August 14, 2020

Second-Quarter G.D.P. Revised Sharply Higher

Other economic data on Thursday showed the number of Americans filing new claims for jobless benefits fell last week, a potential sign of faster hiring in August.

U.S. gross domestic product grew at a 2.5 percent annual rate in the April-June period, according to revised estimates released by the Commerce Department. That was more than double the pace clocked in the prior three months.

The reports could boost confidence that the economy is turning a corner, shaking off the government austerity enacted earlier in the year when Washington hiked tax rates and slashed the federal budget.

“We are likely now moving past the peak of fiscal drag and, as we do, improving underlying private demand should support a pickup in GDP growth,” said Ted Wieseman, an economist at Morgan Stanley in New York.

The government had initially estimated that GDP expanded at a 1.7 percent rate in the second quarter. But recent data showed that exports climbed during the period at their fastest pace in more than two years.

Economists polled by Reuters had forecast the economy growing at a 2.2 percent pace.

Many economists expect the economy will accelerate further in the second half of the year as austerity measures begin to weigh less on national output.

That drag was evident in the second quarter, when spending contracted at all levels of government. Indeed, Thursday’s data showed the economic drag from spending cuts was greater in the second quarter than initially estimated.

Still, the data could make officials at the U.S. central bank more confident in their plan to begin reducing monthly bond purchases later this year.

“The upward revision today does help cement the decision to start tapering,” said Stuart Hoffman, an economist at PNC Financial in Pittsburgh.

Stock prices rose, as did yields on U.S. government debt, while the dollar strengthened against the euro.

The Fed’s program has reduced borrowing costs and helped spark a recovery in the nation’s housing market, which collapsed during the 2007-09 recession.

In the second quarter, investments in housing accounted for nearly a fifth of the economy’s growth during the period.

However, other reports have suggested that housing began to look more shaky toward the end of the quarter. Expectations that the Fed could trim its $85 billion in monthly bond purchases as early as September have driven mortgage rates sharply higher since May.

The bond-buying program is one of the United States’ last major economic stimulus programs, as government spending began to drag on GDP in late 2010.

In the second quarter, higher taxes appeared to hold consumers back. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, slowed to a 1.8 percent growth pace after rising at a 2.3 percent rate in the first quarter.

Corporate profits, however, unexpectedly climbed in the second quarter, posting their fastest after-tax gain since late 2011.

The report leaves the annual economic growth rate averaging 1.8 percent in the first half of the year, making it more plausible that GDP could expand this year as much as the Fed forecasts. Its forecasts in June were for economic growth of at least 2.3 percent in 2013.

Still, some of the strength in the second quarter could dull growth in the third quarter. Part of the upward revision was due to retailers restocking their shelves at a faster pace than originally estimated, so they may face less of a need to build inventories between July and September.

“Inventories might be more of a headwind to (third-quarter) growth than we had been anticipating,” said Daniel Silver, an economist at JPMorgan in New York.

A separate report from the Labor Department showed the number of Americans filing new claims for unemployment benefits slipped 6,000 last week to 331,000.

Claims have not strayed too far from the 330,000 level since mid-July, bolstering expectations of an acceleration in the pace of employment gains in August.

(Reporting by Jason Lange; Additional reporting by Lucia Mutikani in Washington and Richard Leong in New York; Editing by Paul Simao)

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Economix Blog: How Immigration Reform Would Help the Economy


Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

After many months of rival assertions by interested parties, we finally have an authoritative assessment by an impartial referee of the effects of the so-called Gang of Eight senators’ proposed legislation on immigration. On Tuesday, based on work with the Joint Committee on Taxation, the Congressional Budget Office released two reports – one on the direct federal budget impact and one on the broader and longer-run economic effects, with a helpful summary blog post by the office’s director, Douglas Elmendorf).

Today’s Economist

Perspectives from expert contributors.

The assessment is positive. This precise immigration proposal would improve the budget picture (see this helpful chart) and stimulate economic growth. The immediate effects are good and the more lasting effects even better. If anything, the long-run positive effects are likely to be even larger than the C.B.O. is willing to predict, in my assessment. (I’m a member of the office’s Panel of Economic Advisers but I was not involved in any way in this work.)

The debate over immigration is emotionally charged and, judging from recent blog posts, the Heritage Foundation in particular seems primed to dispute every detail in the C.B.O. approach – and to assert that it is underestimating some costs (including what happens when illegal immigrants receive an amnesty and subsequently claim government-provided benefits, a point Heritage has emphasized in its own report).

There is good reason for the C.B.O.’s careful wording in its analysis; it operates within narrow guidelines set by Congress, and its staff is wise to stick to very well-documented points. Still, as the legislation gains potential traction, it is worth keeping in mind why there could be an even larger upside for the American economy.

In 1776, the population of the United States was around 2.5 million; it is now more than 316 million (you can check the real-time Census Bureau population clock, but of course that is only an estimate).

Think about this: What if the original inhabitants had not allowed immigration or imposed very tight restrictions – for example, insisting that immigrants already have a great deal of education? It’s hard to imagine that the United States would have risen as an economy and as a country. How many United States citizens reading this column would be here today? (I’m proud to be an immigrant and a United States citizen.)

The long-term strength of the United States economy lies in its ability to create jobs. For more than 200 years as a republic (and 400 years in total) immigrants have not crowded together on a fixed amount of existing resources – land (in the early days) or factories (from the early 1800s) or the service sector (where most modern jobs arise). Rather the availability of resources essential for labor productivity has increased sharply. Land is improved, infrastructure is built and companies develop.

Most economic analysis about immigration looks at wages and asks whether natives win or lose when more immigrants show up in particular place or with certain skills. At the low end of wage distribution, there is reason to fear adverse consequences for particular groups because of increased competition for jobs. In fact, the C.B.O. does find that income per capita would decline slightly over the next 10 years before increasing in the subsequent 10 years: “Relative to what would occur under current law, S. 744 would lower per capita G.N.P. by 0.7 percent in 2023 and raise it by 0.2 percent in 2033, according to C.B.O.’s central estimates.”

And it is reasonable to ask who will pay how much into our tax system – and who will receive what kind of benefits. This is the terrain that the C.B.O. and the Heritage Foundation are contesting. (See, too, a letter to Senator Marco Rubio, Republican of Florida, from Stephen Gross, the chief actuary of the Social Security Administration. Mr. Gross said immigration reform would be a net positive; of the current 11.5 illegal immigrants, “many of these individuals already work in the country in the underground economy, not paying taxes, and will begin paying taxes” if the immigration legislation are adopted. New illegal immigration would decline but not be eliminated.)

But the longer-run picture is most obviously quite different. The process of creating businesses and investing – what economists like to call capital formation – is much more dynamic than allowed for in many economic models.

People will save and they will invest. Companies will be created. The crucial question is who will have the ideas that shape the 21st century. (See, for example, the work of Charles I. Jones of Stanford University on this point and a paper he and Paul Romer wrote for a broader audience.)

This is partly about education – and the proposed legislation would tilt new visas more toward skilled workers, particularly those in science, technology, engineering, and math (often referred to as STEM).

But it would be a mistake to limited those admitted – or those allowed legal status and eventual citizenship – to people who already have or are in the process of getting a university-level education. To be clear, under the new system there may well be more low-wage immigrants than high-wage immigrants, but the transition to a point system for allocating green cards is designed to increase the share of people with more education and more scientific education, relative to the situation today and relative to what would otherwise occur.

Many people have good ideas. The Internet has opened up the process of innovation. I don’t know anyone who can predict where the next big technologies will come from. I also don’t know who will figure out how to organize production – including the provision of services – in a more effective manner.

We are competing in a world economy based on human capital, and people’s skills and abilities are the basis for our productivity. What we need more than anything, from an economic point of view, is more people (of any age or background) who want to acquire and apply new skills.

Increasing the size of our domestic market over the last 400 years has served us well. Allowing in immigrants in a fiscally responsible manner makes a great deal of sense — and the reports from the Joint Committee on Taxation and C.B.O. are very clear that this is now what is on the table. If the children of immigrants want to get more education, we should welcome the opportunity that this presents. When you cut off the path to higher education, you are depriving people of opportunity – and you are also hurting the economy.

The deeper political irony, of course, is that if the Heritage Foundation and its allies succeed in defeating immigration legislation, there are strong indications that this will hurt the Republican Party at the polls over the next decade and beyond. Yet, even so, House Republicans seem inclined to oppose immigration reform. That would be a mistake on both economic and political grounds.

We are 316 million people in a world of more than 7 billion – on its way to 10 billion or more (read this United Nations report if you like to worry about the future).

We should reform immigration along the lines currently suggested and increase the supply of skilled labor in the world. This will both improve our economy and, at least potentially, help ensure the world stays more prosperous and more stable.

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Today’s Economist: Casey B. Mulligan: Further Thoughts on Assessing Regulatory Costs and Benefits


Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

A new study shows that the impact of federal government regulation might be even more significant than that of federal taxation.

Today’s Economist

Perspectives from expert contributors.

I recently wrote about the need for a federal regulation budget, explaining how private-sector activities to comply with regulation do not appear in the official federal budget, while private-sector interactions with tax and spending programs do, in terms of the amount of money they pay or receive. I also pointed to a few first steps to quantifying the amount of regulation.

Last week Sam Batkins of the American Action Forum, which describes itself as “a forward-looking policy institute dedicated to keeping America strong, free and prosperous,” released a kind of federal regulatory budget for each of the last several years.

The budgets began with the Federal Register, a daily journal of laws passed by Congress, executive orders and federal government agency reports. Government agencies are often required to estimate private-sector costs of complying with those regulations, and Mr. Batkins aggregated those costs (the federal Office of Management and Budget is obligated to conduct a related analysis on a subset of regulations, as you can see in one of its reports).

As a daily journal, the Federal Register contains federal government activity during the year, which makes it different from, say, the federal budget for taxes. Much of the taxes paid in 2012, for example, were collected pursuant to laws and Internal Revenue Service rules promulgated in previous years, at which times they would have appeared in the Federal Register.

In other words, the 2012 Federal Register might be interpreted as additions and subtractions to the inventory of federal regulations as they stood at the end of 2011, rather than the total amount of regulation faced by the private sector during 2012. Mr. Batkins found that new regulations cost $236 billion in terms of compliance, while regulations rescinded during the year reduced compliance costs by $2.5 billion.

He found that more compliance costs were added in 2012 than in any of the other several years in his study.

Just as a government revenue budget should not be interpreted as net costs because the revenue makes beneficial spending possible, Mr. Batkins’s regulatory costs should not be interpreted as net costs because the regulations are thought to create benefits, too.

Another difficulty with estimates from the Federal Register is that new regulations may partly replace old ones (even though the old ones may technically remain on the books), so one might want to subtract the previous compliance costs of obsolete regulations from Mr. Batkins’s estimate to arrive at the total increase in compliance costs from, say, 2011 to 2012.

Other costs in Mr. Batkins’s study are those imposed on state and local governments, which are real costs but largely result in higher taxes for state and local taxpayers. That means Mr. Batkins’s total is really a combination of tax costs and regulatory costs (equivalently, if one were to add tax revenue to Mr. Batkins’s compliance costs, the total would involve some double-counting).

A nice feature of Mr. Batkins’s study, and one it holds in common with a budget for taxes and spending, is that it can be examined by type. He finds that “commodities and securities” was one of the largest categories of new compliance costs, largely because of the implementation of Dodd-Frank regulations. Environmental regulations were another large category.

The results show that, for good or for bad, the costs of complying with federal regulations are probably accumulating more rapidly than taxes are.

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Economic Reports Help Shares Gain Ground

Stocks rose on Thursday after investors recovered from a pessimistic report on federal budget talks and were cheered by reports on economic growth and unemployment claims.

Stock rose and fell in tandem with the tenor of remarks from Washington. The Dow was up as much as 77 points in morning trading, but it turned negative when House Speaker John Boehner reported little progress in budget talks. Stocks recovered slowly in afternoon trading.

The Dow Jones industrial average finished with a gain of 36.71 points, or 0.28 percent, at 13,021.82. The Standard Poor’s 500-stock index rose 6.02 points, or 0.43 percent, to 1,415.95. The Nasdaq composite index gained 20.25 points, or 0.68 percent, to 3,012.03.

After meeting with Treasury Secretary Timothy F. Geithner, Mr. Boehner told reporters that Democrats had yet to say which cuts to government benefit programs they would accept, suggesting that a final budget deal was not close. Republicans have said they are open to increasing taxes but only if that is met by significant cuts to spending.

Investors have been closely watching the talks between the White House and Congress over the spending cuts and tax increases that are scheduled to start on Jan. 1 unless a deal is reached to cut the budget deficit.

“It’s a headline-watching market with this fiscal cliff,” David Brown, the chief market strategist at the investment research firm Sabrient Systems, said, referring to the combined tax increases and spending cuts.

Mr. Brown said the continuing negotiations were likely to cause the stock market to take sudden turns in the weeks ahead. “But things seem to be moving in the right direction,” he said. “I don’t think either party wants to get pinned with hurting the market or the economy.”

Economists have forecast that tax increases and spending cuts will push the economy back into recession.

Stock in Guess, a clothing maker, gained 49 cents to close at $25.74 after it joined the ranks of companies pledging special dividends to shareholders before favorable tax rates on dividends expire at the end of the year.

Dividends, now taxed at 15 percent, will be treated like ordinary income next year unless Congress and the White House extend current tax breaks as part of a budget deal.

The Commerce Department raised its estimate for economic growth to an annual rate of 2.7 percent in the July-through-September period from the 2 percent rate estimated a month ago. The estimate was 1.3 percent rate in the three previous months.

The Labor Department also reported that the number of Americans applying for unemployment benefits for the first time fell to 393,000 last week, in line with economists’ expectations. It was the second consecutive drop after Hurricane Sandy drove applications higher this month.

Target, Gap and other retail stores posted poor sales numbers, driving their stocks lower. Kohl’s reported a decline in sales and fell 12 percent to lead decliners in the S. P. 500. Kroger, the supermarket chain, rose $1.19 to $26.25 after reporting stronger quarterly profits and raising its earnings outlook for the year.

Interest rates were lower on Thursday. The Treasury’s benchmark 10-year note rose 4/32, to 100 2/32, and the yield slipped to 1.61 percent from 1.63 percent late on Wednesday.

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Letters: Executive Pay, Revisited

Executive Pay, Revisited

To the Editor:

Re “We Knew They Got Raises. But This?” (July 3), which offered updated figures on executive pay packages for 2010:

Having spent my entire working career in the elementary classroom, I know little about the business world other than what I read in the newspaper. Still, I must wonder whether any C.E.O.’s are worth the pay and bonuses they receive. Sure, in the competitive world of business, a skilled executive should draw more than those who work for him or her, but why do the awards have to be so astronomical?

As a retired California teacher, my pension is modest. Yet I have no complaints: this monthly retirement pay allows me to pay the rent, put food on the table. As skilled as C.E.O.’s must be in management, I wonder if any of them could manage a class of 32 active third graders, keep order, promote learning, teach how to behave and treat others fairly while maintaining his or her sanity in front of the class? Barney Scott

Spring Valley, Calif., July 3


To the Editor:

There is a simple solution to the problem of executive pay that would also help balance the federal budget.

Not that long before Reaganomics, the highest income tax rate in the United States was in the area of 90 percent. If we now instituted a top rate of, say, 75 to 80 percent, adjusted downward for lower earners, we would not only raise badly needed government revenue but would also put an end to excessive executive pay.

Why? No corporate board would approve disproportionately high compensation while knowing that most of the money would go to the I.R.S. Corporate managers would consider that wasteful — such is the psychology of many of the wealthy.

Runaway executive pay inflation is a fairly recent phenomenon, born of irresponsible tax cuts. Sound tax policy effectively curbs excesses while creating a prosperous society through public benefits.

Gretchen Kaapcke

Santa Fe, N.M., July 4

To the Editor:

My daughter just completed four years of college, graduating with honors. She is one of many graduates seeking employment in this difficult economy. I wonder if any of these extremely well-paid executives would consider giving up some $1 million or $2 million of their pay packages and creating a few entry-level jobs for these young people needing a break.

Such amounts from the executives’ huge paychecks would surely not be missed. Cheryl Williams

Manila, July 4


To the Editor:

According to the theory of trickle-down economics, all of those at the bottom of the economic ladder now have something to cheer about: the steep climb in the pay of our high-end corporate leaders.

Those executives had a median pay gain of 23 percent in 2010, so if the trickle-down idea works, there will surely be plenty to trickle down to all of us. Or, instead, has our economic system evolved from a shared-wealth society into one that benefits the few at the top, while the rest, including many recent public employees, are humiliated by having their pensions, health care benefits, and salaries reduced or frozen by government edict? Morris Roth

Fort Lee, N.J., July 3

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As More Investors Seek Shelter in Gold, Russia Is Only Too Happy to Sell

MOSCOW — Two years ago during the global recession, gold bugs took note when Russia’s president, Dmitri A. Medvedev — taking a swipe at the American dollar — proposed that central banks hold reserves in what would be a new, gold-backed international currency.

But more recently, as gold prices have soared — in part on market expectations that central banks will begin adding to gold reserves as a buffer against global uncertainties — Russia is not following its own advice.

Far from hoarding gold, Russia is selling it. The country’s domestic gold mining industry has continued to sell onto international markets. Russia has also eased gold trading rules to let more gold be mined and exported more quickly.

Meanwhile, the Russian central bank is buying gold at a desultory pace that is barely keeping up with its overall accumulation of foreign currency reserves.

In short, Russia is selling gold because this has been a seller’s market — and the nation needs the money. After years of surpluses before the recession, Russia’s federal budget has slipped into a deficit. And economists predict that Russia could also run a trade deficit within a few years, something that could be addressed in part by exporting gold.

Gold, which many investors view as the ultimate safe haven, is off the recent highs it reached in April. But the price is still up 62 percent in the last two years. And just this week, gold futures contracts have risen in response to continued uncertainty over the European debt crisis. On Thursday, spot gold contracts rose to $1,530.20 an ounce, up more than 3 percent for the week so far.

Russia was the fourth-largest gold producer globally last year, following China, Australia and the United States. (China in 2010 mined 351 metric tons of gold; Australia 261 tons and the United States 234 tons. Russia mined 203.)

When asked about Russian officials’ supposed commitment to holding gold, the central bank issued written responses.

“The bank of Russia is not committed to buying any particular amount of gold,” the bank said. “Nor is there any official target amount of gold purchases. The bank buys gold at a market price, and its buying intentions completely depend on the market conditions.”

And despite Russia’s frequent criticism of the dollar’s status as an international currency, the bank statement said its gold policies were based purely on its investment judgment of the value of gold as a reserve. “It doesn’t result from the wish to diversify away from any particular asset or currency,” the bank said.

Gold as a share of Russia’s central bank’s reserves has actually increased — to 7.8 percent of the total this year, from 5.3 percent in January 2010. But nearly all of that gain is because of the rising value of the gold over that period.

The Russian bank’s gold holdings are far below the global average of 12.1 percent as reported by the International Monetary Fund. And Russia’s portion is minuscule compared with the United States, which holds 74 percent of its reserves in gold, according to the Treasury Department.

The Russian central bank now, as before the economic crisis, keeps about 50 percent of its reserves in United States dollars. It needs those assets on a daily basis to intervene in currency markets to smooth out fluctuations in monetary flows from Russia’s main export of oil and natural gas, which are priced in dollars.

Russia’s gold behavior seems grounded in the country’s hard-learned lessons about commodity markets. Since its financial crisis in 1998, Russia has enacted policies intended to counterbalance the historical cycles of commodity prices to protect the economy during downturns.

Russia, for example, which is currently the world’s largest oil producer, imposes high marginal taxes on oil exports during price spikes, with the proceeds shunted to Russia’s sovereign wealth funds. During the recession, as oil prices plummeted, the government released a portion of these funds as a shock absorber for its domestic economy.

But gold, unlike oil, is naturally countercyclical. In times of economic insecurity, investors tend to buy gold. And so, for Russia’s economy, an economic crisis can be a good time to sell, not stockpile.

And in contrast to tight state control of the far more lucrative petroleum industry, authorities have largely liberalized gold mining and trading in Russia, and have imposed no export restrictions or tariffs.

Russia formerly maintained tight Soviet-style secrecy around its gold reserves. Gold’s glasnost occurred in 1992, when Yegor T. Gaidar, then prime minister, instructed the newly created central bank to publicly declare its holdings, at that point about 300 metric tons. (Last month the central bank held 854 metric tons of gold, while the United States Treasury, representing a much larger economy, reported holding 8,133 metric tons.)

There was more loosening in 1996 when Gokhran, a state agency that formerly had a monopoly on gold purchases, surrendered that role. Now, approximately 30 private banks are licensed to purchase gold. The largely liberalized sector has flourished.

“Our leaders pay far less attention to gold than to petroleum,” Yuri V. Kirilov, director of Irmita-Konsalt, a consulting company, said in an interview.

The formerly highly secretive Gokhran agency, one of two state repositories for gold along with the central bank, also now publishes its reserves of gold bars. It had 12.3 tons in June. And like the central bank, it is not bulking up. So far this year, the agency has purchased only 375 kilograms of gold, according to Prime-Tass news agency.

Gokhran, formed in 1920 as a depository for jewelry confiscated from the bourgeoisie and from the millions of people sent to gulag camps under Stalin, had long embodied the mystery around Soviet and then Russian gold policy.

In one of the few residual areas of secrecy in Russian gold policy, it still does not disclose its volumes of gold jewelry from prison camp inmates and so-called trophy gold taken from Eastern European nations after World War II.

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