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Who’s afraid of zombie firms?

The COVID-19 pandemic has turned many profitable US businesses into money-losers that can stay afloat only because of abundant credit, in part reflecting emergency lending programs of the Federal Reserve and Treasury. Some economists are concerned that these “zombie” firms will drain resources from the healthy parts of the US economy, slow the recovery, and inhibit productivity growth. These fears are fundamentally misguided. Zombies are a consequence of a weak economy, not a cause. Policy...

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Bricks and mortar in the BRICs

The major industrial democracies in the Group of Seven (G7) bloc have had the fiscal and monetary resources to undertake major COVID-19 economic rescue programs.[1] For six months they have helped businesses stay open while providing income assistance to families in need. By contrast, most developing countries are burdened by deficits and cannot borrow readily to finance such programs. Often, they also lack delivery capacity. Instead, many are following the pattern of Brazil, China, India,...

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Biden’s business tax plan: More complexity, questionable effect

US presidential candidate Joseph Biden, pressing his agenda to expand US employment, has released a plan to impose new business taxes designed to discourage offshoring of US manufacturing. The new proposal supplements Biden’s earlier call for Buy America that, as argued here, would impose high costs on US taxpayers. Biden’s business tax proposals are no less problematic. They could end up hurting US-based multinational corporations (MNCs) when competing against foreign companies to sell goods...

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Challenge facing US labor market worsened in September even as the headline numbers improved

The US economy added 661,000 jobs in September, a substantial increase but much slower than the increases in recent months. At the same time, the number of workers who reported being on temporary layoff fell by 1.5 million, while the number of workers who were unemployed for other reasons rose. This will increase the challenge of future labor market recovery. These job gains led the official unemployment rate to fall from 8.4 percent in August to 7.9 percent in September. As in prior months...

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Is the US dollar shirking its “exorbitant duty”?

The US dollar strengthened in the COVID-19 crisis like it did in the last global financial crisis (figure 1). Now like then, this strengthening is generally explained by the fact that global safe assets are denominated in the safe haven currency of the US dollar. The demand for safe assets increases in a crisis, leading to an appreciation of the dollar, exactly when the US economy would need a depreciation. This phenomenon has been called the dollar’s “exorbitant duty” that comes with serving...

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France, Germany, and Italy press ahead to spur their economies

The COVID-19 pandemic compelled the G7 advanced industrial democracies to take drastic action to buttress their economies earlier in 2020, focusing on job retention and business loan guarantee programs. More than six months later, however, only France, Germany, and Italy have launched or are moving toward a second round of recovery plans. The other four G7 economies (Canada, Japan, the United Kingdom, and the United States) are still focused on crisis response, though many initial measures...

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Push for British sovereignty risks worst possible Brexit outcome

British Prime Minister Boris Johnson’s zeal over asserting British sovereignty in Brexit negotiations has not only torpedoed the talks over Britain’s withdrawal from the European Union. It has also increased the likelihood of the worst possible long-term relationship with the EU and Ireland while almost certainly destroying prospects for a trade agreement with the United States. And it has raised the possibility of the most sweeping and disruptive “no deal” Brexit by year’s end, with no...

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Japan’s economic challenges mirror those of other advanced economies

Prime Minister Shinzo Abe’s announced plan to step down has ushered in a period of uncertainty about Japan’s attempts to recover from the COVID-19 economic downturn. But whoever succeeds Abe, Japan is likely to continue experiencing low growth, low inflation, low interest rates, and excess private savings in the foreseeable future—a combination that some characterize as “Japanification,” a term that has been applied to other advanced economies struggling under the weight of these factors....

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US unemployment rate falls in August as many workers on temporary layoffs return to work

The official unemployment rate fell to 8.4 percent in August from 10.2 in July, marking the first time the unemployment rate has been below 10 percent since March. As in prior months of the pandemic, the official unemployment rate continues to understate the unemployment rate from a historically-comparable perspective because it counts an extra 1.1 million people who were "not at work for other reasons" as employed (the so-called "misclassification error") and also because 3.7 million people...

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What Fed Chair Jerome Powell did and did not say

The statement in Jackson Hole by Federal Reserve Chair Jerome Powell on August 27 that the Fed will keep interest rates low in order to focus on "maximum employment" means that the Fed is adapting its medium-term strategy to current economic reality—a welcome step. It also means that the earlier Federal Open Market Committee (FOMC) was wrong to have raised interest rates in 2015-18, particularly to have focused on U* (natural rate of unemployment) rather than labor force participation, and to...

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