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Free exchange

Our economics correspondents consider the fluctuations in the world economy and the policies intended to produce more booms than busts

Articles by Free exchange

Podcast: A poison chalice for GE’s new boss

11 days ago

[unable to retrieve full-text content]Patrick Foulis asks if a break-up is on the cards as General Electric appoints a new CEO. Also, Uber is on a collision course as it grapples with management problems. Why confidence among European companies is sky high. And tension in global trade in aluminium. Hosted by Philip Coggan.

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A new paper rekindles a tiresome debate on immigration and wages

13 days ago

WHAT effect do immigrants have on native wages? It’s perhaps one of the most important questions of labour economics. It’s also one that is largely unanswerable. The problem is that it’s almost impossible to separate cause and effect. If a country with high rates of immigration also sees strong wage growth, we can’t assume that immigrants are boosting wages—it may well be the case that the migrants are choosing to move to places with stronger economies.One approach to getting around this problem is to find a natural experiment in which either the supply of or demand for labour changes exogenously. Perhaps the most famous example of such an event in labour economics is the Mariel Boatlift. In 1980, Fidel Castro, then president of Cuba, eased emmigration restrictions. Some 125,000 Cubans

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Podcast: Super Mario to the rescue

18 days ago

[unable to retrieve full-text content] As the European Central Bank meets in Estonia this week, is it time for Mario Draghi to withdraw support from the Eurozone economy? Emerging Markets Editor Simon Cox on why the BRICs label is still relevant. And, how investors are taking care of the planet. Simon Long presents

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Why the Fed is likely to raise rates, despite low inflation

19 days ago

CREDIBILITY is a thing you have to worry about with toddlers. You cannot reason with them. The best you can hope to do is respond consistently to undesirable behaviour. Get this wrong and your work becomes harder. If your correspondent doesn’t actually go and hide the box of Legos every time he has to count to three, for example, his child will not find his threats to be credible, and will fail to respond to them. This is the problem the Federal Reserve has now with financial markets. For six months the Federal Open Market Committee (FOMC) has been carefully managing its speeches, meeting minutes and economic projections to one end: convince debt markets that it will raise the benchmark interest rate by a quarter of a percentage point at its June meeting. It has succeeded. FedWatch, a tool

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Europe inches closer to a plan for fixing its financial flaws

23 days ago

DONALD TRUMP and Theresa May may have done more to push Europeans together, and open up an opportunity for reform of its institutions, than any pro-European American president or British prime minister could ever have dreamt. The Commission’s “Reflection paper on the deepening of the Economic and Monetary Union”, issued on May 31st, points the way towards a package deal that could be acceptable to Northern and Southern euro area countries. But some key elements are still missing.Encouragingly, the Commission sets out a tight calendar for completing the banking union, with the creation of a common deposit insurance scheme and a common backstop for the European Resolution fund intended to be in place by 2019. These two elements are crucial if we are to stop the banks posing an existential

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Donald Trump’s budget ignores what is ailing American workers

May 24, 2017

PRESIDENTIAL budget requests are worth exactly nothing. They carry no force of legislation. They land, heavy, bound and shrink-wrapped, so they can be immediately binned as Congress continues its now yearly stumble toward a “continuing resolution”—a supposedly temporary legislative act that in recent decades has almost entirely replaced the statutory budget process. The request from the President is the least consequential part of something that is completely broken. It functions like a bumper sticker on an old car. It only tells you about the person who’s driving. Mick Mulvaney, a former congressman from South Carolina who won his seat in the Tea-Party wave of 2010, runs Donald Trump’s Office of Management and Budget. Mr Mulvaney has created the budget his wing of the Republican party

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Podcast: Trumponomics

May 10, 2017

[unable to retrieve full-text content]Simon Long delves into what Donald Trump means for taxes, growth and trade. Also: the markets react to Emmanuel Macron’s election victory in France and China develops its first large passenger jet

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Europe needs true fiscal integration, not its own IMF

May 9, 2017

THE euro-zone debt crisis exposed a critical need for stronger European financial safety nets and institutions. In March 2010, Thomas Mayer and Daniel Gros, two German economists, made a strong case for the creation of a European Monetary Fund (EMF). In the end, European leaders agreed on a European Financial Stability Facility (EFSF) in May 2010. This was later transformed into the European Stability Mechanism (ESM), which today works alongside the IMF in Europe’s financial-assistance programmes. The creation of the ESM was a major step in the process of integrating and completing the euro area. It offered a powerful mechanism to backstop sovereign debt markets and deal with sudden stops in capital flows at a time of acute crisis. But over the years, as the more fundamental flaws in the

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Another pay rise?

May 9, 2017

[unable to retrieve full-text content]Callum Williams joins presenter Simon Long to examine the merits of Labour leader Jeremy Corbyn’s proposal for a £10 minimum wage. The Chinese investors who idolise American billionaire Warren Buffet. Why a gender gap among Economics students could cause problems down the road

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America’s economic growth slows to 0.7%

April 28, 2017

THE news that America’s GDP growth slowed to 0.7% on an annualised basis in the first quarter of 2017 is no real surprise, for two reasons. First, although consumer and small business confidence have soared since Donald Trump won the presidential election, most measures of actual economic activity have failed to display the same vim (see article). Second, it is often the case that growth sags in the first quarter of the year, despite recent efforts by statisticians to purge the economic data of seasonality. Since 2010, excluding today’s release, first-quarter GDP growth has averaged just 1.1%, compared with 2.5% at other times in the year. Judged against that benchmark, the latest data are only a little disappointing.The more interesting story is a shift in the composition of growth. Consumers have driven most of the economy’s spending growth since the end of 2015. But consumption has now slowed abruptly (see chart). For that, blame sales of durable goods. Falling motor vehicle sales alone have taken almost half a percentage point off the growth rate. Weak sales of durable goods would usually signal a hesitant consumer. That makes the contrast between what consumers are doing and what they are saying all the more puzzling. Perhaps politics is muddying the waters.

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Podcast: How will France’s election affect business?

April 26, 2017

[unable to retrieve full-text content] As the presidential race narrows to two strongly contrasting candidates, we explore what a victory for each would mean for businesses. The digital revolution is making measuring GDP a bit trickier. Also, how a website that crowdsources algorithms for quantitative finance could disrupt the industry

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Podcast: How will France’s election affect business?

April 25, 2017

[unable to retrieve full-text content]As the presidential race narrows to two strongly contrasting candidates, we explore what a victory for each would mean for businesses. The digital revolution is making measuring GDP a bit trickier. Also, how a website that crowdsources algorithms for quantitative finance could disrupt the industry

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Reducing rates for “pass-through” businesses will be tough to justify

April 25, 2017

THERE are two main reasons for a country to paw around in its tax code: to create more economic growth, or to repair a structural deficit. Any politician who wishes to quietly give money to friends or kill a troublesome programme will supply one of them. He will either say “businesses need tax certainty to grow” (meaning: “certainty that they will like the tax code”), or “we don’t have the money”. So as the Trump administration releases its tax plan on April 26th, there are only two questions to ask: whether it will speed up America’s current economic recovery, and whether it will begin to fill in the country’s long-term deficits. If the early leaks from the White House are any guide, it will do neither. According to the Wall Street Journal, the White House wants to reduce the top tax rate on pass-through businesses to 15%. “Pass through” means the business itself has no tax obligations—those are passed to the owners. Last year economists from the Treasury department took a hard look at the administrative tax data for these businesses for the National Bureau of Economic Research. In 1980, they found, levies on income from pass-through businesses made up less than a quarter of America’s corporate-tax revenue. By 2011 that had climbed to more than half. Changes to the tax code in 1986 had made this structure more attractive to owners.

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Podcast: A sweet story

April 18, 2017

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America has a retirement problem, not a saving problem

April 18, 2017

HOUSE Resolution 67, which Donald Trump signed last week, rolls back a rule that the Labor Department finalised late last year, which would have made it easier for cities and counties to run retirement savings plans for citizens who couldn’t get them through work. It is an odd choice for Republicans to kill plans that would encourage private, voluntary, tax-deferred saving, which they tend to approve of. But a trade group for investment funds opposes the city-run retirement plans. The Democrats on Capitol Hill, beset with other problems, are not picking a fight. They should. The resolution itself is nothing more than a kick in the shins for the three cities, all run by Democrats, that had considered setting up plans—New York, Philadelphia and Seattle. But it points to a larger problem, which neither party has confronted. The United States has a retirement crisis, which it is treating like a savings crisis. They are not the same thing. In traditional macroeconomics, all saving serves the same purpose: investment in the capital stock, or new machines to make stuff. Workers either spend from their paychecks on rent and food, or put money away in bonds, shares or savings accounts. Through the magic of capital markets, their savings both return interest and buy machines and tools—capital stock. In turn, this stock becomes component of the basic model for economic growth.

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Podcast: The remarkable calmness of gold

April 11, 2017

[unable to retrieve full-text content]Despite rising tensions and fears of inflation, gold prices have stayed relatively still. Our Buttonwood columnist explains why. Traditional carmakers look likely to band together in the face of technological disruption. Also, what Britain’s economists really think about the impacts of Brexit

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Podcast: The robot era is dawning

April 5, 2017

[unable to retrieve full-text content]As robots grow more nimble, humans look increasingly vulnerable. Are the machines poised to take over? Also: now that Article 50 has been triggered, is Ireland’s economy set to be damaged by Brexit? And despite Japan’s workforce growing by more than two million, wage gains aren’t enough to hit an inflation target of 2%. Why is this?

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Should America break up Washington?

April 3, 2017

CONCERNS about regional inequality and frustration with elites are contributing to interest in an intriguing idea: reining in the economic and political power of Washington by dispersing government agencies more widely. Tyler Cowen muses on the subject here. Matthew Yglesias makes the case for such a policy here. Ross Douthat makes a somewhat different but related argument here. So: is this a good idea? It certainly isn’t a terrible idea, but the more you dig into the matter the less it looks like an out-and-out good one. (Some disclosure: I work in Washington now, and once, long ago I was a federal government employee at the Bureau of Labor Statistics.)It might be useful to begin with a little perspective. Funnily enough, Washington was a purpose-built capital, located outside the major cities of the day, partly in order to prevent a Philadelphia or New York from becoming dominant. America’s metropolitan geography remains multipolar in a way few other rich economies manage. Washington, for its part, is neither the largest, or the richest, or the fastest growing of America’s major metropolitan areas. The economy of the Washington metropolitan area accounts for a smaller share of American GDP than Ottawa’s share of Canadian GDP. What’s more, of the 1.8m or so civilian employees of the federal government, only about 15% are located in the Washington area.

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Democrats should be more comfortable discussing economic growth

March 30, 2017

STEVE BANNON is right. This week, in a New York Times Magazine piece otherwise dedicated to the President’s dance with Congress, he offered this: I think the Democrats are fundamentally afflicted with the inability to discuss and have an adult conversation about economics and jobs, because they’re too consumed by identity politics. And then the Republicans, it’s all this theoretical Cato Institute, Austrian economics, limited government—which just doesn’t have any depth to it. They’re not living in the real world.Lose the bit about identity politics, and you have a clear summation of American macroeconomics. Republicans are lost in theory, unburdened by empirical evidence. Democrats don’t seem to have much of a theory at all. And as Republicans dust themselves off and turn to rewriting America’s tax code, Democrats could use a working theory of economic growth. Judging from last year’s campaign, they aren’t ready to commit to one. Should they develop an interest, however, there are several to hand.Grossly simplified, there are two ways politicians talk to voters about economics. Think of a pie. Republicans promise economic growth, to make the pie larger: more pie for everyone.

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Podcast: Luxury for the masses?

March 29, 2017

[unable to retrieve full-text content]The Chinese middle class led a boom in demand for luxury goods. But a government crackdown made consumers wary about showing off their wealth. How has China’s new modesty affected the luxury business as a whole? Also: India’s power sector has until now been dependent on using dirty coal but things are changing.

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Podcast: A most unusual company

March 22, 2017

[unable to retrieve full-text content]The one-time bookseller Amazon accounts for more than half of every new dollar spent online in the US. But how did it get to be the fifth most valuable company in the world? Also: why it costs the American government more to borrow money on the bonds market than European ones.

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Podcast: Microsofter

March 14, 2017

[unable to retrieve full-text content] Microsoft has reinvented itself under its new CEO Satya Nadella with a move to the cloud. Is its friendlier approach to program developers likely to pay off? Also: as the Netherlands goes to the polls, our Europe editor Matt Steinglass examines how each party’s financial manifestos were put to the test.

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Admit it: Republicans’ proposed Obamacare overhaul offers relief for some middle earners

March 9, 2017

WHAT is the best part of House Republicans’ proposed reform of Obamacare? There isn’t one, if you believe much of this week’s commentary. The bill will benefit the young and healthy, by bringing their premiums down, but only at the cost of the old and sickly. But most writers are overlooking the help the bill would offer to one group that has clearly suffered unfairly under Obamacare. So long as Paul Ryan’s reform does not send the market into a death spiral—which is not a sure thing (see article)—this group will get some needed financial assistance under the Republican plan.I’m talking about people who buy health insurance for themselves, rather than through an employer, and who do not get the subsidies which shield those on low incomes from Obamacare’s high premiums. It is easy to overlook this group, because the vast majority of the 10m people who buy insurance through Obamacare’s websites (or "exchanges") receive subsidies. For example, here is Jared Bernstein, Vice-President Joe Biden’s former chief economist, in the Washington Post:Of course, there’s the infamous, headline-generating 2017 premium increases in the non-group market. After growing 2 and 7 percent in 2015 and 2016, insurers in the state-based exchanges raised the cost of the benchmark plan by an average of 25 percent. To Obamacare critics, this was proof of the program’s unsustainability.

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GM says ‘au revoir’ to Europe

March 8, 2017

General Motors has sold its Vauxhall and Opel brands to PSA in France. Adam Roberts our European business editor asks how the car industry is reacting to the consolidation. Also: can Snapchat succeed as a public company? And might President Trump’s accusation that China hasn’t been playing by the rules have a point? Simon Long hosts.

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Podcast: Money talks

March 1, 2017

There are a number of growing threats to Europe with Brexit and maybe another Greek disaster looming. But Eurogroup president Jeroen Dijsselbloem tells Sacha Nauta the EU is actually on the mend. Also: Why Oscar mix-ups symbolise how independent films such as Moonlight are overshadowed by the big studios. Simon Long hosts.

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Clean energy’s dirty secret

February 22, 2017

Could the rise of renewables be putting the traditional electricity market into a crisis? Also: Economist Diane Elson takes governments to task about the gender biases in their economic policies. And how the Brazilian government is tackling one of its biggest financial problems: pensions.

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Banks on the move

February 14, 2017

[unable to retrieve full-text content]Are thousands of banking jobs set to migrate from Britain into the eurozone? Patrick Lane discusses potential destinations with host Simon Long. Also: a currency catastrophe in Zimbabwe and the decline of the executive jet

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