July 4, 2020

Greek Economy Will Shrink More Than Expected, Finance Minister Says

THESSALONIKI, Greece (Reuters) — Greece’s economy will shrink by more than 5 percent this year, topping earlier projections, the country’s finance minister told business people in this northern Greek city where the prime minister will speak about the economy later on Saturday.

A deep recession is making it harder for Athens to increase tax revenue and meet deficit-reduction goals under a bailout plan agreed to with its euro zone partners and the International Monetary Fund. Without corrective action the continued flow of aid may be at risk.

“The recession is exceeding all projections, even the troika’s forecast,” the finance minister, Evangelos Venizelos, said, referring to the European Union, the International Monetary Fund and the European Central Bank. “The projection in May was that recession would be at 3.8 percent, now we are exceeding 5 percent.”

The Greek economy shrank at an annual 7.3 percent clip in the second quarter, after an 8.1 percent contraction in the first three months of 2011.

Austerity measures, including higher indirect taxes and cuts in public sector pay and pensions, have hurt economic activity.

Mr. Venizelos was keen to send a message to Greece’s euro zone partners, who are growing frustrated with its backsliding, that Athens is fully committed to carrying out agreed economic reforms.

Chancellor Angela Merkel of Germany reiterated on Saturday that Greece had to meet conditions laid out by the European Union, European Central Bank and International Monetary Fund to receive the aid it is seeking.

Athens is expecting to get 8 billion euros, or $11 billion, in its next installment of emergency financing under the bailout plan, without which it would default down the line.

Greece’s financial troika, which suspended talks with Athens last week in frustration at Greece’s struggle to stick to its deficit-reduction plan, is expected to come up with a form of words in its next report to allow the next tranche of bailout funds to be paid.

“The most clear message Greece is sending right now,” Mr. Venizelos said, “is that we are absolutely determined, without weighing any political cost, to fully meet our obligations versus are institutional partners.”

“We must prove all those who say that Greece can’t, or doesn’t have the will, is a pariah or does not deserve to be in the euro, wrong” he said.

He also said that holders of Greek government bonds were warming up to a debt-swap plan Greece aims to conclude next month, a crucial part of its new rescue package agreed in July.

Article source: http://www.nytimes.com/2011/09/11/business/greek-economy-will-shrink-more-than-expected-finance-minister-says.html?partner=rss&emc=rss

New Urgency in the Battle for Stimulus

For Mr. Obama, who last month promised a pivot to job creation, the Labor Department’s report raises the stakes as he prepares for a prime-time national address on Thursday before a joint session of Congress. In the speech, he will outline a new round of economic stimulus measures.

In Congress, the reactions from some Republicans suggested small cracks in their party’s wall of opposition to such measures, whether tax cuts or spending. That change underscored the potential of the moment to alter the dynamic in Washington as Congress returns from its recess, though the prospects of a major compromise on short-term stimulus and long-term deficit reduction remain remote.

Within the White House, the report gave ammunition to Obama advisers who have pressed internally for bolder action on tax cuts and spending measures as Mr. Obama makes the final changes to a speech that could be as important to his re-election prospects as any to date. No president since Franklin Roosevelt has been re-elected with unemployment so high.

While the scale of stimulus measures Mr. Obama will seek remains unclear, early indications suggest it will far exceed the limited agenda that the White House was talking about as recently as July, which mostly called for extending for another year a payroll tax cut for workers and unemployment compensation for those out of jobs for six months or more.

Now Mr. Obama has said he will seek those extensions and more, including proposals to put people to work repairing and retrofitting roads, bridges, schools, airports, rails and other public projects, and giving tax incentives to employers to hire additional workers.

The rapidity with which the summer’s signs of a weakening economy have raised calls for fiscal stimulus — from economists, financial forecasters, business leaders and the chairman of the Federal Reserve, Ben S. Bernanke — recalls the final months of 2008, as the near collapse of the financial system intensified the recession that year just as Mr. Obama was preparing to take office. Then, the incoming administration put together a package of tax cuts and spending measures that seemed to grow by the month, and finally passed Congress in February 2009 at nearly $800 billion for two years.

Nonpartisan analysts and the Congressional Budget Office have credited the first stimulus package with helping to end the recession and keep unemployment from growing even higher than it did. They say the winding down of the federal government’s help this year has contributed to the economy’s stall.

But Republicans, who solidly opposed the original stimulus program, say it was a failure that only dug the country deeper into debt — a stand that hardly suggests they will be receptive to such ideas now. That argument against big government helped Republicans win control of the House last November, and they have since forced Mr. Obama and Congressional Democrats into repeated rounds of spending cuts.

While that was widely welcomed at first, given the nation’s mounting long-term debt, economists began to fret that the austerity measures in both the United States and Europe threatened to push the world into another recession. In an analysis this week, for example, the chief economist of OppenheimerFunds, Jerry A. Webman, cited “the counterproductive approach Congress and the administration are taking to fiscal policy.”

Mr. Obama hopes to change the balance with his speech to Congress. He will call for short-term job creation measures now — to prevent a recession that would widen annual deficits through lost revenue and safety-net spending — and for deficit reduction proposals, including spending cuts and tax increases for people with higher incomes, that would take effect after the economy regained full health.

The conventional wisdom has been that Mr. Obama’s job creation plan “is likely to be dead on arrival,” as one financial analysis group, Bank of America Merrill Lynch Global Research, wrote to clients on Friday.

Yet Congressional Republicans’ response to the disappointing jobs numbers suggested slightly more openness than before to Mr. Obama’s pitch. The question is whether the shift is rhetorical or real.

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Credit Agency Tells Congress a Default Is Unlikely

The official, Deven Sharma, president of Standard Poor’s, added that deficit-reduction plans currently being considered in Congress could be enough to allow the United States to keep its triple-A credit rating.

But Mr. Sharma declined to specify what level of cuts would be needed to maintain the top-level credit rating.

He said news articles last week “misquoted” a July 14 S. P. report as saying that Congress would need to achieve at least $4 trillion in spending cuts over 10 years to maintain the country’s triple-A rating.

A cut of $4 trillion, a number that is cited in the S. P. report and that has been the focus of concern on Wall Street over the last two weeks, was “within the threshold” of what S. P. thinks is necessary, Mr. Sharma said. But he declined to draw a bright line, saying only that “some of the plans” currently being considered on Capitol Hill “could bring the U.S. debt burden and the deficit level in the range of a threshold for a triple-A rating.”

The remarks came at a hearing by the Oversight and Investigations Subcommittee of the House Financial Services Committee. The hearing was scheduled to examine the performance of the major credit ratings agencies since changes in policies affecting the companies were instituted as part of the Dodd-Frank Act.

The credit ratings agencies were sharply criticized after the financial crisis for offering top-level ratings on billions of dollars of mortgage-backed securities that later lost substantial value when the housing market collapsed.

But the hearing quickly turned to the issue of what would happen if the nation were unable to meet its obligations because Congress did not raise the federal debt ceiling.

Pressed by Representative Scott Garrett, a New Jersey Republican, on whether the deficit-reduction plans put forth by the Obama administration or Senate Democrats would be sufficient to maintain the country’s credit rating, both Mr. Sharma and Michael Rowan, global managing director in the commercial group of Moody’s Investors Service, declined to comment.

Banking regulators who testified at the hearing were less hesitant to give their views about how a downgrade of the country’s credit rating would affect the financial markets and banks.

David K. Wilson, senior deputy comptroller and chief national bank examiner in the Office of the Comptroller of the Currency, said that members of Congress were “right to worry” about the possible unknown effects of a downgrade.

At the least, he said, borrowers would have to increase the amount of Treasury securities they offered as margin, or collateral for loans. A downgrade of the country’s credit rating would probably also be followed by lower ratings on state and local government debt, he said.

Any difficulties would be “manageable in the short term” because even a downgrade to AA from the current AAA rating would still mean that Treasuries were “very high-quality securities,” Mr. Wilson said. The long-term effects of a ratings downgrade, he added, were unknown.

Asked by Representative Brad Miller, a Democrat from North Carolina, if he were “right to worry that this could be real bad if our debt were downgraded,” Mr. Wilson replied, “You know, it’s hard to measure, but I think you’re right to worry. I mean, it could happen. It could be a big thing.”

Representatives from the Federal Reserve, the Securities and Exchange Commission and the comptroller’s office all said they believed that the credit rating agencies were doing a better job of accurately assessing risks in their credit ratings now than they were before the financial crisis.

However, Mark E. Van Der Weide, senior associate director in the division of banking supervision and regulation at the Federal Reserve, said “the crucial thing is that no matter how good we think they’re doing, we not over-rely on them — not the government, not the private sector.”

Republican members of the panel also asked Mr. Sharma whether Treasury Department officials had pressured the company not to downgrade the United States credit rating.

In an April 27 letter to the Treasury secretary, Timothy F. Geithner, Representative Randy Neugebauer, a Texas Republican who is chairman of the oversight subcommittee, questioned the appropriateness of the government protesting ratings changes “given its regulatory and oversight role over the agencies.”

In a June 13 response, Mr. Geithner said the department had “entirely appropriate” contacts during the ratings review process with Standard Poor’s, which, he noted, “we do not regulate or oversee.”

Mr. Sharma told the committee that its contacts with Treasury, which included the sharing with the department a draft news release about S. P.’s decision to put the United States’ credit ratings under review for a possible downgrade before the move was announced to the public, were “standard operating process.”

This article has been revised to reflect the following correction:

Correction: July 27, 2011

An earlier version of this article incorrectly said that officials from two credit rating agencies said the United States was unlikely to default.

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Economic Scene: Do-Nothing Congress as a Cure

A trick question: If Congress takes no action in coming years, what will happen to the budget deficit?

It will shrink — and shrink a lot. This simple fact may offer the best hope for deficit reduction.

As federal law currently stands, some significant tax increases are set to take effect in coming years. The most important is the scheduled expiration of the Bush tax cuts at the end of 2012.

Of course, both parties favor the permanent extension of most of those tax cuts — the ones applying to income below $250,000. Both parties also oppose big cuts to the military, Social Security and Medicare, at least in the short term. Unfortunately, the deficit is likely to remain frighteningly large over the next decade without either cuts to those programs or tax increases.

Democratic and Republican leaders alike dance around this point. President Obama may call for “tax reform” in his deficit speech on Wednesday. He may even suggest that tax reform can reduce the deficit. He is very unlikely to explain which taxes will go up in his vision of reform, aside from some of those on the affluent. And while those increases will certainly help, they’re not enough.

The Republicans’ numbers are even fuzzier. The recent plan from Paul Ryan, chairman of the House Budget Committee, includes highly specific tax cuts for the affluent and still claims to reduce the deficit long before his proposed overhaul of Medicare begins. How? Partly by eliminating tax breaks — that is, raising taxes — although Mr. Ryan doesn’t say which ones. The savings simply appear under the heading “Tax reform.”

It’s as if tax increases were a mere technicality in any deficit-reduction plan. In reality, finding a way to raise taxes may well be the central political problem facing the United States.

As countries become richer, their citizens tend to want more public services, be it a strong military or a decent safety net in retirement. This country is no exception. Yet our political culture is an exception. It has made most tax increases, even to pay for benefits people want, unthinkable.

This is where the Bush tax cuts come in. They have created a way for inertia to be fiscally responsible.

They are scheduled to expire on Dec. 31 of next year, not long after the 2012 election. If Republicans win the White House and both houses of Congress, they will probably extend all the tax cuts, come what may for the deficit. If Mr. Obama wins re-election and Democrats control Congress, they are likely to extend the cuts on income below $250,000.

But if Mr. Obama wins and Republicans control the House, the Senate or both — an outcome that many analysts, at least for now, consider the most likely one — things could get interesting.

Republicans have said that they will not extend only part of the Bush cuts. Late last year, when the cuts first expired, Mr. Obama yielded to Republican demands to extend all the cuts (while insisting that they expire again after 2012). He was right to do so, in my view, given the fragility of the economic recovery.

Next year, however, the economy should be stronger. When the economy is in good shape, modest tax changes often have little effect on growth. Look at the 1993 Clinton tax increase, which didn’t prevent the 1990s boom. Or consider the Bush tax cuts, which were followed by the slowest decade of economic growth since World War II.

If Mr. Obama wins re-election, he could simply refuse to sign any budget-busting tax cut for the rich — who, after all, have received much larger pretax raises than any other income group in recent years and have also had their tax rates fall more. Republicans, for their part, could again refuse to pass any partial extension.

And just like that, on Jan. 1, 2013, the Clinton-era tax rates would return.

This change, by itself, would solve about 75 percent of the deficit problem over the next five years. The rest could come from spending cuts, both for social programs and the military.

Over the longer term — 20 years — letting all of the Bush cuts lapse would close only about 40 percent of the budget gap. But 40 percent is a great start. No one is seriously suggesting that all deficit reduction should come from higher taxes. Much of it will have to come from slowing the growth rate of medical spending, which is the main cause of the long-term deficit.

To be clear, the end of the Bush cuts is not the ideal way to raise taxes. A better approach would be to close some tax loopholes while possibly even reducing rates. The tax code would then become simpler. Businesses and households would have to waste less effort trying to qualify for tax breaks.

Economists from the right and the left — from President Bush’s tax commission and Mr. Obama’s deficit commission — favor this idea. Politicians, including Mr. Obama and Mr. Ryan, say they do, too.

The problem is that many of the biggest loopholes are politically popular. Saying you favor the vague principle of tax reform is easy. Coming out in favor of cutting the mortgage-interest deduction — or the tax exclusion for employer-provided health insurance or the corporate tax break for new machinery — is not so easy.

A small, bipartisan group of senators, known as the Gang of Six, is now working to do exactly that: devise a credible, specific deficit proposal. White House aides say Mr. Obama supports their overall effort. But they still face a tough task.

Ultimately, deficit reduction will have to involve cutting programs or raising taxes, if not both. Voters don’t particularly like either. So keep your eye on Jan. 1, 2013. The best hope for a solution may be the possibility that the two parties can’t agree to a solution.

E-mail: leonhardt@nytimes.com; twitter.com/DLeonhardt

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Economix: The Logic of Cutting Corporate Taxes

Today's Economist

Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Clinton.

Corporate taxes –- or rather their absence –- have jumped to the top of the news in recent weeks, even drawing humorous commentary from Jon Stewart and Bill Maher. Many Americans are outraged to learn that some profitable American corporations pay little or no taxes in the United States, especially when corporate profits enjoyed their fastest growth ever in 2010.

Shouldn’t the government raise the corporate tax rate to require corporations to contribute their “fair share” to deficit reduction and to enhance the progressivity of the tax system? The answer is no.

In today’s world of mobile capital, increasing the corporate tax rate would be a bad way to generate revenues for deficit reduction, a bad way to increase the progressivity of the tax code and a bad way to help American workers and their families.

After the 1986 tax overhaul, the United States had one of the lowest corporate tax rates among the advanced industrial countries. Since then, these countries have been slashing their rates both to attract investment by American and other foreign companies and to discourage their own companies from shifting operations and profits to foreign locations offering even lower tax rates.

KPMG Corporate and Indirect Tax Rate Survey, 2008, published in “Growth and Competitiveness in the United States: The Role of Its Multinational Companies,” McKinsey Global Institute, June 2010.

The resulting “race to the bottom” in corporate tax rates has made the United States a less attractive place for both domestic and foreign investments, and that has encouraged American multinational companies to shift more of their income abroad, in ways permitted by the United States tax code.

The United States now has the highest corporate tax rate of all developed countries –- and is alone in its attempt to impose taxes on the worldwide income of its resident corporations. All other developed countries and most major emerging countries have adopted a territorial system that exempts most foreign income of their resident corporations from taxes.

Some critics, like Jeffrey Sachs, say the United States should resist participating in the race to the bottom and should champion a multilateral agreement that increases taxes on corporate income. My fellow Economix blogger Nancy Folbre made that same point on Monday.

But there is no sign that other countries are interested. The European Union can’t even agree on harmonizing the corporate tax rates of its member nations. In continuing negotiations over an European Union bailout package, Ireland has steadfastly rejected French and German demands to increase its low corporate tax rate (12.5 percent, the lowest rate in the European Union and one of the lowest in the world).

And Ireland has been wise to do so: its corporate tax incentives are credited with attracting significant amounts of foreign direct investment by European and American companies that fostered the Irish development miracle of the last decade.

The race to the bottom in corporate tax rates reflects intensifying competition among countries for mobile capital and technological know-how to support jobs and wages for immobile workers.

For many years, the conventional wisdom was that the corporate income tax was principally borne by the owners of capital in the form of lower returns. Now, with more mobile capital, workers are bearing more of the burden in the form of lower wages and productivity as investments move around the world in search of better tax treatment and higher returns.

In this environment, a high corporate tax rate not only undermines the growth and competitiveness of American companies; it is also increasingly ineffective as a tool to achieve more progressive outcomes in the taxation of capital and labor income.

The Obama administration and many members of Congress are calling for a significant reduction in the corporate tax rate to promote jobs and competitiveness, as well as a move to a territorial tax system.

At the same time, they are searching for ways to broaden the corporate tax base so that corporate tax revenues will either increase or remain unchanged, even with a lower tax rate. This search is proving difficult and may well produce an undesirable result.

A significant “revenue neutral” reduction in the corporate tax rate would require a significant broadening of the corporate tax base, and that in turn would require scaling back or eliminating three large corporate tax expenditures that reduce the cost of capital and encourage new investment and job creation in the United States: accelerated depreciation, the domestic manufacturing production deduction and the research and development tax credit.

Cutting these items to “pay for” a reduction in the corporate tax rate would increase the cost of new investments in the United States and could impose higher burdens on American workers, in the form of forgone productivity and wage growth. (For a discussion of the pros and cons of different options to reform the corporate tax system, see the President’s Economic Recovery Advisory Board’s Report on Tax Reform Options: Simplification, Compliance and Corporate Taxation, published in August 2010.)

More promising ways to pay for a significant reduction in the corporate tax rate have been proposed.

Prof. Michael Graetz of Columbia Law School told the Senate Finance Committee that the shortfall in corporate tax revenues resulting from a cut in the corporate tax rate could be offset by the imposition of a corporate withholding tax on dividend and interest payments to shareholders and bondholders.

Many countries that have reduced their corporate tax rates have raised taxes on these groups; the United States has been going in the opposite direction.

According to a recent study by Rosanne Altshuler, Benjamin H. Harris and Eric Toder, restoring tax rates on dividends and capital gains to their pre-1997 level of 28 percent could finance a reduction in the federal corporate tax rate to 26 percent from 35 percent.

Such a change would both reduce the incentive for corporations to move investments abroad and increase the progressivity of tax outcomes by shifting more of the burden of corporate taxation from labor to capital owners.

Professor Graetz, and more recently, William G. Gale and Mr. Harris have proposed introducing a value-added tax to reduce the deficit and to finance a reduction in the corporate tax rate.

Most countries that have reduced their corporate tax rates have a value added tax that accounts for a significant share of their tax revenues. To offset the regressive effects of a value added tax, countries have used lower value-added-tax rates on items like food, health care and education, as well as cash subsidies for poor households.

I believe that a federal value added tax with such offsets should be considered as part of a balanced multiyear deficit-reduction package that includes a sizeable reduction in the corporate tax rate.

Many Americans who are outraged that American corporations pay little or no corporate tax would be equally outraged to learn that more than 50 percent of all business income is earned by partnerships, sole proprietorships and S corporations, many of which are very large and profitable and enjoy the same legal benefits as regular corporations and do not pay corporate taxes.

Broadening the corporate tax base to include more business organizations with corporate characteristics would allow for a revenue-neutral reduction in the corporate tax rate that would make the United States a more attractive location for both foreign and domestic investments, with benefits for American workers.

The United States needs a significantly lower tax rate on corporate income, not a higher one.

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