Tag Archives: US

Today’s Economic Report Card

This has been an eventful week in economic news. This morning, we got a first, early look at US economic growth in the fourth quarter of 2013—and it proved a pleasing sight. The economy grew at a 3.2 percent annual pace. That was down from a 4.1 percent rate in the third quarter, but both numbers are the best we’ve seen in almost two years. These figures are interesting in their own right, but they also cast a revealing light on some big economic controversies of the last year, such as the government shutdown, fiscal austerity, and the Federal Reserve’s taper.

The period in question covers the government shutdown and debt debates of early October. Those antics, which were forecast at the time to be devastating for the economy, seem only to have had a marginal effect. Today’s numbers included a calculated impact of the shutdown—0.3 percent. That seems to suggest that, absent the shutdown, growth would have been 3.5 percent in the quarter. In fact, the underlying story is a bit more interesting. In a note, the Commerce Department says that it cannot quantify the effects of the shutdown. It generates the 0.3 number by looking at the reduction in federal labor services (employees not coming in to work). Since those workers were eventually given back pay, the note says it ultimately modeled the effect as “a temporary increase in the prices paid for federal employee compensation.” Qualitatively, at least, this bears some resemblance President’s proposal to raise the minimum wage for federal contractors, though that change is meant to be permanent. In retrospect, October’s predictions of catastrophe seem overblown.

Today’s report also covers a period in which the US government engaged in fiscal austerity. If one compares government budget numbers in the fourth quarter of 2012 to the fourth quarter of 2013, we saw a decrease in spending (from $909bn to $838bn, a 7.8 percent drop); we saw an increase in tax receipts (from $616bn to $665bn, an 8.0 percent increase); and a resulting decrease in the quarterly deficit (from $293bn to $174bn, a 40.8 percent drop). And yet the economy grew substantially faster (growth in 2012:4 was just 0.1 percent). Of course, these numbers hardly suffice to confirm or reject Keynesian claims about how one spurs or slows the economy. Multiple factors play into economic growth and some of those factors are not contemporaneous—they can kick in with a lag, or they can even work in advance, when people change their behavior based on expectations of future changes. But these numbers, on their face, certainly do not lend strong support to the assertion that a smaller government role dooms the economy to stagnation.

Before today’s GDP report, the big economic news of the week was the Federal Reserve’s decision to continue with its “taper”—the program of cutting back by $10bn per month in the amount of money it pumps into the economy (quantitative easing). In both the case of GDP and that of the Fed, the news came exactly as forecast by market watchers. The Fed had to act first, without the benefit of the GDP report. It proceeded in spite of some pressure to reconsider. The December jobs report, released earlier in the month, had been surprisingly weak. Further, if the Fed looked abroad, the view was more alarming. Emerging markets, along with some major Asian exchanges, have been crashing this last week. Among the explanations that have been offered were the tightening of the global money supply (directly affected by the Fed taper) and weakening growth in China. This highlights the challenge faced by the Fed. Its actions do work with a lag—perhaps 18 months. That means it must react not to current conditions, but rather to its forecasts for years to come. Furthermore, it has really just one tool—the money supply—with which to target domestic prices (inflation), unemployment, plus the well-being of the global economy, and that last one isn’t even part of its official mandate. The problem of getting the timing right led one past Fed chairman to say that the central bank’s job was “to take away the punch bowl just as the party gets going.”

So what hints of the future are there in today’s GDP report? The Bureau of Economic Analysis helpfully breaks down the contributors to GDP growth (Table 2). One of the most striking contributors in the last quarter of 2013 was the importance of international trade for the US economy. Net exports of goods and services accounted for 1.3 percent of the overall 3.2 percent growth. Most of that came from exports growing at an extraordinary 11.4 percent annual rate. Looking ahead, that driver of growth now looks threatened, both with faltering economies abroad (someone has to buy those exports) and an endangered agenda for gaining new market access through trade agreements.

Guest Commentary: TTIP – Views from Europe

By Fredrik Erixon, director and cofounder of the European Centre for International Political Economy (ECIPE), a world-economy think tank based in Brussels, and was the Convenor of the Transatlantic Task Force on Trade, a joint project of ECIPE and the German Marshall Fund of the US that spearheaded the TTIP negotiations. A fuller version of his analysis can be found here (PDF).

Failures in the World Trade Organisation’s Doha Round have prompted countries to turn to preferential trade agreements. But are they worth their salt? While the most outstanding feature of past FTAs is that they have not had impressive effects on growth in trade and Gross Domestic Product (GDP), the negotiations for a Transatlantic Trade and Investment Partnership (TTIP) may change this verdict. Clearly, TTIP will be won or lost for its economic merits. And the pro-growth effects of TTIP are really what persuaded reluctant officials and politicians in Europe to join countries like Germany and Sweden in their efforts to push for a transatlantic FTA. Given Europe’s poor growth rates, trade agreements that could deliver higher economic growth have been given a new hearing.

Few would deny that TTIP has the capacity to deliver a sizeable contribution to GDP in Europe. The gains from this FTA would be bigger than from other FTAs for the reason that it involves two large economies. Simply, size matters. A “conservative” estimate by the Centre for Economic Policy Research in London suggests the TTIP gain for the EU to be in the tune of 0.3-0.5 percent of GDP (the GDP gains are slightly smaller for the US).

However, political scepticism of TTIP is less concerned with the bilateral economic gains (or losses) and more directed to its consequences on the World Trade Organisation as the central forum of trade negotiations. But perhaps surprisingly to some, the debate in Europe over TTIP has taken a different view. Generally, it has not thrived on the notion that TTIP should be an attempt to build a Fortress Atlantic – or that it is a strategy to gang up on China or other emerging powers competing with the US and Europe.

So while the strange acronym of TTIP is for some a code word for the death knell of the WTO, many trade observers in Europe would argue it is the substance that should be used to give global trade policy a needed shot in the arm.

TTIP, like the TPP, was not born out of deep and genuine beliefs in the principles of free markets or the classical school of free trade. Like any other trade agreement in the past years, these initiatives build on conditional views of free trade and free competition mixed up with soft mercantilism and a growing urgency to support economic growth. Yet it is the best available strategy to rejuvenate global efforts to liberalise trade.

In the past 15 years, the multilateral trading system has been a leaderless system with no clear direction that has unified the key members. The system itself benefited for several decades from the leadership by the United States, which considered this system to be critical for its overall strategic objective of spreading market-based capitalism. There were willing followers to the US leadership, but none other than the US had the requisite economic, political, and institutional capacity to underwrite the system. Yet since the collapse of the Cold War, American leadership has withered away, and its general position on trade liberalisation has somewhat changed. Absent political leadership and direction, the Doha Round got stuck because the political instinct of many countries was to favour status quo rather than new liberalisation as long as there is no external pressure that prompts them to revisit that position.

Like many other things in economic life, trade liberalisation tends to be driven by two motives: profits and fear. Countries agree to open up for greater foreign competition because they believe it will boost their economy or because they fear that other countries will go ahead without them if they stubbornly resist liberalisation. Despite all the success of trade-oriented models of growth, many countries have grown to think that they will not stand to benefit much from new trade liberalisation – and that they have no reason to fear failure.

TTIP may partly change this. It is a big initiative. And if the two biggest economies of the world go for a bilateral agreement, it means that there is a risk for other countries that stand outside that bilateral agreement and, which is important, other efforts to liberalise trade. That risk is mostly about not having a voice in the design of the trade reforms that are likely to serve as benchmarks in future international agreements. It is far less about loosing current trade access – but it is about the fear of not having as good access to trade that will be liberalised in the future. Consequently, if TTIP is the ‘real thing,’ if it achieves the promise of ushering the world into 21st Century trade policy, the response from the larger emerging economies cannot be no response at all. The political and economic opportunity costs of status quo would have been changed.