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Euro Finance Ministers Struggle to Reach Accord on Greece

November 26, 2012 by Leave a Comment

The haggling continues against the background of a financial catastrophe unfolding in Greece, where the economy has shrunk by about one-fifth in three years and unemployment is hovering at around 25 percent. The unrelenting gloom means suffering for the Greek public and also makes it increasingly improbable that the country can pay back its debts in full.

Ministers said ahead of the meeting that they had made strides in a teleconference on Saturday toward reaching a joint position. “All the parameters of the solution are on the table,” the French finance minister, Pierre Moscovici, said on arriving at the meeting.

But diplomats in Brussels said they expected the meeting to be long and stormy and run late into the night — as did a similar gathering last week — as the parties try to find alternative ways of giving Greece relief in light of opposition by major creditors like Germany and the Netherlands to forgiving some Greek debt.

To reach a deal, the I.M.F. may also have to compromise, loosening its budgetary expectations for Greece and accepting that the country will not be able to hit a target of reducing debt to 120 percent of gross domestic product by the end of the decade.

The seemingly endless round of meetings over Greece is a sign that after nearly three years of crises, the politicians are still trying to contain contagion in the euro zone, which began with a huge hole in Greek accounts, even as that country’s debt prospects continue to worsen.

For Greece, the immediate goal is unlocking a loan installment worth €31.5 billion, or $40.8 billion, from an international bailout program.

If ministers reach a deal, Greece is likely to get a larger amount of about €44 billion because two additional installments are due by the end of the year under the program.

In June, creditors froze aid from the current program, worth €130 billion, after determining that Greece was failing to meet the conditions of that bailout, its second.

“Greece has fully delivered its part of the agreement, so we expect our partners to deliver their part too,” Yannis Stournaras, the Greek finance minister, said Monday ahead of the meeting.

The complication that has led to further delays and acrimony among lenders — as well as to the flurry of meetings — are conflicting views about how quickly Greece can grow its economy, lure investors, pay down its towering debt and return to the markets to borrow money once aid programs expire later this decade.

Since June, the Greek economy has worsened and social problems in the country have become more acute as employment has climbed. Those factors have already led Greece’s lenders to agree that the government in Athens will need two years longer than previously agreed, or until 2016, to meet its budget targets.

But that concession will cost more money because of a range of factors including revenues from privatizations that will not be as large as expected. The cost could come to nearly €33 billion on top of existing bailouts to help Greece reach a primary budget surplus, which excludes debt repayments.

The prospect of paying more to Greece has perturbed a number of lenders, particularly Germany, where transferring more wealth to the poorer-performing economies of Southern Europe is politically toxic, particularly as Chancellor Angela Merkel gears up for a re-election fight next year.

Rather than being willing to write down their countries’ Greek holdings, ministers on Monday were instead discussing other options of making Greece’s debt more manageable — like lowering interest rates, lengthening the deadlines for debt repayments, allowing the country to buy back its bonds at a steep discount and asking national governments to return profits made on bonds held by the European Central Bank.

Many analysts regard those measures as necessary but insufficient to remedy Greece’s problems. They say that Germany and other reluctant creditors will have to take politically unpalatable losses, or haircuts, on their holdings of Greek debt to keep the country in the euro area, even if they are able to agree on other measures to reduce the size of the country’s deficit and reform the economy.

The result is a standoff, with Germany trying to keep the bill for Greece as low as possible at least until after the German elections in 2013.

Those concerns were on display over the weekend. Jörg Asmussen, a member of the E.C.B.’s Executive Board, told the German newspaper Bild that a write-down of Greek debt should not be part of the deal, echoing repeated statements from the German finance minister, Wolfgang Schäuble, who said it would be illegal.

Maria Fekter, the Austrian finance minister, seemed to agree, saying Monday, “That’s not on the agenda at the moment.”

“A debt cut for the public bodies, and in fact the taxpayers, was not wanted by any country,” she said.

On the other side is the I.M.F., which insists that fresh money, or even a write-down, will be needed to put Greece on a pathway to manageable debt by the end of the decade. By its own rules, the I.M.F. can lend money only if the debt is “sustainable” or can be paid back by a recipient country, like Greece.

On Monday, the Fund was pressing ministers to agree that Greece’s debt should immediately be cut by 20 percent of G.D.P. through methods like lowering interest rates and extending maturities on loans, and to pledge further reductions in future, with the aim of reaching sustainable levels.

Christine Lagarde, the managing director of the I.M.F., has insisted that Greece pare its debt to 120 percent of gross domestic product by 2020. But that target has steadily become considered unfeasible.

Greek debt is now estimated at 175 percent of G.D.P., and its economy could shrink again, pushing that figure to 190 percent next year, and even up to 200 percent by 2014, according to some E.U. officials.

That means the I.M.F. will almost certainly have to make concessions to help keep Greece afloat by loosening its debt target, perhaps to around 124 percent by the end of the decade.

Arriving at the meeting in Brussels on Monday, Ms. Lagarde pledged “to work towards a solution that is credible for Greece,” and added, “We are going to work very intensely on that.”

Article source: http://www.nytimes.com/2012/11/27/business/global/euro-finance-ministers-confront-a-standoff-over-greece.html?partner=rss&emc=rss

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Europe Gives Greece Two More Years for Budget Cuts

November 13, 2012 by Leave a Comment

But the ministers put off until Nov. 20 any decision to give Greece a long-delayed payment worth $40 billion so international officials and national parliaments could continue to assess the steps that the government in Athens had agreed to make as a condition of two bailout packages totaling 240 billion euros, or $305 billion.

In a sign that fixing the Greek economy and the euro would continue to be a rancorous process even after three years of continuous crisis, Jean-Claude Juncker, the prime minister of Luxembourg, and Christine Lagarde, the managing director of the International Monetary Fund, publicly disagreed on how long to give Greece to make its debts sustainable into the next decade.

Mr. Juncker told reporters at a late-night news conference that Greece should now be given until 2022 to cut its debt to 120 percent of its gross domestic product. But Ms. Lagarde immediately met that assertion with incredulity, saying there was an urgent need to take steps sooner to ensure the country’s high external financing needs would be viable in the future.

“The appropriate timetable is 120 percent by 2020,” said Ms. Lagarde, who shook her head and rolled her eyes at Mr. Juncker’s comments. “We clearly have different views,” she said, adding that keeping to that goal was vital “so that that country can be back on its feet and reaccess the private market in due course.”

Speaking later in the news conference, Mr. Juncker insisted that his comment “was not a joke.”

Ms. Lagarde also was more cautious in her praise of progress made by the Greek authorities than other euro area officials, including Mr. Juncker.

“From the I.M.F.’s point of view, it’s critical that all chapters of the book be not only opened but closed satisfactorily — that means the fiscal commitments, the structural reforms, the financing and the debt sustainability analysis, which we will clearly come back to with additional work to be done in coming days,” Ms. Lagarde said.

Last week, Greece’s shaky coalition won a tight vote on a package of austerity measures and fiscal overhauls totaling 17 billion euros for the next four years.

Then, early on Monday, the Greek government pushed through Parliament a tough budget for 2013 that calls for cuts totaling 9.4 billion euros, or $12 billion, to salaries, pensions and social benefits, and that raised the retirement age to 67 from 65 and imposed higher taxes.

Those steps were a sign that “words have been backed by deeds,” Olli Rehn, the E.U. commissioner for economic and monetary union, told the same news conference.

“It is time to debunk the perception that no progress has been made,” said Mr. Rehn, referring to the structural reforms made by Greece. “This perception is damaging, it is unfair, and it is simply wrong.” Mr. Rehn gave as examples the way Greece had reformed disbursement of medicines and adjusted its pension system.

Failure to disburse the pending loan tranche to Greece could result in a chaotic exit from the euro and threaten the currency.

But obstacles to releasing that money remain. Even when ministers do give the green light for that disbursement, the decision still is subject to approval by a number of national parliaments.

Mr. Juncker said checking that those parliamentary approvals had been made could require finance ministers to hold a teleconference or meet in person at the end of the month in addition to their Nov. 20 meeting.

“Seriously, thoroughness is a must and before we decide, Germany’s Bundestag has to be involved, just like in other countries,” Wolfgang Schäuble, the German finance official, said earlier on Monday.

In Greece, promised reforms and budget cuts went off track in recent months, partly as a result of holding two elections in three months earlier this year. That left the government in Athens seeking more time to make reforms.

Yet relaxing the terms of agreement with Greece will cost more money for lenders and put leaders of big creditors like Germany in an awkward position with voters who have grown tired of bailing out others.

A draft copy of a report by the troika — the European Commission, the European Central Bank and the International Monetary Fund — that was circulating at the meeting said the bill for allowing Greece the additional time would be 32.6 billion euros.

Addressing lawmakers before the vote on the Greek budget, Prime Minister Antonis Samaras said the new cuts would be the last and he appealed to the troika to support his country.

“Greece has done its part,” Mr. Samaras said. “Now it’s the turn of the lenders.”

Article source: http://www.nytimes.com/2012/11/13/business/global/europe-gives-greece-two-more-years-for-budget-cuts.html?partner=rss&emc=rss

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Economic View: Budget Showdown Offers an Opportunity for Progress

November 12, 2012 by Leave a Comment

LOOMING CHANGES ARE BAD POLICY Though our long-run budget problems are enormous, a permanent dive over the cliff isn’t the answer.

Cold-turkey deficit reduction would cause a significant recession. A recent analysis by the Congressional Budget Office estimated that going headlong over the cliff would cause our gross domestic product, which has been growing at an annual rate of around 2 percent, to fall at a rate of 2.9 percent in the first half of 2013. I suspect that this estimate is, if anything, too optimistic. Many private-sector analysts predict a longer, deeper recession if we take the plunge. But even the C.B.O. number suggests that the resulting recession would be worse than those in 1990 and 2001.

Going over the cliff would also be a poor way to deal with our long-run deficit problem. Too much of the deficit reduction comes from tax increases — particularly on middle-class families whose incomes have stagnated for the past decade. And the spending cuts are haphazard and do nothing to deal with the fundamental driver of our long-run budget problems: rising government health care spending.

DON’T KICK THE CAN DOWN THE ROAD Just as going permanently over the cliff isn’t the answer, neither is wimping out. Pre-emptively extending all of the Bush tax cuts for another year and postponing the spending cuts would be a mistake. The cliff is a unique opportunity to forge a genuinely bipartisan solution to our budget problems. Republicans have strong views about how they want to reduce the deficit. The threat of automatic tax increases and military spending cuts gives Democrats a fair shot at negotiating for their priorities as well.

As bad as going over the cliff — and staying over it — would be, going over for a few weeks or even a few months wouldn’t be catastrophic. The Treasury has some discretion over how quickly the tax withholding tables are changed, so some of the tax increases might not be felt for a while. And since the result of a stalemate is budget consolidation, going over the cliff temporarily is unlikely to unnerve bond markets.

SOME TAXES NEED TO RISE A brief fall off the cliff would free lawmakers from the straitjacket of having signed Grover Norquist’s pledge never to raise taxes. Once taxes have returned to their Clinton-era levels, a partial reinstatement of the Bush tax cuts would count as a tax cut. And a brief plunge would also show that the president is serious about raising additional revenue.

And he should be. Every serious bipartisan budget plan — Bowles-Simpson, Rivlin-Domenici, the Gang of Six — includes additional revenue. That makes sense. With a long-run budget as out of balance as ours, the only way to solve the problem while spreading the pain widely is to work along every possible margin.

Democrats should be flexible, however, about the form of tax increases. If Republicans want to cut exemptions and loopholes more and raise marginal rates less, that should be on the table. What shouldn’t be contemplated is redistributing tax burdens away from the wealthy and toward the middle class. And the additional revenue needs to be substantial. The Bowles-Simpson proposal that revenue be about $200 billion a year higher should be a guidepost for the size of a sensible tax component.

EMBRACE ENTITLEMENT REFORM Republicans in Congress will likely insist that reforms to Medicare, Medicaid and Social Security be part of any budget deal. Democrats should meet them partway. It will be impossible to get our long-run deficit under control without slowing entitlement spending. Rather than fighting all changes to these programs, Democrats should work to preserve their core functions and protect the most vulnerable.

For example, in a previous column, I described how replacing Medicare’s fee-for-service model with accountable care organizations could help reduce costs while maintaining quality. And with the president’s health care law now likely to go into effect on schedule, it’s possible to consider gradually raising the eligibility age for Medicare. This would lower government health care spending and encourage people to continue working longer — and, thus, to continue paying taxes.

Another entitlement program needing attention is Social Security Disability Insurance. It provides essential support for people unable to work, and will be even more important if we raise the Medicare eligibility age. But the current system is expensive and inefficient. The rolls have surged in recent decades, and the system discourages part-time work and moves to less-demanding jobs. Economists have proposed innovations that could allow more workers to stay in the labor force — thus slowing spending growth and improving the security and well-being of disabled workers.

PRESERVE VALUABLE PUBLIC SPENDING To deal with the deficit, we’re going to have to trim other types of spending as well. My plea is to protect public investment. Infrastructure, job training and basic scientific research are the country’s seed corn — the spending that allows us to be more productive and prosperous in the future.

A related point involves near-term jobs measures. Because immediate severe austerity would be terrible for the economy and for unemployment, the president needs to gain support for including job-creation measures in an overall fiscal reform package.

One such measure that he probably shouldn’t embrace is an extension of the payroll tax cut legislated in late 2010. That cut, like its predecessor in the 2009 Recovery Act, was useful, but less effective than expected for stimulating consumer spending. And if we extend the cuts for a fifth year, I fear that they could become permanent.

Far better to focus on temporary infrastructure spending, which would create jobs today and leave us with something of lasting value. One way to achieve bipartisan support might be to give Republicans in Congress substantial control over the specifics of the spending. Our infrastructure needs are so large that we shouldn’t be fighting over which to address first.

IN the seven weeks before Jan. 1, not even the best-functioning political system could enact the kind of comprehensive fiscal plan I’ve outlined. What policy makers can do is agree in principle on the broad components of a plan and the top-line numbers for deficit reduction in each area. With that vote in hand, it would be reasonable to enact temporary measures to avoid the fiscal cliff while Congress negotiates the details of a comprehensive agreement.

A child care book I read as a new mother encouraged parents not to dread nighttime feedings, but to embrace them as another chance to nurture their babies. We should view the fiscal cliff the same way — not as a disaster to be avoided, but an opportunity to be embraced. It’s a chance for Congress and our re-elected president to nurture the economy and to protect the future of all Americans.

Christina D. Romer is an economics professor at the University of California, Berkeley, and was the chairwoman of President Obama’s Council of Economic Advisers.

Article source: http://www.nytimes.com/2012/11/11/business/budget-showdown-offers-an-opportunity-for-progress.html?partner=rss&emc=rss

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Off the Charts: Slower Economic Growth Is Seen as Population Ages

November 10, 2012 by Leave a Comment

That forecast was issued Friday by the Organization for Economic Cooperation and Development, a group of 34 countries that includes all of the major industrialized nations.

“Aging will be a drag on growth in many countries,” said the report, titled “Looking to 2060: Long-Term Global Growth Prospects.” It also projected that while the aging of the population would be offset to some extent by better education in many countries, global growth in gross domestic product, which averaged 3.5 percent a year from 1995 through 2011, would rise to 3.7 percent through 2030, but then fall to just 2.3 percent over the next three decades.

“The active share of the population has to finance the old population,” said Asa Johansson, a senior economist in the organization and the principal author of the report, explaining why the rising proportion of older people is expected to reduce growth.

The accompanying charts show the growth forecasts for the world and for nine major countries, as well as what is known as the old-age dependency ratio, defined as the number of people over the age of 65 for each 100 people ages 15 to 64, which defines the working-age population.

The process is expected to be particularly rapid in China. In 2010, that country had just 11.3 people over 65 for each 100 people in the working-age population, less than half of Britain’s 25.1 figure and well below the United States’s 19.9. But the United Nations estimates that by 2045, the dependency ratio in China will be 39, almost exactly the same as in Britain and well above the 34.6 figure forecast for the United States.

The O.E.C.D. report said that more rapid aging in China “partly explains why India and Indonesia will overtake China’s growth rate in less than a decade.” It forecast that China’s G.D.P. would grow at a rate of 2.3 percent a year from 2030 to 2060, little more than the 2 percent it forecast for the United States. But it projected growth of 3.3 percent in Indonesia and 4 percent in India.

The United Nations estimates reflect uncertainty about changes in fertility rates over the coming decades, and the charts show three forecasts based on assumptions of high, medium and low rates. The O.E.C.D. growth forecasts assume the medium fertility rates.

If the medium rates are correct, by 2060 Germany and Italy will each have old-age ratios above 55, while Britain and France will have ratios below 45.

Ms. Johansson said she expected that more countries would move to delay retirement age, and noted that some countries were considering indexing that number to life expectancy.

One thing that could render these forecasts wrong would be an increase in immigration. For South Korea, which now seems to be on course to rival Japan as one of the oldest — and slowest-growing — countries in the world by late in this century, an obvious source of new workers would be the much younger North Korea, if politics ever made that possible. For many other countries, a source would be less developed nations, something that is politically unpopular in both the United States and Western Europe, and all but anathema in Japan.

Perhaps the politics of that will change someday, as young immigrants are viewed not as competitors for limited employment opportunities but as sources of tax revenue to help support aging populations.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2012/11/10/business/economy/slower-economic-growth-is-seen-as-population-ages.html?partner=rss&emc=rss

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Spain Raises Deficit Forecast

December 30, 2011 by Leave a Comment

MADRID — Spain’s new conservative government revised upward its forecast for the country’s 2011 budget deficit, saying it would represent 8 percent of its gross domestic product, up from the 6 percent target of the last government.

The new administration approved 8.9 billion euros ($11.5 billion) in spending cuts Friday and maintained a freeze on civil servants’ salaries and a freeze on practically all government hiring, said Soraya Sáenz de Santamaria, a government spokeswoman.

Taxes on the wealthiest Spaniards will be raised but temporarily, for two years.

The government is seeking to reassure markets that it has a plan to get a grip on its public finances at the same time as it tries to kick-start an economy saddled with sky-high unemployment.

Article source: http://feeds.nytimes.com/click.phdo?i=dae0647dde4929bbbb53ebdc75ccbaef

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News Analysis: Euro Deal is a Pill, but Experts Doubt It Is a Cure

December 12, 2011 by Leave a Comment

At least four major issues still need to be resolved: how much money is needed to protect Italy now from speculative attack; whether banks will stumble because of the crisis; the isolation of Britain, which does not belong to the euro zone; and not least, whether the Brussels cure, prescribed by Germany, fits the disease.

With mounds of European debt due to be refinanced early next year, the crisis is far from over. “More tests will obviously come, and soon,” perhaps as early as the opening of financial markets on Monday, said Joschka Fischer, the former German foreign minister.

And there are risks remaining even in getting the Brussels deal ratified, which is likely to take until late summer 2012 at the soonest.

The agreement, under which the euro zone’s 17 member governments accept more oversight and control of national budgets by the European Union, “was a big step, which was pushed on the Europeans by the markets,” Mr. Fischer said. He has been sharply critical of what he considers Chancellor Angela Merkel’s hesitant, slow and incremental management of the crisis, but he said that “in the end, the markets have limited the options of the political leaders, especially of Merkel, and pushed her into giving more support for the euro.”

Germany got nearly unanimous agreement on a treaty to pursue its favored remedy for the sovereign-debt crisis that has shaken the union for months: fiscal discipline, central oversight and sanctions on countries that break the rules about debt limits, which will be written into national laws. The rules themselves are not new: they recap the ceilings set in Maastricht 20 years ago when the euro was created, with deficits limited to 3 percent of gross domestic product and cumulative debt eventually held to 60 percent of G.D.P. Now, though, those formulas will have teeth.

The idea is that, with the new fiscal discipline in place, the Germans and the European Central Bank will be willing to do more to solve the euro zone’s current troubles.

But many argue that the core problem is less discipline than the lack of economic growth and the deep current-account imbalances — exporters versus importers — within the euro zone. Austerity tends to bring recession, not growth, and Europe needs growth to cope with its debt. But structural changes and investments to accelerate growth and competitiveness generally take years to bear fruit.

“The relationship between 3 percent and fiscal vulnerability is a weak one,” said Jean Pisani-Ferry, director of Bruegel, an economic research institution in Brussels. Both Spain and Ireland have run balanced budgets, or even budget surpluses, in recent years, and both were well within the Maastricht criteria, but became speculative targets in the credit crisis anyway; Italy has one of the lowest budget deficits in the euro zone, and runs a primary surplus, meaning that its budget is in the black when debt service is discounted.

“The countries were not in crisis because of bad management of their budget,” said Jean-Paul Fitoussi, professor of economics at the Institute of Political Studies in Paris. He called the Brussels deal “rather disappointing over all, since it means that there will be more rigor, more austerity, which means less growth ahead.”

The issue is how to promote economic growth and competitiveness in the poorer countries at the euro zone’s periphery that ran up large debts and trade deficits. “You need discipline as part of your stabilization strategy, but we also need a much stronger growth strategy for the southern countries,” including Italy, Mr. Fischer said.

Bernard Avishai, a contributing editor of the Harvard Business Review, said that the questions now should be: “Under what scenarios are the southern economies most likely to grow? Who will be starting, owning, and profiting from what businesses? In that context, would not Spain, Portugal, Greece, et cetera, be better off with their own currencies? Would they not become more competitive if they could simply devalue them?”

His answer to that last question is no: A globalized, networked economy requires a stable currency, he said. Inside the euro or out, he said, the real competitors for countries like Greece and Portugal are Poland, Hungary and Romania, and to thrive they need to remain part of the European economic space and invest in education and high technology to attract more capital from abroad.

“The path to development is not devalued money in the hinterland, but intellectual capital from the metropole,” Mr. Avishai said. “The key is not cheap labor but rich brainpower, the climate that will cause globals to inject the DNA of various businesses into the commercial life of southern European states.”

Mr. Pisani-Ferry believes that significant progress was made in raising the “firewall” of bailout money available to lend to vulnerable economies like Italy and Spain, which need to refinance large debts at manageable interest rates.

Steven Erlanger reported from Vienna, and Liz Alderman from Paris. Maïa de la Baume and Scott Sayare contributed reporting from Paris.

Article source: http://feeds.nytimes.com/click.phdo?i=d179a7c07ea6d5514a634e165dabc5fb

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Economix Blog: Uwe E. Reinhardt: Make-Work and the G.D.P.

October 14, 2011 by Leave a Comment

DESCRIPTION

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

Suppose some evening a group of bored and mischievous teenagers slash tires on a number of cars in the parking lot of a shopping center. Distraught car owners call sundry nearby garages to send someone to fix the damage on the spot or tow the cars in for repairs. That work is speedily done, and the cars are ready for use again. The car owners pay the garage owners sizable repair bills.

This fictitious event leads to a number of questions:

1. Did the garages deliver value to the car owners?
2. Was gross domestic product increased or decreased?
3. Were the car owners better off, after paying the repair bill?

Today’s Economist

Perspectives from expert contributors.

My answer to the first question is yes and to the second yes, as well, unless the garages had to give up other jobs with revenue equal to or greater than what they earn coming to the car owners’ rescue. To the third question, my answer is, it depends.

If we take as the baseline the position of the car owners after the tires had been slashed, they would be better off, unless for some the repair bill turned out to be so high that, in retrospect, these owners would have preferred to abandon their cars. If we take as the baseline the situation before the tires were slashed, the entire affair left the car owners worse off. It reduced what economists would call social welfare.

Why is this vignette in so serious a blog as Economix? Because it illuminates a phenomenon not always fully appreciated when we talk about value added or G.D.P.

In many instances, Person (or Enterprise) A delivers great value to Person (or Enterprise) B to extract the latter from a situation into which B should not have been put in the first place. We count in G.D.P. the value added by the extrication but do not detract the value destroyed by being driven into a precarious situation.

Quite a few economic transactions included in our G.D.P. parallel this vignette. Think of reconstruction after a natural disaster. We count the money paid for reconstruction in G.D.P. but do not deduct the value destroyed by the disaster.

Suppose a country developed long-range missiles that made our aircraft carriers sitting ducks for attack or developed the ability to paralyze our country with cyberattacks. To extract ourselves from that threat with possibly expensive countermeasures, we would give up enjoyable consumption or investments yielding future enjoyable output in order to increase military spending.

Now think about the almost incomprehensible tax code that Congress has imposed. Think of it as a disaster of human making. To cope with it, individuals and businesses hire legions of lawyers and accountants who have deployed their human capital to understanding this bewildering code. These tax experts work hard and often brilliantly to shield their clients from taxes, usually achieving tax savings that are multiples of what they charge for their services.

For the clients, it is a highly valuable service. Indeed, the more confusing the tax code, the more of these experts we need, the harder they work, the greater the value of their services to their clients and the more income they earn. That income, of course, is part of the G.D.P. But for the most part, their work collectively amounts to one giant zero-sum game, because taxes not paid by one client will have to be paid by other taxpayers now or in the future to bring in the revenue needed to sustain the spending level Congress has set. It does not enhance overall well-being for society as a whole.

We can doubt that these professionals’ work creates a more efficient incidence of taxation, because much of their work is to know and take advantage of complicated and inherently inefficient tax loopholes that Congress should not have established in the first place.

In many ways, our health care system mirrors our tax code — especially in its financing and health insurance facets. These can be made so complex and have been made so complex in the health care system in the United States that many decision makers in health care — patients, physicians, hospitals, employers and so on — need in-house or external consultants to find their way through the maze.

A few months ago, I asked a Canadian hospital executive how many employees he had in his hospital’s compliance department. “Compliance?” he responded. “What do you mean by that?”

Somehow the Canadian provincial government-insurance plans manage to pay Canadian hospitals without requiring them to have the large compliance staff or outside compliance consultants engaged by hospitals in the United States whose task it is to ensure that the hospital does not violate the hugely complex, ever-changing terms of Medicare, Medicaid and other government programs or regulations. An academic health center may have a dozen or two dozen employees devoted to compliance. Such a center may employ several hundred billing clerks to cope with the myriad of private health insurance plans and policies, each with its own coverage, nomenclature and payment rules and requirements for prior authorizations.

Consulting firms help physicians bill private and public insurers or help patients submit claims to insurers after an illness. Legions of insurance brokers help prospective clients through the maze of the nongroup or small-group health insurance market. Large employee-benefit consulting firms, helping large companies, establish what amount, in effect, to analogues of the health-insurance exchanges in the Affordable Care Act, and many more consultants of many stripes are involved.

One does not find legions of expert consultants helping individuals and businesses through the administrative maze of the health care system in, say, Switzerland, Germany or other European countries, or Canada, or Taiwan. It seems to be a uniquely American phenomenon — part of American exceptionalism, I suppose.

All of these consultants perform highly valuable services to their clients, but taken together their work consists for the most part of helping Americans extricate themselves from an administrative nightmare into which they should not have been put in the first place.

At Yale University I had the privilege of sitting in the classroom of the late James Tobin, an early Nobel laureate in economics and one of our profession’s greats. He distinguished between “enjoyable” and “nonenjoyable” G.D.P., with the latter including military spending or other “value added” from coping with either externally inflicted or self-inflicted damage done to our society. I often think of our revered professor when I contemplate the composition of this country’s G.D.P.

Article source: http://feeds.nytimes.com/click.phdo?i=74f2b1e1bfbfb2b741644d1424e004ca

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New Claims From Jobless Are Lowest in 5 Months

September 30, 2011 by Leave a Comment

Initial claims for state unemployment benefits fell 37,000, to 391,000, the Labor Department said, well below economists’ expectations of 420,000. But the department cautioned that the way it adjusted the data for seasonal fluctuations might have overstated the improvement.

Separately, the Commerce Department said the nation’s gross domestic product grew at an annual rate of 1.3 percent in the second quarter instead of the previously reported 1 percent. Consumer spending and export growth were both stronger than estimated.

“When you connect these data points together, they indicate a very tepid recovery. We are still experiencing positive growth, which is better than we feared a few months ago,” said Paul D. Ballew, chief economist at Nationwide in Columbus, Ohio.

The cautious optimism generated by Thursday’s data was tempered somewhat by a report showing that the housing sector remained weak last month.

A survey of chief executives in the United States released on Thursday by the Business Roundtable showed that their views of the economy’s prospects deteriorated in the third quarter, with the number who expected to cut jobs roughly doubling.

The drop in initial claims for unemployment benefits took them below 400,000 for the first time since early August. The department, however, said the labor market’s weakness in recent years might have led the model it uses to seasonally adjust the data to overstate last week’s drop.

The decline also reflected the fading impact of Hurricane Irene, which caused claims to spike in the week ended Sept. 10.

Still, the total number of unemployed continuing to claim benefits after an initial week of aid fell to 3.73 million in the week ended Sept. 17 from 3.75 million a week earlier.

The Sept. 17 week corresponds with the survey period for the Labor Department’s household employment measure, which is used to construct the national unemployment rate.

In August, the jobless rate remained at 9.1 percent, and a separate survey of employers showed that hiring had ground to a halt, which increased recession fears.

Those worries are beginning to fade. Factory output continues to expand and businesses have maintained their appetite for spending on capital goods.

“Indications are that the third quarter is doing better than previously thought. We now anticipate third-quarter real G.D.P. growth of just above 2 percent,” said Nigel Gault, chief United States economist at IHS Global Insight in Lexington, Mass.

Housing, however, remains a weak spot.

The National Association of Realtors said its index of pending home sales, based on contracts signed in August, fell 1.2 percent, to 88.6, its lowest point since April. The association said contract signings, which usually precede actual closings by a month or two, were held back by tight credit and, in the Northeast, Hurricane Irene.

With millions of Americans locked into mortgages worth more than their homes, historically low interest rates are failing to lift sales. Freddie Mac said on Thursday that the average rate on 30-year fixed-rate mortgages fell to a record low of 4.01 percent this week.

Article source: http://www.nytimes.com/2011/09/30/business/economy/second-quarter-gdp-grew-at-1-3-rate.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Economix Blog: Casey B. Mulligan: How Payroll Tax Cuts Can Create Jobs

September 14, 2011 by Leave a Comment

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Casey B. Mulligan is an economics professor at the University of Chicago.

Last week President Obama proposed a collection of policy changes, including payroll tax cuts, unemployment benefit extensions and new infrastructure projects. The latter do not have much job-creation potential, because they reduce private-sector activity in the short run. But they can be desirable for the infrastructure they produce, and because doing some of those projects now would be cheaper than doing them later.

Today’s Economist

Perspectives from expert contributors.

Unemployment compensation may be compassionate, and for that reason alone might be the “right thing to do.” But an unfortunate side effect of unemployment compensation is that it reduces employment by discouraging people from seeking and retaining jobs.

The real job-creating potential in the president’s proposals comes from one of its payroll tax cuts.

The payroll tax is the second most important tax in the United States, normally bringing in almost $900 billion a year through a combination of taxes on employers and employees — about 15 percent of payroll. Although workers may not realize it, most of them pay more payroll tax than they pay in federal income tax.

The president proposes cutting the employer portion of the payroll tax by 3.1 percentage points (bringing the combined total down to about 12 percent) for employers with less than $5 million in payroll. Unfortunately, this last condition is business-distorting. Why encourage a $10 million business to split into two $5 million businesses?

Nevertheless, the 3.1-percentage-point part of the president’s proposal could raise employment by at least a million, albeit the duration of job creation is related to how long the tax cut lasts. I expect that every percentage-point reduction in employers’ costs raises employment by about a percentage point and real gross domestic product by about 0.7 percentage point.

That means employment could be roughly three million greater during the period of the tax cut than it would otherwise.

The tax cut is proposed to last a year, and some of the estimated three million incremental job-years — a job that lasts a year, or 12 jobs that last a month — could be spread over time. So we might see only two million in the first year of the cut, with another one million after the cut expires. But still that’s a lot of jobs.

The other part of Mr. Obama’s payroll tax cut proposal is more complicated — and counterproductive. It would reduce the employer’s proportion of the payroll tax by 6.2 percentage points for increases in its payroll spending. Assuming that this payroll tax change would be in place in 2012, the payroll spending subject to the reduction would be the difference between the 2012 payroll and the 2011 payroll.

Because this part of the cut is based on the payroll difference, it makes expanding the 2012 payroll cheaper — presumably the intention of the law — but it makes it cheaper to contract the 2011 payroll.

That could be part of the reason why employment so far in 2011 has been so low; if you think that tax credits for new hires will catch employers completely by surprise, remember that the Obama administration has been floating ideas like this for three years.

To see this, consider an employer that would have a $1 million payroll in both 2011 and 2012. With the normal rates in place, that employer and its employees would owe a combined $150,000 in payroll taxes in each of the two years (15 percent of payroll; for simplicity I have put to the side payroll tax caps and a employee-side cut that has been in place since Jan. 1), or a total of $300,000.

If this employer decided to increase its 2012 payroll by $100,000, that would add a total of about $15,000 to the tax bills under the normal rates, but only about $9,000 under the proposed cut. In other words, as intended, the proposal makes 2012 payroll expansion about 6 percent cheaper than it would be under the normal rates.

However, if the same employer decided to cut its 2011 payroll by $100,000, that would subtract a total of about $15,000 from the tax bills under the normal rates, but subtract a total of $21,000 from the tax bills under the proposed rates — if the payroll cut was restored in 2012, since that part of the payroll would benefit from the reduced payroll tax rate. Contrary to the policy’s intentions, it makes cheaper certain types of payroll reductions, namely those reductions that occur before the law goes into effect.

While President Obama’s proposals have some real job creation potential, it remains to be seen whether any of them become law and whether the job-creating policies are packaged with too many job-destroying policies.

Article source: http://feeds.nytimes.com/click.phdo?i=8008cf2dcca9a3a70a864e284d1dc834

Filed Under: Business News Tagged With: , ,

Economix Blog: How Far Should Consumers Unwind Debt?

August 15, 2011 by Leave a Comment

In an article today, Tara Siegel Bernard and I examined whether the Fed’s announcement that it would keep credit cheap for two more years would inspire more people to borrow and spend.

Aside from consumer confidence, which is decidedly shaky, a crucial underlying factor holding back borrowing is that families are still paying off debt accumulated during the boom, when credit was easy and people treated their homes like big A.T.M.’s.

According to an analysis from Moody’s Analytics, total household debt peaked in August 2008 at $12.41 trillion and has come down by about $1.2 trillion.

As a proportion of gross domestic product, household debt peaked at 99.5 percent in the first quarter of 2009, and has come down to just under 90 percent.

Economists, who talk about the “deleveraging” process, say that debt still has a way to come down before the economy will return to full health. Just how far it needs to come down, though, is difficult to say.

As recently as 2000, household debt was less than 70 percent of G.D.P., and in 1990 it was around 60 percent.

Kenneth S. Rogoff, a professor of economics at Harvard University and the co-author, with Carmen M. Reinhart, of “This Time Is Different,” a history of financial crises, has repeatedly cautioned that this recovery would take longer than most other recoveries because this recession was caused by a debt-fueled financial crisis.

But even Mr. Rogoff does not have a specific target in mind for how far debt has to decline before households will feel comfortable adding debt again.

It may not have to go as low as it has been in previous decades, he said, because “financial markets deepened and became more sophisticated, and interest rates have been coming down, which allows households to carry higher debt,” Mr. Rogoff said.

He said that studies of financial crises outside the United States have shown that economies generally retrace their steps — in other words, if the ratio of household debt to G.D.P. doubled during the boom that preceded the bust, then the ratio needs to half again in order for the economy to get back to normal consumption patterns.

Whether that would be the case in the United States, Mr. Rogoff said, “I’m hesitant to say.” But, he added, “the overhang of debt really is the major problem for policy makers.” Mr. Rogoff suggests a mix of forgiving some of the housing related debt (perhaps in exchange for homeowners’ giving up gains from future appreciation in their home values) and pursuing a mild inflationary policy.

Article source: http://feeds.nytimes.com/click.phdo?i=3c1e1ab4a23c682ce86499d7c34542b6

Filed Under: Economy News Tagged With: , ,
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