that would undo any economic boost those deficits create.

But many economists don’t see it working out that way. Mark Zandi, chief economist at Moody’s Analytics, was skeptical in a much-discussed paper released earlier in the year estimating the economic impact of a Trump administration. He assumed that if Mr. Trump’s policies were taken at face value, it would increase the deficit from 3.5 percent of G.D.P. this year to more than 10 percent by the end of Mr. Trump’s term. He said this would cause the Federal Reserve to raise interest rates above 6 percent in 2018 to prevent inflation.


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It’s unwise to extrapolate from short-term moves in financial markets what will happen to the economy over years ahead. But shifts in the markets on Wednesday suggest that investors are pricing in some significant chance of this happening.

The yield on Treasury bonds fell initially Tuesday night as Mr. Trump’s victory looked more probable and investors sought a safe-haven investment. But Wednesday, rates actually rose 0.11 percentage points, which suggests global investors think that higher rates are in the United States’s future. Measures of expected inflation in the bond market rose as well.

“While things change fast, for now the market seems to think of a Trump presidency largely as inflationary,” said Roberto Perli, an economist with Cornerstone Macro, in a research note Wednesday morning.

Even for people who don’t like Mr. Trump’s proposed tax cuts or the rest of his policy agenda, if he gets his way on taxes and infrastructure spending, it will be a test of whether deficits really matter in a world that has been locked in a slow-growth reality for years.

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Article source: http://www.nytimes.com/2016/11/10/upshot/the-trump-administration-could-test-whether-deficits-help-the-economy.html?partner=rss&emc=rss

Global Shock: Global Markets Plummet on Rising Odds of Trump Victory

An employee of a foreign exchange trading company watching U.S. election results in Tokyo. Credit Toru Hanai/Reuters

Donald J. Trump’s surprisingly strong showing in the presidential race is throwing global financial markets into disarray.

In effect, markets had priced in a Hillary Clinton victory in Monday and Tuesday’s sessions, reflecting a firming of her position in polling. But as incoming results made a victory by Mr. Trump look increasingly probable, a furious reversal took place.

The Mexican Peso Fell Sharply


The steep drop across global markets as a Trump victory became more likely suggested that investors believe that the global risk premium — the compensation investors demand for all the varied risks around future economic and financial conditions — had risen. It suggests that if Mr. Trump prevails there could be global financial ripple effects.

Asian stock markets plummeted, as did futures on major stock indexes covering the United States and Europe, including a 4.8 percent drop in Japan’s Nikkei index as of 11 p.m. Eastern. United States Treasury bonds, typically a safe haven, rallied, pushing long-term interest rates sharply lower. The dollar was down 1.4 percent against other major currencies as of late evening, by which point Mr. Trump’s victory appeared probable in The Upshot’s election model.

There was a particularly steep sell-off in the Mexican peso, which had the steepest drop against the dollar since the country’s 1994-1995 currency crisis. The Mexican currency has consistently dropped when Mr. Trump’s prospects improved in recent weeks, suggesting global investors believe that a Trump administration — with its threats of renegotiating trade agreements — would spell bad news for the country’s economic outlook.

Oil Prices Also Tumbled


The price of gold shot upward. Gold is often a defensive play by investors whose fears about the economy are building. Surging higher than $1,330 an ounce, gold had the biggest upward movement since the unexpected Brexit vote in Britain in June.


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The swings across global markets suggest that investors believe a Trump presidency will be a deeply uncertain time for the global economy, and even that some of the fundamental underpinnings of global commerce could come into question.

Whether a political shift has long-term consequences is less certain. As I’ve written before, the complex feedback loops among political decisions, public policy and the economy aren’t always apparent after a political shock.

Asian Markets Fell Fast

Nikkei 225

Analysts have suggested that there are companies that could win in a Trump administration, benefiting from promises of lower corporate taxes and lighter regulation. But on the flip side, trade wars, a hard-line stance against international outsourcing and restrictions on immigration could prove bad for the bottom line for many United States companies.

Markets hate uncertainty, and few people are certain of what a Trump administration would do.

That said, market reactions can be volatile and overreact to the fundamentals of a situation. In June, when British voters elected to leave the European Union, global stock markets immediately sold off before stabilizing, and are now higher than before the vote.

But in the case of Brexit, there is still evidence that the economic consequences will be long-lasting, with Britain’s currency sharply below its levels before the vote, to around $1.25 compared with more than $1.50 on the eve of the vote.

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Article source: http://www.nytimes.com/2016/11/09/upshot/global-markets-plummet-on-rising-odds-of-trump-victory.html?partner=rss&emc=rss

Economic Scene: After the Election, a Nation Tinged With Racial Hostility

Consider the challenges ahead for the nation. The next administration will face rampant inequality and persistent poverty, decaying infrastructure, and mediocre and segregated public education. It will have to deal with one of the most expensive, least effective health care systems in the industrialized world. And one way or another, it will have to address climate change.


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Mr. Trump’s mobilization of the frustration of aging white Americans without a college degree, who believe they are losing their country to a more ethnically diverse future, is not going to make this any easier.

Racism is hardly new to America. It lies behind the United States’ knottiest paradox: Millions of white Americans who would benefit from a more robust government are steadfastly against it, at least partly out of a belief that minorities would gain at their expense.

That racial polarization — fed by Mr. Trump’s overt racial appeals that began with his false claims that Barack Obama was not born in the United States — has intensified since Mr. Obama took office. In many ways, that is the biggest obstacle to the development of any sort of national project.

Consider health care. In 2007, 69 percent of the public said it believed that it was the responsibility of the federal government to ensure that every American had health care coverage, according to a Gallup poll. By last year, support for such government intervention was down to roughly 50 percent.

Republicans’ relentless attack on the Affordable Care Act certainly contributed to changing opinion. So did the botched rollout of the federal government’s health insurance marketplace, healthcare.gov, and rising premiums.

But that doesn’t fully account for the fundamental shift. In “Post-Racial or Most-Racial: Race and Politics in the Obama Era,” (University of Chicago Press), Michael Tesler, an assistant professor of political science at the University of California, Irvine, argues that “the declining support for government health insurance during Barack Obama’s presidency was driven by racially conservative defections.”

Drawing from the 2012 American National Election Study, Professor Tesler found that only one-fifth of the most “racially resentful” whites (measured by their responses to questions about the causes of racial inequality and discrimination) supported health insurance provided by the government, compared with half of the least racially resentful.

Much of the opposition is set off directly by President Obama’s race, Professor Tesler says. In similar surveys from 1988 to 2008, before Mr. Obama became president, support for government health insurance among racially resentful whites was considerably higher.


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Opposition is also fueled by the sense that blacks would gain more; 56 percent of respondents to a poll in 2010 commissioned by Stanford and The Associated Press said the Affordable Care Act would “probably cause most black Americans to get better health care than they get today.” Only 45 percent said the same thing about whites.

The dynamic doesn’t apply just to health care. Professor Tesler finds similar racial patterns in support of raising top marginal tax rates and in favor of the fiscal stimulus package of 2009. Fewer than 20 percent of the most racially resentful whites thought the stimulus was a good idea, compared with more than 60 percent of the most racially liberal.

Mr. Obama’s race probably intensified such misgivings, but they have been there all along, shaping politics and policy for a very long time.

It has been half a century since the Democratic Party lost much of the Southern white vote, after the Johnson administration pushed the Civil Rights Act through Congress. John E. Roemer, a professor of economics and political science at Yale, notes that to this day “the white Southern vote is the reason that the Republican Party remains a player in U.S. national politics.”

The racial divide remains the main obstacle to building a robust American state — entangling the debate over taxes and spending in a zero-sum calculation over “us” versus “them.”

In a paper published a decade ago, Professor Roemer and Woojin Lee, now a professor of economics at Korea University, estimated that voter racism reduced the top income tax rate by 11 to 18 percentage points. The magnitude, they wrote, “would seem to explain the difference between the sizes of the public sector in the U.S. and Northern European countries.”

What does the current election portend for the American project? If Mr. Trump wins, all bets are off, of course. As Mark Zandi of Moody’s Analytics describes it, Mr. Trump’s policy wish list, if actually carried out, would probably foster an economic disaster.

Who knows what, exactly, a Trump administration would do? For starters, he would have to deal with House Speaker Paul D. Ryan, a canonical Republican who doesn’t naturally share Mr. Trump’s hostility toward trade or immigration.


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Still, win or lose, Mr. Trump will have exposed the United States to the depth of its racism. That is perhaps his most important legacy.

Tuesday’s results are likely to prove even more racially lopsided than in 2012, when nonwhites amounted to 45 percent of President Obama’s voters but just 10 percent of the Republican Mitt Romney’s. The Republican Party’s reliance on less-educated white men and women is likely to intensify. Racial mistrust will remain a powerful political lever to exploit.

Under these circumstances, an ambitious policy agenda to combat climate change or battle income inequality and persistent poverty seems like a pipe dream. Repairing decaying infrastructure and improving public education will most likely also remain out of reach.

The next progressive era will have to wait until the political system figures out how to build bonds of solidarity across racial and ethnic lines. Perhaps America’s growing diversity will ultimately lead to a more generous society. But based on the campaign that just ended, it’s not looking good.

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Article source: http://www.nytimes.com/2016/11/09/business/after-the-election-a-nation-tinged-with-racial-hostility.html?partner=rss&emc=rss

The 2016 Race: What the Election Means for the Markets

What will happen to financial markets after the election? More so than usual, we have a decent idea.

That’s because there has been a clear and identifiable swing in a variety of asset prices — especially the stock market and currencies — at inflection points in the presidential race. A stock market rally on Monday is the latest evidence. The more than 2 percent gain in the Standard Poor’s 500 appears to be linked to the announcement on Sunday by James Comey, the F.B.I. director, that an examination of newly discovered Hillary Clinton’s emails revealed nothing warranting charges.

Market swings over the course of the election suggest that people and institutions with money on the line view a world with Mrs. Clinton as president offering a less volatile economic and financial environment than one with Donald J. Trump in charge.

It’s a risky game to try to tie swings in financial markets to political news. Markets often rise and fall for reasons that have nothing to do with the day’s biggest headlines. And if Monday’s rally were a one-time occurrence, it would be safer to attribute it to random chance than to the market’s collective judgment of the future under the two potential presidents.

But in this election cycle, there has been a clear pattern in which the odds shifted in the race and different financial indicators moved in a consistent direction. Good news for Mrs. Clinton’s campaign has coincided with higher stock prices, a rally in the Mexican peso and a decline in expected stock market volatility. Good news for Mr. Trump has coincided with the reverse swings. (The impact on the value of the dollar and Treasury bonds has been more ambiguous.)

That movement was evident when audio emerged of Mr. Trump making vulgar comments about women and Mrs. Clinton had strong debate performances. It went in the opposite direction when Mr. Comey indicated on Oct. 28 that investigators were examining newly obtained emails tied to Mrs. Clinton.

U.S. S.P. 500 Index $

An analysis around the first debate by the economists Justin Wolfers and Eric Zitzewitz found that the coinciding movements between Mrs. Clinton’s odds and market prices implied that Mr. Trump’s winning would lead to a 10 to 15 percent drop in major stock markets and substantial drops in the price of oil and the Mexican currency, combined with higher volatility. (Mr. Wolfers is a contributor to The Upshot).

Stock market analysts agree on the direction of the likely movements in the event of a Trump win, if not their magnitude. In a research note Monday, Evercore I.S.I. interpreted the evidence as signaling that a Trump win would create a drop of 5 to 6 percent in stocks, with a 2 percent gain if Mrs. Clinton wins. Citigroup analysts see a drop of 3 to 5 percent.


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“A Democratic sweep could cause investors and corporate leaders to worry about higher taxes and regulation,” wrote Ethan Harris, global economist at Bank of America Merrill Lynch. “A Trump win could have an even greater impact due to uncertainty about how campaign promises translate into policies,” particularly around the risk of trade wars.

Even if estimates like those correctly predict the near-term market reaction to the election, their ability to correctly judge the long-term consequences of a political shift for the economy and the business environment isn’t particularly good. Complex feedback loops among political decisions, public policy and the economy aren’t always evident in the immediate aftermath of elections or referendums.

The June 23 vote by British voters to leave the European Union is a prime example. In the days just after the vote, the British stock market fell sharply, as did the country’s currency. In the weeks that followed, the stock market largely rebounded, as there was no evident damage to British companies’ profitability and the cheaper pound made shares of those companies a bargain. British stocks are now higher than they were the day of the vote, as measured by the FTSE 100 index. The pound has fallen further.

On the floor of the New York Stock Exchange on Monday. Credit Richard Drew/Associated Press

Similarly, a Trump win would set in motion shifts that market analysts can only guess at. Even if the stock market dropped as analysts are forecasting, that might make the Federal Reserve less likely to raise interest rates at its December meeting, and low rates tend to strengthen asset prices.

And investors would surely start to game out which companies stood to gain the most from Mr. Trump’s promises of a lower corporate income tax rate and lighter regulation — and which could suffer from less availability of immigrant labor.

Fundamentally, the tone from economic and market analysts is that they don’t know exactly how Mr. Trump would govern. Nor do they know the composition of the new Congress and how it would deal with a Clinton or Trump administration.

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“The impact of an initial Trump shock to financial conditions would depend on whether the shock was persistent or not, which in turn is likely to depend importantly on which Trump shows up,” wrote Krishna Guha of Evercore ISI, casting a President Trump as either “the angry populist of the campaign trail or the hard-nosed but ultimately pragmatic New York deal-maker.” (Mr. Guha views a pragmatic Trump as the more probable outcome.)

A victory by Mrs. Clinton would most likely signal continuity with President Obama’s policies and fewer radical shifts. But there, too, the details would ultimately shape the fate of markets, and some of those are unknowable, like whether she would find willing partners to enact pieces of her agenda or would face steadfast resistance from Congress.

In other words, think of the market reaction on Wednesday as a response to one mystery being solved (who won) while another one is created (how that person will lead).

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Article source: http://www.nytimes.com/2016/11/08/upshot/what-the-election-means-for-the-markets.html?partner=rss&emc=rss

Economic View: A New Movement in Liberal Economics That Could Shape Hillary Clinton’s Agenda

The talk of monopsony is part of a shift in the policy tools that many left-of-center economic thinkers see as most promising for addressing the economic challenges of poor and middle-class Americans. Rather than focusing on policies that amount to redistribution — tax rates, the social welfare system — they are looking at how the rules of the economic game shape people’s outcomes.


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Some use a term for this set of policies coined by the Yale political scientist Jacob Hacker: predistribution policy. This is policy that shapes how the market works in the first place, as opposed to redistribution policy, which assumes a free market will generate growth and then uses taxes and spending to give a lift to the economy’s losers.

To understand the dueling approaches, think of a professional sports league that finds that richer, big-market teams are consistently at an advantage, making games less entertaining. One approach would be to tack on a few extra points to the small-market team’s score when it plays a larger rival. That’s the equivalent of redistribution.

Jason Furman, chairman of the Council of Economic Advisers, said a reason for the Obama administration’s shift in dealing with income inequality was economists’ growing understanding of the effects of corporate consolidation. Credit Andrew Harrer/Bloomberg

The predistribution approach would examine the factors that make rich teams more competitive, and try to remedy the situation by changing the rules around, say, the league’s salary cap or the amateur draft.

“The idea is that if we’re going to deal with rising inequality and income insecurity, we can’t just let the market rip and clean up afterward,” Mr. Hacker said.

In the economic policy world, that can mean many different things. Besides the monopsony research, the Obama White House has focused on evidence that inequality is fueled by a shift away from labor unions and by corporate consolidation within industries.

Elsewhere, the Roosevelt Institute, a think tank in New York, has explored the interplay between the outsize growth of the financial industry and pay for top corporate executives and the slow growth in the typical worker’s wages. And last week, the Washington Center for Equitable Growth issued recommended strategies for the next administration, which included ensuring that the minimum wage covers workers who depend on tips, and making sure that modern supply chains do not inhibit the creation of good jobs.

“I think when I was coming up and started engaging with economic policy issues, a lot of the emphasis was on the idea that capitalism works, and that’s over on one side, and then the question is after you’ve gotten the gains from growth, if it’s a little unequal or if some people are in poverty, you can just redistribute the gains,” said Heather Boushey, the executive director of the group.

“Another way to think about it is that the interaction between policy and economics is really important, and how the gains from growth are distributed to begin with has a huge impact on the path of the economy moving forward,” she said.


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John Podesta, now chairman of Mrs. Clinton’s campaign, founded Ms. Boushey’s group in 2013, and Ms. Boushey is the chief economist of the Clinton transition team. The predistributionist philosophy comes through if you read between the lines of Mrs. Clinton’s economic policy proposals and speeches. She seeks, for example, to “rewrite the rules to ensure workers share in the profits they help create,” including measures like rewarding corporate profit-sharing and strengthening collective bargaining rights and antitrust enforcement.

Jacob Hacker, a political scientist at Yale, coined the term “predistribution” to apply to policy that shapes how the market works in the first place, as opposed to redistribution policy. Credit Bryan Bedder/Getty Images for The New Yorker

Many of the policies under discussion — a higher minimum wage, or tougher antitrust enforcement — have long been supported by liberal economists and politicians. What has changed is that they are being emphasized as a first-order set of priorities, and as part of a unified body of work.

There are pragmatic reasons for taking this approach, too. With Republicans controlling Congress and resolutely opposing tax increases on the affluent or a stronger social safety net, redistributionist policy hasn’t been on the table politically. That has left the Obama administration looking for other ways of dealing with rising inequality.

Jason Furman, chairman of the White House Council of Economic Advisers, acknowledged a variety of reasons for the shift. “One is the increased understanding among economists about the increasing concentration in the economy and the ramifications that can have for some of the biggest problems we face,” he said.

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Political news and analysis from the staff of The New York Times.

But it’s no accident that the administration can use administrative tools, such as the Labor Department’s rules requiring more workers to receive overtime compensation, to shape policy even when Congress is deadlocked. “It’s an area where we can actually do something,” Mr. Furman said.

If liberal economists keep focusing on these issues, and if Mrs. Clinton is elected and indeed makes market structure, labor rules and other predistribution policies a top economic priority, there are more subtle risks.

For example, there’s always a temptation to overrate the benefits of whatever policy you favor as a solution for all that ails the economy. Among conservatives, this may take the form of arguing that tax cuts will solve every problem. Liberal economists may be engaging in wishful thinking of their own as they suggest that more powerful labor unions generate not just higher wages but stronger productivity growth and a faster-growing overall economy.

“I certainly think these are important things to think about, but I guess the question is whether they’re first-order or not,” said Michael Strain, an economist at the American Enterprise Institute. “When I think about the biggest challenges facing the U.S. economy, monopsony is not one of them.”

And adjusting taxes and spending has the advantage of directness, even if it is a political nonstarter. It is much less certain just what policies focused on predistribution would do. Tweaking overtime rules or preventing mega-mergers might help reduce inequality, in other words. But raising taxes on the wealthy and using the money to increase benefits for the working class definitely would.

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Article source: http://www.nytimes.com/2016/11/06/upshot/monopsony-liberal-economics-policy-hillary-clintons-agenda.html?partner=rss&emc=rss

Economic Scene: How Waning Competition Deepens Labor’s Plight

An ATT store window in New York. The proposed ATT-Time Warner merger and others of that scale are reconfiguring the American economy in ways that seem tilted against workers. Credit George Etheredge for The New York Times

The Communications Workers of America union has learned to appreciate corporate consolidation.

When ATT tried to purchase the rival wireless company T-Mobile five years ago — a deal that was ultimately blocked as anticompetitive — the union called the proposal “good for American consumers and good for American workers.” Three years later, it argued that ATT’s acquisition of DirecTV “provides substantial public interest benefits for consumers, workers and the U.S. economy.”

The union offered concrete reasons for its support, not least that the deals could increase the ranks of unionized workers. In 2010, it opposed the merger of the cable giant Comcast and NBC, which was ultimately waved through by antitrust regulators, partly on the grounds of Comcast’s hostility toward unions.

These days, yet another media leviathan is in the making. If it is approved by regulators, the proposed $85 billion combination of ATT and Time Warner will merge one of the nation’s biggest wireless networks, which also owns a satellite television system, with studios that make some of the most popular movies and television shows.

The Communications Workers’ leadership is now mulling over whether to support the proposition — a spokeswoman said the union was evaluating the merger, but she would not comment further. This time the union might want to change its tune.

The latest deal may pass muster when viewed in isolation. But collectively, mergers at this scale are reconfiguring the American economy in ways that seem to be tilting the scales toward the interests of ever-larger corporations, to the broad detriment of labor.


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As Senator John Sherman, the principal author of the nation’s core antimonopoly law, put it more than a century ago, a monopoly “commands the price of labor without fear of strikes, for in its field it allows no competitors.”

Stumped by an economy where wages have gotten stuck for all but the most highly educated, where too many men in their prime working years struggle to stay in the job market, and where women’s long march into the work force has stalled, some economists are turning their attention anew to the role that diminishing competition might have in causing workers’ plight.

“I think it is an underappreciated part of the problem,” said Jason Furman, President Obama’s chief economic adviser.

Competition policy can no longer be understood in the narrow terms of protecting consumers from higher prices.

Three years ago, the Nobel laureate economist Joseph Stiglitz proposed that increasing profits from companies managing to avoid normal competitive forces — what economists refer to as “rents” — appeared to be an important factor in the rising share of the nation’s income flowing toward corporate profits and top executive pay in recent years. He surmised that weak labor unions — which represent barely over 7 percent of workers in the private sector — did not have the clout to protect the workers’ share.

Since then, several other studies have presented various channels through which a lack of competition between employers could keep wages down. In a report published last month, the White House Council of Economic Advisers, led by Mr. Furman, laid out the case.

In a competitive market, companies will vie with their rivals to hire the best workers, lifting wages up to workers’ “marginal product,” the last cent where their employers could still turn a profit. As productivity grows, wages will be bid up further. Prosperity will spread. But when there are few or no rivals in a labor market, employers will pay much less.

This kind of power doesn’t even require employers to hold absolute monopolies. Employers can collude more easily when there are few competitors. They can more easily impose tough contractual restrictions that make it tough for workers to shop for better jobs.


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Competition in product markets does not necessarily translate to competition in the labor market — an exporter that sells into global markets but hires domestically may experience a lot of the former yet little of the latter.

Waning competition in employment can muck up the economy in more ways than one. It slows wage growth, of course. Lacking outside options, workers are much less likely to leave a job. But economic output and employment will suffer, too, because fewer workers will be willing to work for the lower wage.

Not everybody agrees that a lack of competition is having a big impact on the job market. “There is evidence of market power,” acknowledged Michael Strain, a moderate conservative at the American Enterprise Institute in Washington. But “pending further research, my current view is that big macroeconomic forces like technological change and globalization are significantly more important.”

The main reason for falling wages and declining employment is simply that demand for less-skilled work is falling.

Still, American markets have been growing more concentrated. Since the late 1990s, the share of revenue accruing to the top 50 firms has been rising in most industries. The average age of firms is rising, as fewer new firms have been entering many markets. In some sectors, like health care, there is clear evidence of monopoly profits.

And there is direct evidence that big employers are interested in limiting their workers’ options. Hospitals in several metropolitan areas have been accused in court of colluding to reduce nurses’ pay. In a better-known case, some of the titans of Silicon Valley were sued by the Justice Department for agreeing not to poach one another’s engineers.

Employers have other tools to limit competition in hiring. The Treasury Department has discovered, for instance, that 18 percent of workers are covered by noncompete agreements. They aren’t all high-end engineers with trade secrets in hand. The list includes fast-food workers.

Policy makers can push back against employers’ market power. Strengthening labor unions, of course, would give workers more leverage against dominant employers. Raising the minimum wage would provide a higher wage floor. But it seems there is an opportunity to rethink the nation’s approach to antitrust law, too. It should not be seen exclusively as a tool to protect consumers from sticker shock.


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In a speech in September, Renata Hesse, the Justice Department’s acting assistant attorney general for antitrust, argued forcefully that “the antitrust laws were intended to benefit participants in the American economy broadly — not just in their capacity as consumers of goods and services.”

Antitrust enforcement efforts, Ms. Hesse said, “also benefit workers, whose wages won’t be driven down by dominant employers with the power to dictate terms of employment.”

Christopher Shelton is the president of the Communications Workers of America. Maybe he’s listening this time.

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Article source: http://www.nytimes.com/2016/11/02/business/economy/how-waning-competition-deepens-labors-plight.html?partner=rss&emc=rss

Making Sense of the Two Candidates’ Plans on Student Debt

After decades of college tuition rising faster than inflation or middle-class families’ incomes, something had to give. And now looks like that moment: Expect a debate over how to fix the system of providing and paying for higher education in the 115th Congress and in the administration of the nation’s 45th president.


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To understand that debate, it helps to step back from campaign slogans and look at the underlying economics of higher education — both the ways it has gone wrong and the various philosophical approaches to fixing it.

Start With a Simple Question

What makes education different from any other expensive thing people buy? Why is buying a college education so different from, say, buying a car?

For one, because education is the path to higher-paying work, society has decided that it’s important to help lower-income people attain it. By contrast, there’s not much case for government intervention to make sure people have access to a nice car. Also, when buying a car, it’s a lot easier to predict whether you’re getting a good deal. You can test-drive the car and read consumer reviews and pretty much know what you’re getting. With a college degree, the payoff — a more lucrative career — is distant and uncertain.

Finally, for students who must borrow to afford college, private sector lending doesn’t work as well as it does for other types of purchases. With a car loan, collateral can be repossessed if the borrower doesn’t pay. Students have only that uncertain future. If banks were willing to lend to every student who’s in need, the cost — skyscraping interest rates, loan defaults — would be too great for an economy that relies on an educated work force. So an entire structure of federally subsidized loans was created to try to fix that market failure.

Put all this together and you get a market with some weird flaws. In that sense, higher education is more like health care or housing than autos.

Interactive Graphic

Student Loan Calculator

A guide to student loans at various universities, and what it takes after graduation to repay that debt.

Think of it as a triangle. There is the student who pays tuition for an education. There is the college dispensing the education and collecting that tuition. And then there is the government — state governments, which provide part of the operating budget of public institutions, and the federal government, which provides Pell grants for low-income students and backs loans for students of all income levels.

And once you draw that triangle, the differing approaches of conservative and liberal thinkers to the problem — and the approach that a President Trump or a President Clinton might pursue — become clearer.

The Trump Approach

Mr. Trump hasn’t talked much about higher education and student debt on the campaign trail, at least until Oct. 13, when he unveiled a few details at a rally in Columbus, Ohio, that was billed as his millennial policy speech.


“Students should not be asked to pay more on their loans than they can afford,” he told a crowd bused in from campuses around the state. “The debt,” he said, “should not be an albatross around their necks for the rest of their lives.”


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To help young graduates pay off their federal loans, his plan would cap repayment at 12.5 percent of their income and eliminate remaining debt entirely after 15 years. The idea is similar in philosophy to what the Obama administration has done: That program caps debt payments at 10 percent of disposable income and any remaining debt is forgiven after 20 years.

Pundits immediately took to Twitter to frame Mr. Trump’s plan as “left of Obama” and more generous (thus potentially more costly to the government). But the devil — and the politics — is in the details, and the campaign did not respond to requests for an interview.

In Columbus, Mr. Trump also spoke in broad terms about pushing colleges to cut costs more aggressively, particularly by limiting spending on “administrative bloat.”

“There’s not enough incentive for these colleges to cut,” he said. “If the federal government is going to subsidize student loans, it has a right to expect that colleges work hard to control costs and invest their resources in their students.” One incentive: threaten to end their endowments’ tax-free status. He also wants to loosen federal regulations, reducing the cost of compliance “so that colleges can pass on the savings to students,” and he wants universities to tap more of their endowment money.

On one end, then, Mr. Trump intends to tweak the terms of student lending and use federal funds to make debt burdens more manageable; on the other end, he would use the power of the federal government to force colleges and universities to clamp down on tuition increases.


“Trump is essentially trying to deal with the effects of the student loan problem by proposing a new policy somewhat similar to what we have already,” said Mark Huelsman, a senior policy analyst at the liberal think tank Demos. “But his diagnosis of the root causes are misaligned and incorrect.”

The focus on administrative salaries, he said, neglects the bigger problem: the role that the decline in state government support, especially when measured on a spending-per-student basis, plays in the burdens facing college students. Mr. Trump has mentioned no plans to encourage states to spend more to support their public universities.


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The Clinton Approach

If Mr. Trump is attacking one linkage in the triangle of students, government and schools, Mrs. Clinton is going after the entire triangle.

Her central pledge is for students from families with an income of under $125,000 a year to be able to attend their state school tuition-free. She wants to do it with a mix of carrots and sticks: new federal resources for tuition grants, for example, but ones that would be available only in states that fund public universities at a high level — an attempt to reverse the drop in per-student state spending over the last decade.


Similarly, Mrs. Clinton’s proposal includes financial penalties for universities that fail to trim costs, reduce tuition and ensure students are able to get good jobs. She wants a contribution from the third corner of the triangle as well, expecting students to work 10 hours a week as part of the debt-free college calculations.

“The problem of rising costs has deep roots,” said Jacob Leibenluft, a senior policy adviser to Mrs. Clinton’s campaign. “We need both new funding and new measures of accountability. Most of all, we need everybody to be part of the solution.”

But every government policy can have unintended consequences. For example, incentives put in place to reward schools that have high graduation rates might, paradoxically, cause schools to refuse admission to lower-income students who are more likely to drop out — and who most need a college education to lift themselves into the middle class.

Beth Akers, a senior fellow at the conservative-leaning Manhattan Institute, raised an additional concern: “We could design a free tuition regime in which the federal government said, ‘We’ll pay your tuition at a public college,’ but then states would have a huge incentive to reduce the money they put into their own institutions.”

To some extent, Mrs. Clinton’s approach echoes the Obama administration’s health care overhaul: In trying to keep existing institutions intact and minimize the financial cost, it ends up being quite complex and creates risks of miscalibration. Incentives for states to increase funding could be too generous, leading to cost overruns, or not generous enough, undermining the goal: to improve the ability of Americans to get an education debt-free.

To conservatives, the proposals amount to excessive confidence in the ability of the federal government to micromanage the sprawling higher education system. “This has kind of been the theme from the left on federal higher education policy, which is: We can make everything better if we just get the formula right,” said Jason D. Delisle, a resident fellow at the conservative American Enterprise Institute.


There’s a similar argument from the left: that a simpler, blunter federal program to reduce college costs, while more expensive for taxpayers, would prove more effective and longer lasting. To carry forward the Obamacare metaphor, it’s the equivalent of arguing that a single-payer health system — one where the government funds all health care — would be better than the current, complex system involving private insurers.


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“We’ve had a certain style on the left of doing this sort of policy for a very long time, and I think she’s still kind of caught in the old mode,” said Sara Goldrick-Rab, a professor of higher education at Temple University and author of “Paying the Price,” a new book about college costs and financial aid. Mrs. Clinton’s approach focuses so much on targeting aid carefully that it could be less effective at reducing costs for everyone.

For a voter deciding between Mr. Trump and Mrs. Clinton based only on how they would approach student debt, the differences are stark. Both set goals of using federal policy to reduce debt burdens for future students, but they adopt different philosophies of government to get there.

Do you think that colleges and universities have become bloated spendthrifts and that the government should deploy a set of threats to force cost cutting? Or do you think that states should shoulder more responsibility, and that greater federal control can encourage them, and their colleges, to fix the problem?

Whatever the outcome, as long as student debt levels keep rising, so will the political pressure around the issue. Whether meaningful legislation results, of course, is a different question.

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Article source: http://www.nytimes.com/2016/11/06/education/edlife/presidential-candidates-on-student-debt-in-college.html?partner=rss&emc=rss

As China’s Economy Slows, a Look at What Could Happen

That is a major concern for central banks, economists, investors and corporate executives around the world, as China has been a major engine of growth for decades. Their main question: What happens next?


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Below are three situations that are often discussed as the most likely outcomes of China’s predicament — and what each would mean for the rest of the world.

Financial Meltdown

China escaped the worst of the 2008 global financial crisis by starting a campaign of state-directed spending that created mountains of new debt. This helped cushion the blow of the fallout around the world. But critics argue that this only delayed China’s own day of reckoning.

China is still adding credit at a heady pace, and experts are starting to sound alarm bells. Under this situation, China risks its own version of the 2008 crisis that shook Wall Street and plunged the United States into recession and years of painfully slow growth. The rest of the world — which is still dealing with Europe’s woes — could follow.

Construction this month on a new airport for Beijing. Credit Ng Han Guan/Associated Press

Last month, the Bank for International Settlements published new data estimating that the gap between China’s outstanding credit and its long-term economic growth rate had widened to a record and was well above the historical level that indicates a financial crisis is likely.

Part of the problem lies in the rapid growth of what is known as shadow financing, like wealth management products, or other forms of nontraditional lending, which have been the focus of a number of prominent frauds. In a report this month, the International Monetary Fund warned that shadow loans average almost 300 percent of the capital buffers at China’s smaller banks.

The sharp rise in debt prompted one I.M.F. official to warn this month of the risk of a financial “calamity” emanating from China.

The good news is that few people actually think such a crisis is the most likely outcome.

“The risks of a financial crisis remain very low,” said Andy Rothman, an investment strategist at Matthews Asia, based in San Francisco.

Mr. Rothman and others point to China’s tight grip on its own financial system. It controls the country’s big banks as well as the big companies that borrow the most. It also limits how much money can leave its borders and keeps a firm grip on the value of its currency.


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The Good Times Return

So why can’t China just spend its way out of its slowdown?

Optimists point to China’s history of responding to economic challenges: the 2008 lending surge, an earlier bailout of the banking system and a painful restructuring of state-owned enterprises. This time, China could make progress with a plan to restructure debt while increasing spending on areas that could benefit its growing consumer class, like medical care and social services. That would be good news for a world economy looking for sparks.

The problem is that China’s debt burden is so much larger than ever before — both in absolute terms and compared with the economy.

At the same time, recent efforts to support growth by increasing state spending have met with another challenge: The government is getting less bang for its buck.

What’s more, private companies, put off by the lackluster economic outlook, have been pulling back on investment. State spending has helped keep growth rates on target so far this year, and a rebound in real estate investment has also helped, albeit at the risk of inflating a housing bubble.

The Yangshan Deep Water Port in Shanghai. Credit Aly Song/Reuters

“The resurgence of state investment has helped sustain growth in the short run, as has the modest rebound in property investment this year,” said Nicholas R. Lardy, an expert on China’s economy who is a senior fellow at the Peterson Institute for International Economics in Washington.

But he added, “The productivity of state investment is low, so it is a very inefficient way to sustain growth.”

Japan Comparisons

With China’s high debt, inability to spend and a lack of political will to make tough choices to fix its economy, economists are increasingly comparing it to another Asian powerhouse: Japan.

Like China now, Japan in the 1990s faced enormous bank debt, the bursting of a stock market bubble and overcapacity in a number of industries. Reluctant to make the sort of tough choices that result in shutting factories and killing companies, Japanese leaders tolerated years of economic stagnation instead. The result was called the Lost Decade, though many of Japan’s problems linger today.


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China is not Japan, of course, and its vast and upwardly mobile population stands in contrast to Japan’s wealthier but aging society. Still, a growing number of economists see the possibility of something similar.

“Just having a lot of debt, and bad debt, does not cause you to have a crisis,” said Arthur R. Kroeber, the managing director of Gavekal Dragonomics, an economic research firm in Beijing.

“But the price that you pay — if you don’t do the financial restructuring and real economy restructuring that is necessary to restore things to health — is that you get a very long period of very low growth and anemic activity,” he added.

That could also sideline one of the world’s most reliable engines of growth. It could also cause problems in China, where leaders have long pledged to provide jobs and opportunity to the millions who still leave their rural villages looking for a better life.

Still, that could be better than the alternative.

“This expansion of debt is way beyond anything we saw in Japan, both in terms of magnitude and time frame,” said Charlene Chu, a partner at Autonomous Research and a former China banking analyst at Fitch Ratings.

“I think a Japan outcome in many ways would be a best-case scenario for China.”

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Article source: http://www.nytimes.com/2016/10/19/business/international/china-economy-slows-impact.html?partner=rss&emc=rss