Economy

Austerity Über Alles

Germany's insistence on belt-tightening during the recession stems from a fear of history repeating itself.

BERLIN, GERMANY —Score another one for Angie. Last night in Brussels, the leaders of 25 of the 27 European Union countries agreed to become more like Germany. Not in so many words, of course. There was talk of spurring growth, creating jobs, and liberalizing trade. But at the heart of the pact was the so-called debt brake. Modeled on Germany’s own 2009 Schuldenbremse , which imposed a tight cap on federal and state deficits, the debt brake compels participating eurozone countries to keep their structural deficits under 0.5 percent of their gross domestic product (GDP). The 25 countries that signed on—that is, every EU country but non-eurozone Britain and the Czech Republic—are now expected to write language into their national constitutions codifying the deficit limit, with violators to be hauled before the European Court of Justice, which can fine member countries as much as 0.1 percent of their GDP. The fiscal pact is a major victory for German Chancellor Angela Merkel, who set it...

Let's Worry About Unemployment Instead

Over at The Washington Post , op-ed editor Fred Hiatt is worried that the political world has stopped being concerned with the federal debt and is instead focused on pet programs: Mitt Romney would extend all the Bush tax cuts and cut trillions more besides—eliminating taxes on investment income for most Americans, reducing the corporate tax, getting rid of the inheritance tax and more. How would he afford this? Please don’t ask. President Obama wants to rebuild our infrastructure, and never mind raising the gasoline tax to do so. He would pay by redirecting money that we would have borrowed for foreign wars, if the wars had continued, and instead borrow it for roads. This is what passes for fiscal prudence these days. Hiatt ends the column with an ominous warning: “If America doesn’t tackle its debt problem, everything else is at risk: economic growth, the safety net for the poor, investment in research and roads.” Hiatt is exaggerating the extent to which Congress and the president...

Couture's Chinese Culture Shock

Chinese luxury consumers are becoming an important market but fashion's racial stereotypes persist.

AP Images
We’re witnessing a remarkable shift in China’s relationship to global fashion: once “the world’s factory,” in Asian American fashion scholar Thuy Linh N. Tu’s words, China is now poised to be the world’s mall. While China remains a poor country with an average annual per capita consumption of $2,500 (in contrast, the U.S. per capita average is $30,000), China’s rising number of millionaires and the Internet-enabled diffusion of Western fashion consumer culture are quickly transforming the communist nation into what The New York Times has called “The Shoppers’ Republic of China.” Today, young Chinese—like Lu Jing, a 22-year-old Beijing resident who told the China Daily that she earns $943 a month and saved up for a $3,200 Louis Vuitton handbag by surviving on instant noodles and taking public transportation—make up an new consumer class. Fashionistas between 20 and 30 years old are buying luxury fashion and micro-blogging about it on Sina Weibo (China’s version of Twitter) where...

By Any Other Measure

Relying on GDP to calculate economic progress ignores social and environmental realities.

The 2011 fourth quarter GDP numbers released today show a 2.8 percent growth in economic activity, due in part to the increase in spending around the holidays. But, what do GDP numbers really show? A new report from Demos, Beyond GDP , looks at the flaws in our dependence on GDP as the sole measure of progress and highlights important economic and social measures that are not captured by GDP. GDP calculates the total monetary value of goods and services produced domestically in a given period. At the time it was developed at the end of the Great Depression, it was meant to be used as a tool to help policymakers gauge the success of economic recovery measures. At no time was it meant to be a tool for measuring economic, let alone social, progress. Fast forward several decades and GDP has become the go to measure for determining economic and societal well-being, even though it is not equipped to offer an accurate reflection of either. To paraphrase Robert F. Kennedy in a speech he made...

Mitt Romney, Hero of Finance

Romney’s backers say he did the tough work needed to restructure the economy. Actually, he seized opportunities that the tax, securities, and bankruptcy laws should never have given him.

“Creative destruction” is Mitt Romney’s best defense for his career in private equity and the trail of displaced workers some of his ventures left behind. The idea comes from the economist Joseph Schumpeter, who argued that capitalism generates economic growth through “gales of creative destruction” that sweep away obsolete technologies and products. As Romney’s advocates have it, that’s what his firm, Bain Capital, has advanced—painful economic changes that are essential to a rising standard of living. If Romney made his fortune that way, he deserves the praise that some conservatives have lavished on him for contributing to American competitiveness. But that isn’t the whole story. Much of the work of Bain and other private—equity firms has little to do with the kind of wrenching Schumpeterian change that contributes to growth, still less to the job creation for which Romney claims credit. Technological innovation was at the heart of Schumpeter’s vision, and no one today objects to...

Everybody's (A Little) Happy Nowadays

If this most recent poll from NBC News and the Wall Street Journal is any indication, the public is feeling a little better about our economic situation: [R]esults from the poll, released Wednesday, found voters feeling more positively about the economy and of Mr. Obama’s handling of it. Some 30% believed the country was headed in the right direction, up eight percentage points from a month ago. Some 60% said the country was on the wrong track, down from 69% in December and from 74% in October. […] The poll found that more voters are encouraged by recent signs of economic improvement: 37% said they expected the economy to get better over the next year, while 17% said they expected it to get worse. Expectations have risen since last month, when optimists outnumbered pessimists 30% to 22%. For as much as we focus on political strategy, continued improvement in the economy is the single most important variable in this year’s election. If the economy continues to pick up and these numbers...

Force-Fed

AP Photo/Jacquelyn Martin
The Federal Reserve, in a remarkable acknowledgement of how soft the economy is, has disclosed a vote of its open market committee to keep short term interest rates close to zero for at least three more years—until late 2014. This means that the Fed will keep pumping money into the economy by purchasing bonds at whatever level is required. The Fed, improbably enough, has also been pressing the Obama Administration to do more about the housing bust, arguing that its own cheap money policies can only do so much. The climate of very low interest rates means that the new program announced by President Obama in the State of the Union Address making it easier for homeowners to refinance—details still to be disclosed—will have several years to lower housing costs and perhaps help put a floor under housing prices. But the Administration needs to do a great deal more so that under-water homeowners can refinance at the current depressed market value of the house. It is rare to see the Fed...

The Fairness Doctrine

Today's Balance Sheet: Obama laid out his economic message for the election in last night's State of the Union address.

President Barack Obama delineated his campaign message in last night's State of the Union address. Positioning himself as a populist alternative to Mitt Romney and the 1 percent, Obama spent the beginning of his speech laying out his economic plan for the year: "We need to change our tax code so that people like me, and an awful lot of Members of Congress, pay our fair share of taxes," he said. He recommended that the Buffett Rule—which would make it so millionaires can't pay less than 30 percent in taxes—be put in place. Underscoring his economic platform—which also touched on job creation, energy independence, deficit reduction, and trade—was the theme of fairness. "We can either settle for a country where a shrinking number of people do really well while a growing number of Americans barely get by, or we can restore an economy where everyone gets a fair shot, and everyone does their fair share, and everyone plays by the same set of rules," Obama said. The Latest European Central...

Eurozone Overexposed

EU leaders scuttle a Greek bond deal for fear of greater losses.

AP Photo/Thanassis Stavrakis
Greece is once again the focal point of efforts to stem the bleeding of investor confidence and save the eurozone. Intense negotiations continue on the precise terms of the restructuring of privately held debt in the struggling Mediterranean country. Agreement is a necessary condition for the approval of a second bailout package from Greece’s eurozone partners and the International Monetary Fund (IMF), which, at 130 billion euros or more, will exceed the first one. On Friday, it looked as though the Greek government and the Institute of International Finance (IIF), the global banking lobby group, were close to a deal and a tentative agreement on interest rates, averaging out around 4 percent for coupons on the 30-year bonds issued in exchange for Greece’s existing debt. As the day progressed, however, it became clear that, even though the Greeks and the bankers had reached the essentials of an agreement, the deal could not be finalized. The IMF and the eurozone countries, in...

The Scarlet Tax Return

AP Photo
Mitt Romney’s newly released tax returns, showing that he paid taxes in 2010 at a rate of just 13.9 percent on income of $21.6 million, should provide ammunition for President Barack Obama’s newly rediscovered populism. Obama is on record supporting a “Buffett Rule,” that the boss should pay at least the same tax rate as the help. In the watered down economic dialogue of 2012, a flat tax rate rather pitifully passes for the progressive position. Not so long ago, progressives were of the view that the more money you made, the higher your rate should be. The tax schedule should be, well, progressive. The original presidential sponsor of this concept was that Bolshevik, Theodore Roosevelt. That view of progressive taxation was widely held and was public policy in America, until the supply-side revolution of the Reagan era and its claim that lower taxes on dividends, interest, and capital gains would reward, and hence promote, investment and growth. Unfortunately for the theory, taxes,...

How the Other Half Banks

Today's Balance Sheet: Mitt Romney makes beaucoup bucks.

Mitt Romney released his tax returns today, revealing that he made a combined $42.6 million in 2010 and 2011, mostly through capital gains. Because the bulk of his wealth was made through investment, Romney only paid $6.2 million in taxes, which translates into a 13.9 percent tax rate in 2010 and an estimated 15.4 percent rate in 2011. Those rates place him in the same tax bracket as a couple making $70,000 a year. Romney's taxed income was mostly held in a blind trust, with an undisclosed amount held in the Grand Caymans and other overseas financial institutions (including a Swiss bank account that was closed in 2010 after an investment advisor said it could become politically embarrassing). Comparatively, President Barack Obama paid a 25 percent tax rate, and Newt Gingrich paid 31 percent on his income. None of Romney's earnings—$21.7 million in 2010 and $20.9 million last year—came from wages, which is the primary source of income for most people in the U.S. "I pay all the taxes...

Occupy the Alps

Today's Balance Sheet: The conference in Davos is no laughing matter, but apparently Federal Open Market Committee meetings were.

Thousands of the world’s business and political leaders are all heading to Davos, Switzerland—the home of Thomas Mann's fictional sanatorium—for this year’s five-day World Economic Forum. The euro crisis will be a dominant theme of the conference and Angela Merkel will serve as the keynote speaker. The conference comes as public confidence in world leaders' ability to fix the economic crisis hits a new low. In 2011’s “truth barometer” poll , conducted by the Edelman PR firm, 11 countries—twice as many as last year—said they are "skeptical" of government, business, non-governmental organizations, and the media. The drop in trust is most attributable to a loss in faith in political leaders—52 percent of "informed people" polled trusted government last year; this year the figure has dropped to 43 percent. Trust in business dropped too, from 56 to 53 percent. "European policy makers at Davos will keep doing everything possible to try to calm markets,” William Browder, a Davos-goer for 12...

Mega-Crackdown

Today's Balance Sheet: The FBI shuts down Megaupload in what the Justice Department is calling its biggest copyright case ever.

AP Photo/Greg Bowker
Yesterday, on the same day that major websites like Wikipedia, Wordpress, Reddit, and Wired went dark to protest the Stop Online Piracy Act (SOPA), the Justice Department shut down Megaupload , one of the largest file-sharing sites on the Internet. The site’s seven founders were arrested in New Zealand and are accused of making $175 million in profits while costing copyright holders an estimated $500 million in revenue. They face up to 20 years in prison for violating international copyright laws. Lawyers for the men said Megaupload allows users to legitimately transfer large files. But the government maintains that the service is simply a front for piracy, racketeering, and money-laundering. Hackers responded swiftly to the crackdown, with the group Anonymous taking responsibility for briefly shutting down the Department of Justice and Universal Music Group websites. The Latest Intel and Microsoft Post Gains in Last Quarter as Google Dips Bloomberg Businessweek European Debt Crisis:...

The Internet Strikes Back

Today's Balance Sheet: A war is brewing between the Internet and the entertainment industry, and it looks like things might get brutal this week.

The coming week is shaping up to feature a hostile fight between tech companies and content producers as the Stop Online Piracy Act (SOPA) and PROTECT-IP bills are debated in Congress. Reddit and Wikipedia have announced their intention to go dark for 12 hours on Wednesday to protest the bills, and rumors that Google, Facebook, and Twitter might join in have circulated. These tech companies are framing the issue as a battle between profits and free speech, an argument that has rallied opposition to the legislation. In a sign of support, 19,000 people on Twitter have changed their profile pictures to an icon saying "Stop SOPA." The White House joined Team Internet on Saturday, stating "While we believe that online piracy by foreign websites is a serious problem that requires a serious legislative response, we will not support legislation that reduces freedom of expression, increases cybersecurity risk, or undermines the dynamic, innovative global Internet." These measures, plus the...

Handicapping 2012

Today's Balance Sheet: Starting off the 2012 race between a tortoise and our economic recovery

In the past few weeks, the good economic news pouring in has kept newspaper business sections buoyant, but the celebrations may be premature. One of the biggest problems barring a quick comeback for the economy is inadequate aggregate demand —without demand, we can't produce more goods and can't hire more people. The Treasury estimates that the gap between actual and potential output is over 7 percent—that's equal to $1 trillion worth of goods and services. The U.S. has a considerable 12.1 million jobs gap as well, which won't close until 2024 if we keep adding 200,000 new jobs per month, the pace set in December 2011. Recovery so far has been somewhat backwards too—consumer spending, housing, and construction are usually signs of early growth, but they have been the last things to bounce back. Instead, manufacturing and business investments—leading to downturns in unemployment—have been at the forefront of our recovery. These changes have led to a tepid increase in consumer spending...

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