By Jennifer Ryan
July 24 (Bloomberg) -- The U.K. economy shrank more than twice as much as economists forecast in the second quarter as a record annual slump in construction, banking and business services kept Britain mired in the recession.
Gross domestic product contracted 0.8 percent from the first quarter, the Office for National Statistics said today in London. Economists predicted a 0.3 percent drop, according to the median of 32 forecasts in a Bloomberg News survey. From a year earlier, the economy shrank 5.6 percent, the most since records began in 1955.
Prime Minister Gordon Brown’s Labour Party trails the opposition Conservatives in polls less than a year before an election as the recession drives up unemployment. Bank of England policy maker Andrew Sentance said yesterday that the British economy may start to pick up in the second half of 2009.
“It’s a very sizeable recession indeed,” said George Buckley, chief U.K. economist at Deutsche Bank AG in London. “I think we’ve seen the worst, but what will the post-recession environment look like? There is a risk in the medium term that growth will be weaker than we’re used to.”
The pound dropped as much as 0.5 percent against the dollar after the report. The U.K. currency traded at $1.6466 as of 12:20 p.m. in London.
Today’s report is the first among the Group of Seven nations for the second quarter. The International Monetary Fund forecasts the U.K. will contract 4.2 percent this year, compared with 4.8 percent in the euro area and 2.6 percent in the U.S.
‘Return to Growth’
Brown said today that the Group of 20 nations need to take steps to revive the world economy.
“We are at a point where banks have been stabilized, but we don’t yet have a strategy for a return to growth,” Brown said at the opening of a meeting in his office in London.
Brown, who must call a general election by June, has trailed David Cameron’s Conservatives in every opinion poll this year. A July 19 survey by Ipsos-Mori Ltd. showed the ruling party lagging the biggest opposition party by 16 points.
“Today’s figures are fresh evidence of the sheer scale of the global downturn we’re fighting,” said Liam Byrne, a junior Treasury minister. “But they also show the pace of slowdown is easing compared to the winter, which is why we remain cautious but confident that growth will return towards the end of the year.”
The data show the economy has now shrunk by 5.7 percent since the recession began last year. That compares with a total 6 percent slump in the recession period that ended in 1981, the statistics office said.
Annual Decline
Construction fell 2.2 percent on the quarter and 14.7 percent from a year earlier, which was the biggest annual drop since records began in 1948. Business services and finance slumped 0.7 percent on the quarter and had a record annual decline of 4.4 percent, the statistics office said.
While the government has committed as much as 1.4 trillion pounds ($2.3 trillion) to revive lending and rescue banks such as Royal Bank of Scotland Group Plc, it hasn’t stopped joblessness from increasing. Unemployment in the quarter through May increased by 281,000, the most since records began in 1971. The jobless-benefit roll has reached 1.56 million, the most in 12 years.
Policy makers unanimously voted on July 9 to keep the key interest rate at a record low of 0.5 percent and said they will review the size of their 125 billion-pound plan to print money in August, when they publish forecasts on growth and inflation.
Quarterly Predictions
The bank will “make a judgment about whether we need to add further to that stimulus” once the new quarterly predictions are available, Sentance said yesterday in an interview. “The economy is already benefiting from a big monetary stimulus as we go into the second half of this year and next year.”
Former policy maker David Blanchflower said in an interview on Bloomberg Television yesterday that the economy may not be through the worst, and the central bank risks stifling the recovery were it to raise rates or reverse the bond-purchase program prematurely.
“My worry is that the tightening comes too soon and people kill off any recovery that’s coming,” he said. “It’s very early days to say that you know the endgame is even in sight.”
Oil prices rise on brighter economic outlook
NEW YORK (AFP) – Oil prices rose Friday, powered higher by growing optimism that the recession-stricken US economy is on the mend after a series of positive corporate earnings reports.
New York's main futures contract, light sweet crude for September, climbed 89 cents to close at 68.05 dollars a barrel.
In London, Brent North Sea crude for September delivery increased 1.07 dollars to settle at 70.32 dollars a barrel.
The rise in prices "was sharply buoyed by positive economic sentiment," and the upward trend is expected to persist, said Amrita Sen of Barclays Capital.
Even though the euphoria was tempered somewhat, oil prices advanced.
"Higher stock prices suggest higher aggregate output which spells increasing energy demand," said Mike Fitzpatrick of MF Global.
"Short-term upward momentum though still appears quite strong, but unless strong signs of sustainable growth appear soon, that momentum could dissipate rather quickly," he added.
The oil market has found support in a flood of US earnings reports and economic data that was not as bad as feared as the world's largest energy consumer struggles with recession. Crude oil has gained nearly 10 dollars in New York over the past two weeks.
Positive data on the eurozone and German economies Friday also gave oil a lift.
A purchasing managers' report showed activity in the eurozone manufacturing and service sectors rose to 46.8 points in July from 44.6 in June, the highest reading since September 2008.
In Germany, Europe's biggest economy, the Ifo institute's business climate index for July rose to 87.3 points, beating market expectations of 86.5 points and up from 85.9 points in June. It was the highest reading since November 2008.
Phil Flynn of PFG Best Research cautioned that the rise in oil prices was not supported by economic fundamentals.
"Oil has ignored bearish supply and demand fundamentals as the fundamentals of expectations of an improving economy seem to be a bit more exciting," Flynn said.
"After this pop, oil will fall hard."
WASHINGTON: Federal Reserve chairman Ben Bernanke told lawmakers on Friday the central bank should remain in charge of consumer financial
Bernanke's comments clashed with those of Treasury Secretary Timothy Geithner, who called for support of a new "Consumer Financial Protection Agency" proposed by the administration of President Barack Obama.
Bernanke argued in a hearing of the House Financial Services Committee that it was "important to point out some of the benefits that would be lost through this change."
He said the Fed is the appropriate regulator and must look at issues of consumer protection as well as systemic risk when supervising financial institutions.
"Both the substance of consumer protection rules and their enforcement are complementary to prudential supervision," he said.
"Poorly designed financial products and misaligned incentives can at once harm consumers and undermine financial institutions."
He said the Federal Reserve "has adopted strong consumer protection measures in the mortgage and credit card areas" but is also careful about "tailoring rules that prevent abuses while not impeding the availability of sensible extensions of credit."
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Geithner insisted in the same hearing however that "the case for the Consumer Financial Protection Agency is clear."
He said that many non-bank financial firms such as mortgage brokers and large independent mortgage companies "currently operate under no federal supervision."
Thus, the creation of a new consumer protection agency "would fix this problem and ensure a level playing field by extending the reach of federal oversight to all financial firms, no matter whether they are banks or non-banks."
He also said that while bank regulators' "primary focus is the safety and soundness of the institutions" rather than the effect on consumers.
"That is why the CFPA would have as its sole mission examining how a product or practice affects consumers," Geithner told the panel.
Perry raises possibility of states' rights showdown with White House over healthcare
By DAVE MONTGOMERY
Perry
AUSTIN — Gov. Rick Perry, raising the specter of a showdown with the Obama administration, suggested Thursday that he would consider invoking states’ rights protections under the 10th Amendment to resist the president’s healthcare plan, which he said would be "disastrous" for Texas.
Interviewed by conservative talk show host Mark Davis of Dallas’ WBAP/820 AM, Perry said his first hope is that Congress will defeat the plan, which both Perry and Davis described as "Obama Care." But should it pass, Perry predicted that Texas and a "number" of states might resist the federal health mandate.
"I think you’ll hear states and governors standing up and saying 'no’ to this type of encroachment on the states with their healthcare," Perry said. "So my hope is that we never have to have that stand-up. But I’m certainly willing and ready for the fight if this administration continues to try to force their very expansive government philosophy down our collective throats."
Perry, the state’s longest-serving governor, has made defiance of Washington a hallmark of his state administration as well as his emerging re-election campaign against U.S. Sen. Kay Bailey Hutchison in the 2010 Republican primary. Earlier this year, Perry refused $555 million in federal unemployment stimulus money, saying it would subject Texas to long-term costs after the federal dollars ended.
Interviewed after returning from a trip to Iraq and Afghanistan, Perry spoke out against President Barack Obama’s healthcare package less than 24 hours after the president used a prime-time news conference Wednesday night to try to sell the massive legislative package to Congress and the public.
'Not the solution’
"It really is a state issue, and if there was ever an argument for the 10th Amendment and for letting the states find a solution to their problems, this may be at the top of the class," Perry said. "A government-run healthcare system is financially unstable. It’s not the solution."
Perry heartily backed an unsuccessful resolution in this year’s legislative session that would have affirmed the belief that Texas has sovereignty under the 10th Amendment over all powers not otherwise granted to the federal government.
In expressing "unwavering support" for the 10th Amendment resolution by state Rep. Brandon Creighton, R-Conroe, Perry said "federal government has become oppressive in its size, its intrusion into the lives of our citizens and its interference with the affairs of our state."
Returning to the "letter and spirit" of the 10th Amendment, he said in April, "will free our state from undue regulations and ultimately strengthen our union."
Perry, in his on-air interview Thursday with Davis, did not specify how he might use the 10th Amendment in opposing the Obama health plan. His spokeswoman, Allison Castle, said that the governor’s first goal is to defeat the plan in Congress and that any discussion of options beyond that would be "hypothetical."
"I don’t think it’s surprising that the governor is taking a stand against it," said Anne Dunkelberg, associate director of the Center for Public Policy Priorities, an Austin-based research organization that supports the House version of Obama’s plan. "Unfortunately, the national dialogue on health reform has been extraordinarily partisan and polarized."
The White House Media Affairs Office, asked to comment on Perry’s statements, did not have an immediate response. In his remarks to the nation Wednesday, Obama restated his midsummer deadline for passage of the bill in Congress, saying it is urgently needed to help families "that are being clobbered by healthcare costs."
High stakes in Texas
Texas has a higher percentage of uninsured people than any other state, with 1 in 4 Texans lacking health coverage. Dunkelberg, whose organization supports policies to help low- and modest-income Texans, said the House version would create a "predictable and comprehensive benefits package" for thousands of struggling middle-income Texans.
Former Rep. Arlene Wohlgemuth of Burleson, a senior fellow for healthcare at the conservative Texas Public Policy Foundation, echoed Perry’s assertion that the Obama plan is the wrong approach and could have disastrous financial consequences for Texas.
Under the Senate version of the bill, she said, an expansion of the joint federal-state Medicaid program for the poor could cost Texas $4 billion a year.
"There are good solutions" to the country’s healthcare problems, Wohlgemuth said. "This isn’t it."
Perry said the plan is another example of the Obama administration’s "massive takeover of the private-sector economy."
"I hope our leaders will look for solutions that don’t dig our country further into debt," he said.
Perry called on Texans in the House and Senate to oppose the plan. "I can’t imagine that anyone from Texas who cares about this state would vote for Obama Care. I don’t care whether you’re Democrat or Republican," he said.
Of those Texans who might consider supporting the plan, he said: "This may sound a little bit harsh, but they might ought to consider representing some other state because they’re sure not representing Texas."
Obama is the One Who 'Acted Stupidly'
By Bob WeirFrom the moment a police officer dons that uniform, he/she becomes a symbol of authority, and it becomes obvious very quickly that most people in a free country resent authority. It could be the guy who gets pulled over for speeding or passing a red light; it could be the guy who's clobbering his wife during a family dispute, or it could be a guy who breaking into a residence that turns out to be his.
Although these are situations in which the police must take action, their authority will usually be resented. It's the type of job in which you are damned if you do, and damned if you don't. When a neighbor called police to the Cambridge, Massachusetts neighborhood next to Harvard University, she said there were two men breaking into a home. Sergeant Jim Crowley, a sixteen year veteran of police work, took the call and arrived at the scene to discover that the door had been jimmied and two men were inside.
It turned out later that it was Henry Gates, a Harvard professor, and his chauffer. Unfortunately for Sgt. Crowley, Gates did not have his name and address tattooed to his forehead. Therefore, it became necessary for the sergeant to ask him to show his identification.
What ensued from that moment is something that any veteran cop can relate to. This professor, evidently indignant about being questioned by a mere public servant, launched into a tirade that included references to the cop's mother and charges of racism.
In addition, it was reported that Gates made insinuations about his political influence. When he asked the officer if he knew who he's "messin' with," it was a likely reference to his friendship with President Obama.
So, here we have a case of a man who lost his keys to his house, broke in through a rear door and then became indignant when police responded to a report of a burglary and had the temerity to ask him to identify himself. When he was asked to step outside to speak with the officer, this Harvard-educated, "learned" professor said: "I'll speak with your mama outside!"
Such trash talk is generally confined to inner-city ghettos, not upscale areas which are often targeted by burglars. Is it any wonder that the cop doubted he was talking to a prominent citizen and respectable member of the community?
The fact that the cop is white and the professor is black made this a dream scenario for an opportunist to scream racism. Gates, who is reportedly working on a documentary about racism in America, apparently seized the moment as an excellent way to grab publicity for his upcoming project.
Keep in mind that the actions of the sergeant were thoroughly investigated by the Professional Standards Unit of the Cambridge PD and found to be in accordance with proper police protocol. If that cop had not followed procedure, and it turned out later that the house had in fact been burglarized, he could have been fired.
Speaking as a veteran cop (retired), who has effected more than 500 felony arrests in my 20 years with NYPD, I can tell you that Sergeant Crowley must be very tolerant indeed to have taken so much abuse from Gates before putting the cuffs on him. If it had been me, not only would he have been arrested sooner, but those manacles would have secured his arms behind his back, not in front, as Crowley did, once again being overly tolerant with this arrogant agitator.
If anyone is a racist in this confrontation, it is this obstreperous professor who evidently feels that his loft academic status and his friendship with Obama not only put him above the law, but give him a platform to inject "color" into every situation. Make no mistake about it, if Crowley were black and followed the same protocol, Gates would have recognized that there was no opportunity for a public spectacle, so he would have behaved properly.
Speaking of behavior, President Obama showed his own lack of class and judgment when he said the Cambridge PD "acted stupidly." To make such a sweeping statement of condemnation after admitting that he didn't "know all the facts," is beneath the dignity of his high office.
For a black man who has achieved the level of Chief Executive in a country where the overwhelming majority of voters are white to use that tired old canard about everything being racist, is stunningly contemptible. If this is the type of judgment Obama uses to make decisions, God help us if he's able to pass any more legislation.
Rhetoric Meets Reality
By Charles KrauthammerWASHINGTON -- What happened to Obamacare? Rhetoric met reality. As both candidate and president, the master rhetorician could conjure a world in which he bestows upon you health care nirvana: more coverage, less cost.
But you can't fake it in legislation. Once you commit your fantasies to words and numbers, the Congressional Budget Office comes along and declares that the emperor has no clothes.
President Obama premised the need for reform on the claim that medical costs are destroying the economy. True. But now we learn -- surprise! -- that universal coverage increases costs. The congressional Democrats' health care plans, says the CBO, increase costs in the range of $1 trillion plus.
In response, the president retreated to a demand that any bill he sign be revenue neutral. But that's classic misdirection: If the fierce urgency of health care reform is to radically reduce costs that are producing budget-destroying deficits, revenue neutrality (by definition) leaves us on precisely the same path to insolvency that Obama himself declares unsustainable.
The Democratic proposals are worse still. Because they do increase costs, revenue neutrality means countervailing tax increases. It's not just that it is crazily anti-stimulatory to saddle a deeply depressed economy with an income tax surcharge that falls squarely on small business and the investor class. It's that health care reform ends up diverting for its own purposes a source of revenue that might otherwise be used to close the yawning structural budget deficit that is such a threat to the economy and to the dollar.
These blindingly obvious contradictions are why the Democratic health plans are collapsing under their own weight -- at the hands of Democrats. It's Max Baucus, Democratic chairman of the Senate Finance Committee, who called Obama unhelpful for ruling out taxing employer-provided health insurance as a way to pay for expanded coverage. It's the Blue Dog Democrats in the House who wince at skyrocketing health-reform costs just weeks after having swallowed hemlock for Obama on a ruinous cap-and-trade carbon tax.
The president is therefore understandably eager to make this a contest between progressive Democrats and reactionary Republicans. He seized on Republican Sen. Jim DeMint's comment that stopping Obama on health care would break his presidency to protest, with perfect disingenuousness, that "this isn't about me. This isn't about politics."
It's all about him. Health care is his signature reform. And he knows that if he produces nothing, he forfeits the mystique that both propelled him to the presidency and has sustained him through a difficult first six months. Which is why Obama's red lines are constantly shifting. Universal coverage? Maybe not. No middle-class tax hit? Well, perhaps, but only if they don't "primarily" bear the burden. Because it's about him, Obama is quite prepared to sign anything as long as it is titled "health care reform."
This is not about politics? Then why is it, to take but the most egregious example, that in this grand health care debate we hear not a word about one of the worst sources of waste in American medicine: the insane cost and arbitrary rewards of our malpractice system?
When a neurosurgeon pays $200,000 a year for malpractice insurance before he even turns on the light in his office or hires his first nurse, who do you think pays? Patients, in higher doctor fees to cover the insurance.
And with jackpot justice that awards one claimant zillions while others get nothing -- and one-third of everything goes to the lawyers -- where do you think that money comes from? The insurance companies, who then pass it on to you in higher premiums.
But the greatest waste is the hidden cost of defensive medicine: tests and procedures that doctors order for no good reason other than to protect themselves from lawsuit. Every doctor knows, as I did when I practiced years ago, how much unnecessary medical cost is incurred with an eye not on medicine but on the law.
Tort reform would yield tens of billions in savings. Yet you cannot find it in the Democratic bills. And Obama breathed not a word about it in the full hour of his health care news conference. Why? No mystery. The Democrats are parasitically dependent on huge donations from trial lawyers.
Didn't Obama promise a new politics that puts people over special interests? Sure. And now he promises expanded, portable, secure, higher-quality medical care -- at lower cost! The only thing he hasn't promised is to extirpate evil from the human heart. That legislation will be introduced next week.
New Jersey's race for governor
The target
Jon Corzine, the Democratic incumbent, looks vulnerable
Corzine (right) and friendMORE than 17,000 people turned up in the hot sun on July 16th to see Barack Obama speak at a campaign rally. It was his first visit to New Jersey since be became president. A DJ played “Glory Days” by Bruce Springsteen, New Jersey’s famous son. Some of the waiting crowd began to dance when the sound system belted out a Michael Jackson tune. When Mr Obama appeared on stage the place erupted. And oh yes, Jon Corzine, who is hoping to be re-elected this November as governor, was there too.
Mr Corzine needs some of Mr Obama’s popularity to rub off on him. Mr Obama won the state handily last November, but Mr Corzine is not so blessed. Not only is he 12 points behind Chris Christie, his Republican rival, but a recent poll revealed that only a third of New Jersey voters approve of the job he is doing. “Having the president gives you a bump,” says Jennifer Duffy of the Cook Political Report, a non-partisan newsletter. “But that wanes after a few days.” More worrying, only 13% say Mr Corzine can point to any major accomplishments in his first term. Mr Corzine, perhaps because of the need to be tight-lipped when he ran Goldman Sachs, is not a natural braggart.
He needs to become a bit more of one, because he has in fact had a fair few successes. He is the first governor for 60 years to reduce the size of government. He has changed education funding so that it is more evenly distributed. And last month his budget, crafted in tough economic circumstances, reduced spending while providing some property-tax relief.
Chris Christie is certainly taking advantage of Mr Corzine’s reticence. He is a well-respected former federal prosecutor who gained a reputation for fighting corruption. He is a harsh critic of Mr Corzine’s economic policies, which is going down well in a state with unemployment reaching a rate not seen since 1977 and the nation’s heaviest tax burden. Mr Corzine, the Wall Street financier, was supposed to fix this, but hasn’t been able to so far, though Mr Christie hasn’t provided much of an alternative plan. It is only July and already the campaign is nasty and sure to get worse.
Mr Corzine’s biggest obstacle is the perception that he is a distant technocrat who is unable to connect with ordinary voters. Yet his recent speeches, in particular his primary-victory speech and the one he gave at the rally, were passionate and crowd-pleasing. He still needs to do a better job at reaching out to the newly registered voters who voted for Mr Obama. The Republican Mr Christie sees the wisdom in this too and has, cunningly, released a web video courting New Jerseyans who voted for the president. Both candidates are taking a page from Mr Obama’s campaign playbook by focusing on new media like Facebook and YouTube. Mr Christie announced his choice for lieutenant governor via Twitter. This is especially clever as the candidates are faced with two of the most expensive television markets, New York City and Philadelphia. Mr Christie is relying on public financing to fund his campaign, while Mr Corzine is mostly opening his own large wallet.
The race is gathering national attention. Only New Jersey and Virginia have governors’ races this year. The Virginia race looks tight, but the Republicans would be able to trumpet a win in New Jersey, a famously blue state, as an early referendum on the Obama administration before next year’s mid-term election, when 36 Senate seats and the whole House are up for grabs. There is an encouraging New Jersey precedent for them. Christine Todd Whitman’s victory over Jim Florio in 1993 turned out to be the precursor to the 1994 Republican national sweep.
Central banks and regulation
Rulers of last resort
For good and bad reasons, central banks are being set up to fail
MOST political constitutions try to disperse power. In financial regulation the fashion is to concentrate it. America’s Federal Reserve is accumulating huge control over the economy and banks. Similarly, Britain’s Conservative Party, likely to form the next government, wants the Bank of England to be in charge not just of interest rates, but also the two big tasks of regulation: guarding the overall system’s stability (“macro-prudential regulation”, as it is known) and the “micro” supervision of individual firms (see article). Does that make sense?
It is not hard to see why the central banks are being given more clout. Regulatory credibility is scarce and the central bankers often have more of it than other financial policemen. In times of disaster the mess ends up with them: the boundary between, say, the Bank of England lending to HBOS and testing its solvency, supposedly the job of the Financial Services Authority (FSA), became academic when the system seemed hours from blowing up. Above all, central bankers now know that they ignore macro financial stability at their peril.
For years most central banks concentrated on using a single tool, interest rates, to achieve a single goal, price stability. They ignored or failed to spot huge asset bubbles and banks’ kamikaze behaviour. Now, it is clear central bankers should consider not just the economy but the state of the financial plumbing behind it. By using tools like bank-capital rules and credit controls, they can try to prevent excesses building up again.
If they are to be responsible for stability, the central banks must have the power to act. That means the authority to swoop on individual firms that pose a threat to the system or are failing. As Mervyn King, the governor of the Bank of England, puts it, it would be hopeless “if we can do no more than issue sermons”. So it makes sense for the central banks to be in charge of the macro-prudential bit. The harder question is the micro one: who should do day-to-day supervision of firms?
Being close to banks should allow regulators to get better information. But it also raises the risk that supervisors will be “captured” by bankers. This newspaper has argued that the Fed should cede responsibility for the micro management of American banks. In Britain, the situation is different. The existing supervisor, the FSA, has an impressive new boss in Adair Turner but in the past it has suffered something close to Stockholm syndrome, exempting Northern Rock from regular examination, and allowing Royal Bank of Scotland to buy ABN AMRO. And unlike America’s finance, British banking is now concentrated in four big firms, blurring the distinction between general rules and regulation of individual companies. On balance, the Tories are probably right to return day-to-day supervision to the Bank of England.
Reap the reward: the hate of those you guard
That regulatory argument, however, is dwarfed by three worries. First, where the financial policemen sit matters less than hiring competent ones. Second, no matter how good those people are, central banks are bound to fail eventually: the banking system is huge and complex, and now enjoys a taxpayer guarantee that both encourages risky behaviour and is hard to withdraw. Thus, third, central banks will be on the hook more explicitly than ever before. When times are good they will struggle to take the punchbowl away: a central bank that tried to stop subprime lending in 2003 would have faced a political firestorm. When times are bad, they will be blamed.
That plainly raises the spectre of political intervention. But central banks need not be helpless. One priority should be to counter the impression that they are acquiring their new empires by accident. Their mandates need to be refined to include clear responsibility for both price and financial stability. One group of decision-makers should be responsible for both. Sometimes they will conflict, but having separate committees, as the Tories propose, does not resolve this.
And central banks should lead efforts to reform banking, so that it poses less risk to taxpayers. They can prod banks with taxpayer guarantees to shrink their risks and to build up capital buffers to absorb losses. It will be difficult, but unless the industry is reformed, the future will consist of banks that are too important to fail and central banks that are destined to do so.
Rebalancing global growth
A long way to go
The global recession is coming to an end, but the ingredients of a lasting recovery are still missing
WITH luck, the global slump has reached its trough. Asia’s economies are looking rosier, buoyed by a spectacular rebound in China, where output grew at an annualised rate of some 16% between April and June. Even in America and the euro area, GDP is likely to stop shrinking during the summer. Trade, having fallen precipitately, is levelling off (see article). And, as firms rebuild their stocks, global growth over the next few months could be surprisingly robust.
That is a welcome prospect. But it is not the all-clear. For this “recovery” has fragile foundations. The boost from restocking will be temporary. And a big source of demand—government stimulus—is unsustainable. Across the globe governments have, rightly, stepped in to counter the economic slump. In America an increase of 12 percentage points in the budget deficit has cushioned the slump in private spending. Around 75% of China’s growth this year will be state-directed, either through public spending or officially induced lending.
Governments can prop up economies temporarily, but rising budget deficits are not a route to sustainable growth. Eventually burgeoning debt will limit the room for fiscal manoeuvre, and politicians may balk at renewed stimulus long before then. Worries about the budget deficit are already weighing on political debate in Washington (see article). A solid global recovery demands healthy and balanced growth in private demand. Unfortunately, that still seems far off.
Before the financial crash, global demand was horribly skewed. It was far too reliant on spending from increasingly indebted American consumers: witness the country’s gaping current-account deficit, which reached almost 6% of GDP in 2006. The crisis—particularly the credit crunch and the destruction of more than $13 trillion of household wealth—has wrecked the American shopping machine and changed the nature of the world’s imbalances. As consumer spending has slumped, the external imbalances have shrivelled. America’s current-account deficit this year is likely to be less than 3% of GDP. On the other side of the ledger, China’s surplus is on course to fall by half from its 2007 peak, of 11% of GDP, by 2010. The surpluses of both Germany and Japan are shrinking fast.
Laying out the to-do list
Rebalancing via recession is hardly to be recommended. Worse, even as imbalances between countries have unwound, those within them have worsened, as governments have stepped in. Chinese and German consumers are not spending more; the Chinese and German governments are. The task is to right these internal imbalances without recreating the external ones. The solution is well known: consumers in China and other emerging economies, and in thrifty rich countries like Germany, must become bigger engines of demand, while the former bubble economies, such as America, must continue the shift towards saving and exports.
How hard will this be? We will examine the task in a series of articles on the world’s four biggest economies, beginning this week with America’s (see article). The detailed to-do list differs from one country to the next, but three broad requirements stand out: a change of mindset for many policymakers; greater macroeconomic co-ordination than hitherto; and bolder microeconomic reforms.
The shift in mindset is most necessary in surplus economies. Too many German leaders seem to take the economy’s export orientation as immutable. Few even grasp the need to nudge it towards domestic spending. China’s authorities want to shift towards consumption, but are reluctant to pull the obvious lever: allowing the yuan to strengthen faster.
Macroeconomic co-ordination will be necessary, especially to ensure that the fiscal tightening which must follow the stimulus does not strangle the recovery. While central bankers are laying out their exit strategies from monetary looseness in detail, few finance ministers have done anything similar on the fiscal side. In the big economies they claim they will cut their deficits substantially in 2011, but there are few details, even on the appropriate mix of tax reforms and spending cuts.
The hardest part, however, will be the microeconomic reforms required to smooth the macroeconomic adjustments. China’s leaders need to boost household income (for instance by encouraging more labour-intensive growth and forcing state enterprises to pay fatter dividends) as well as improve health-care and pension provision so that people feel less need to save. Japan and Germany both have to encourage investment in services, by freeing markets from health care to education. America must counter the rigidities that have arisen after its asset bust. Millions of people with negative equity in their homes, for instance, cannot move to get a new job.
The to-do list is a long one, the risk of missteps is high, and it will take years to complete. That is why the world economy is not yet out of the woods.
New Jersey corruption investigations
A tangled web
A huge corruption investigation leads to a string of arrests in New Jersey
A MAYOR, a rabbi, and an organ trafficker sounds like the beginning of a bad joke. But the mayors of the New Jersey cities of Hoboken, Secaucus and Ridgefield, a council president, two state assemblymen, numerous other public officials and political operatives, and five rabbis are not laughing. They are among 44 people charged in criminal complaints filed on Thursday July 23rd. The arrests were part of a ten-year federal investigation of both public corruption and an international money-laundering conspiracy. And, indeed, some organ selling.
The operation was huge. Three hundred federal agents of the FBI and Internal Revenue Service were spanned across New Jersey and New York to make arrests and raid homes and offices. The alleged money-laundering conspiracy seems especially shocking as it involved several high-ranking religious leaders, including the chief rabbi of America's Syrian Jews. With the help of an informant, who was charged with bank fraud in 2006, the federal agents infiltrated existing money laundering networks that operated between Brooklyn, New Jersey and Israel according to Ralph Marra, New Jersey’s acting United States attorney.
Some of the charges relate to tens of millions of dollars apparently laundered through purported charitable organisations run by rabbis in New York and New Jersey. Mr Marra said in disgust that “religious leaders [were] heading money-laundering crews, acting as crime bosses”.
The investigation seems set to reinforce the perception of the pervasive nature of public corruption in New Jersey. “The list of names and titles of those arrested today sounds like a roster for a community-leaders meetings”, observed Weysan Dun, an FBI agent. Except they were not in a town hall but in a “FBI booking room”. The collaborating witness posed as a property developer offering money to politicians and aides in return for assistance in getting projects prioritised and approved. Much of the alleged bribery was connected to fund-raising efforts in recent election campaigns.
The court documents read like a cliché-filled movie script. Clandestine meetings were held in parking lots and diners. Money, to the tune of $97,000, was stuffed in an Apple Jacks cereal box. Anthony Suarez, Ridgefield’s mayor, was charged with agreeing to accept $10,000 corrupt cash payment for his legal defence fund. Peter Cammarano, who was elected as mayor of Hoboken last month, has been charged with accepting $25,000 in cash bribes, including $10,000 just last week. The most bizarre charge detailed a conspiracy to broker the sale of a human kidney for a transplant. Levy Izhak Rosenbaum, according to the complaint, targeted vulnerable people, persuading them to give up their kidneys for $10,000 and then selling the organs for $160,000.
The arrests come in a state that is no stranger to political corruption. The former mayors of Newark, Paterson and Camden, to name but a few, have or are serving time in prison. Wayne Bryant, a former state senator, is due to be sentenced for fraud and bribery on Friday. Until recently, “double-dipping”, holding two elected positions, was the norm. Handing out public-sector contracts to political donors, “pay to play”, is common practice. Cronyism is practically accepted. Mob ties are not unusual.
Part of the problem is the state is very fragmented. There are thousands of public officials in the state’s 21 counties, 566 municipalities and over 600 school districts. But even so, it is shocking how widespread and ingrained public corruption has become. Ingrid Reed of the Eagleton Institute for politics, who recently wrote a study on ethics in local government in the state, notes sadly “Corruption is part of the culture. For real reform, the culture of New Jersey has to change”.
Jon Corzine promised comprehensive ethical reform when he was first elected governor of New Jersey, but his sweeping proposals have been blocked, postponed or watered down by state lawmakers. Chris Christie, who is running against Mr Corzine this year, is New Jersey’s former chief prosecutor. He spent much of his tenure putting away corrupt officials. But this may not help his campaign given the high tolerance for corruption in New Jersey. According to the complaint, Mr Cammarano said, “I could be, uh, indicted, and I’m still gonna win 85% to 95% of those populations”.
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