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Posts Tagged ‘USA’

What do trade deals involve?

In the light of the Brexit vote and the government’s position that the UK will leave the single market and customs union, there has been much discussion of the need for the UK to achieve trade deals. Indeed, a UK-US trade deal was one of the key issues on Theresa May’s agenda when she met Donald Trump just a week after his inauguration.

But what forms can a trade deal take? What does achieving one entail? What are likely to be the various effects on different industries – who will be the winners and losers? And what role does comparative advantage play? The articles below examine these questions.

Given that up until Brexit, the UK already has free trade with the rest of the EU, there is a lot to lose if barriers are erected when the UK leaves. In the meantime, it is vital to start negotiating new trade deals, a process that can be extremely difficult and time-consuming.

A far as new trade arrangements with the EU are concerned, these cannot be agreed until after the UK leaves the EU, in approximately two years’ time, although the government is keen that preliminary discussions take place as soon as Article 50 is triggered, which the government plans to do by the end of March.

Articles
Trade deals are difficult to negotiate and Britain lacks the skills for the job The Conversation, Nigel Driffield (27/1/17)
Why a U.S.-U.K. Trade Deal Could be Harder than it Sounds Newsweek, Josh Lowe (26/1/17)
UK-US trade deal will have ‘very small upsides’ for Britain, says former Bank of England economist Independent, Rob Merrick (26/1/17)
Trump says he wants a U.K. trade deal. Don’t hold your breath CNN Money, Alanna Petroff (23/1/16)
Reality Check: Can there be a quick UK-USA trade deal? BBC News, Jonty Bloom (16/1/17)

Questions

  1. What elements would be included in a UK-US trade deal?
  2. Explain the gains from trade that can result from exploiting comparative advantage.
  3. Explain the statement in the article that allowing trade to be determined by comparative advantage is ‘often politically unacceptable, as governments generally look to protect jobs and tax revenues, as well as to protect activities that fund innovation’.
  4. Why is it difficult to work out in advance the likely effects on trade of a trade deal?
  5. What would be the benefits and costs to the UK of allowing all countries’ imports into the UK tariff free?
  6. What are meant by ‘trade creation’ and ‘trade diversion’? What determines the extent to which a trade deal will result in trade creation or trade diversion?
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A risky dose of Keynesianism at the heart of Trumponomics

The first article below, from The Economist, examines likely macroeconomic policy under Donald Trump. He has stated that he plans to cut taxes, including reducing the top rates of income tax and reducing taxes on corporate income and capital gains. At the same time he has pledged to increase infrastructure spending.

This expansionary fiscal policy is unlikely to be accompanied by accommodating monetary policy. Interest rates would therefore rise to tackle the inflationary pressures from the fiscal policy. One effect of this would be to drive up the dollar and therein lies significant risks.

The first is that the value of dollar-denominated debt would rise in foreign currency terms, thereby making it difficult for countries with high levels of dollar debt to service those debts, possibly leading to default and resulting international instability. At the same time, a rising dollar may encourage capital flight from weaker countries to the US (see The Economist article, ‘Emerging markets: Reversal of fortune’).

The second risk is that a rising dollar would worsen the US balance of trade account as US exports became less competitive and imports became more so. This may encourage Donald Trump to impose tariffs on various imports – something alluded to in campaign speeches. But, as we saw in the blog, Trump and Trade, “With complex modern supply chains, many products use components and services, such as design and logistics, from many different countries. Imposing restrictions on imports may lead to damage to products which are seen as US products”.

The third risk is that the main beneficiaries of Trump’s likely fiscal measures will be the rich, who would end up paying significantly less tax. With all the concerns from poor Americans, including people who voted for Trump, about growing inequality, measures that increase this inequality are unlikely to prove popular.

Articles
That Eighties show The Economist, Free Exchange (19/11/16)
The unbearable lightness of a stronger dollar Financial Times (18/11/16)

Questions

  1. What should the Fed’s response be to an expansionary fiscal policy?
  2. Which is likely to have the larger multiplier effect: (a) tax revenue reductions from cuts in the top rates of income; (b) increased government spending on infrastructure projects? Explain your answer.
  3. Could Donald Trump’s proposed fiscal policy lead to crowding out? Explain.
  4. What would protectionist policies do to (a) the US current account and (b) dollar exchange rates?
  5. Why might trying to protect US industries from imports prove difficult?
  6. Why might Trump’s proposed fiscal policy lead to capital flight from certain developing countries? Which types of country are most likely to lose from this process?
  7. Go though each of the three risks referred to in The Economist article and identify things that the US administration could do to mitigate these risks.
  8. Why may the rise in the US currency since the election be reversed?
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A major new trade deal – the Trans-Pacific Partnership

Governments of twelve Pacific rim nations, including the USA, Canada, Japan and Australia have just agreed to a trade deal – the Trans-Pacific Partnership (TPP). This represents the most significant trade deal since the completion of the Uruguay Round and the creation of the World Trade Organisation in 1994. Together these countries account for some 40% of global GDP. The deal must still be signed by the leaders of the TPP countries, however, and, more importantly, ratified by their legislatures, where, to put it mildly, agreement is not universal.

The deal is hailed as a move towards freer trade in a number of areas, including agriculture and services. But it also provides greater protection for owners of intellectual property. Proponents of the deal argue that it will to lead large-scale reductions in tariffs and other trade restrictions. As the Economist article states:

For American exporters alone, 18,000 individual tariffs will be reduced to zero. Much the same will be true for firms in the other 11 members. Even agricultural barriers, usually among the most heavily defended, will start to come down. Foreigners will gain a toehold in Canada’s dairy sector and a bigger share of Japan’s beef market, for example.

But despite this being the biggest trade deal for some 20 years, it has been highly criticised by various groups. Freer trade threatens industries that will face competition from other countries in the TPP. This unites both corporations and unions in trying to protect their own specific interests. However, the agreement gives ground to many special industries by retaining protection in a number of areas, at least for several years.

It has also been criticised by environmentalists who worry about the removal of various environmental safeguards. In answer to these concerns, there are several provisions in the agreement that provide some measure of environmental protection so as to slow things such as deforestation, overfishing and carbon emissions. But environmentalists argue that these provisions do not go far enough.

Others are concerned that the agreement will allow corporations to challenge governments and undermine the ability of governments to regulate them.

The articles look at some of the details of the agreement and at the arguments for and against ratifying it. Some of these arguments go to the heart of the age-old free trade versus protection debate.

US, Japan and 10 countries strike Pacific trade deal Financial Times, Shawn Donnan and Demetri Sevastopulo (5/10/15)
What Trade-Deal Critics Are Missing Wall Street Journal, Zachary Karabell (8/10/15)
The Trans-Pacific Partnership: Weighing anchor The Economist (10/10/15)
A trade deal is no excuse to milk taxpayers Globe and Mail (Canada), Yuen Pau Woo (7/10/15)
What Is the Trans-Pacific Partnership Agreement (TPP)? Electronic Frontier Foundation
Wikileaks release of TPP deal text stokes ‘freedom of expression’ fears The Guardian, Sam Thielman (9/10/15)
TPP’s clauses that let Australia be sued are weapons of legal destruction, says lawyer The Guardian, Jess Hill (10/11/15)

Questions

  1. Who are likely to benefit from the TPP?
  2. Why are American republicans generally opposed to the agreement?
  3. What are the objections to the TPP’s provisions for the protection of intellectual property rights?
  4. Would the current twelve members of the TPP gain if China joined?
  5. What are the objections of environmentalists to TPP?
  6. What effect will the TPP on European countries?
  7. Other than a reduction in tariffs, what other types of measures are included in the TPP?
  8. What is the Investor-State Dispute Settlement mechanism and what criticisms have been made of it? Are they justified?
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Effects of raising the minimum wage

Conservative Party leaders are considering the benefits of an above-inflation rise in the minimum wage. This policy has been advocated by both the Labour Party and the Liberal Democrats as a means of helping the lowest paid workers. From 2008 to 2013, minimum wage rates fell 5.2% in real terms: in other words, nominal increases were less than the increase in both the RPI and CPI (see UK minimum wage: a history in numbers).

Advocates of a real rise in the minimum wage argue that not only would it help low-paid workers, many of whom are in severe financial difficulties, but it would benefit the Treasury. According to Policy Exchange, a free-market think tank closely aligned to the Conservative Party, increasing the minimum wage by 50p would save the Government an estimated £750m a year through higher tax revenues and lower benefit payments.

But even such a rise to £6.81 would still leave the minimum wage substantially below the living wage of £8.80 in London and £7.65 in the rest of the UK, as estimated by the Living Wage Foundation (see The cost of a living wage). Although many businesses are now paying at least the living wage, many others, especially small businesses, argue that a rise in the minimum wage above the rate of inflation would force them to consider cutting the number of employees or reducing hours for part-time workers.

Meanwhile, in the USA 13 states have raised their minimum wage rates from the 1st January 2014 (see). Some of the rises, however, were tiny: as little as 15 cents. In a couple of cases, the rise is $1. Currently 21 states and DC have minimum wage rates above the Federal level of $7.25 (approx. £4.40); 20 states have rates the same as the Federal level; 4 states have rates below the Federal level. At $9.32 per hour, Washington State has the highest state minimum wage; the lowest rates ($5.15) are in Georgia and Wyoming. In 5 states there is no minimum wage at all. As the ABC article below states:

The piecemeal increases at the local level are occurring amidst a national debate over low wages and income inequality. Fast food and retail workers have been staging protests and walking off work for more than a year, calling for better pay and more hours. Currently, fast food workers nationally earn an average of about $9 per hour.

Workers from McDonald’s, Wendy’s, Burger King and other fast food joints are calling for $15 per hour. Wal-Mart workers organizing as part of the union-backed OUR Walmart aren’t asking for a specific dollar amount increase, but they say it’s impossible to live on the wages they currently receive.

President Obama has been throwing his weight behind the issue. Earlier this month, the President said in a speech that it’s “well past the time to raise the minimum wage that in real terms right now is below where it was when Harry Truman was in office.” But such legislation has a bleaker outlook if it reaches the Republican-led House of Representatives. House Speaker John Boehner has said that raising the minimum wage leads to a pullback in hiring.

So what are the costs and benefits of a significant real rise is the minimum wage on either side of the Atlantic? The articles explore the issues.

Articles: UK
Lib Dems accuse Tories of ‘stealing’ their policy as George Osborne prepares to approve above-inflation rise in minimum wage Independent, Andrew Grice (7/1/14)
Lib Dems accuse Tories of ‘nicking’ party’s policy on low wages The Guardian, Nicholas Watt (7/1/14)
Cut housing benefit? A higher minimum wage would help The Guardian, Patrick Collinson (6/1/14)
Miliband prepares to wage war The Scotsman, Andrew Whitaker (8/1/14)
Increasing the minimum wage is only a half answer to poverty New Statesman, Helen Barnard (8/1/14)
Raise the bar: Economically and socially, Britain needs higher wages Independent (7/1/14)
Another Tory says there’s a ‘strong case’ for raising the minimum wage The Spectator, Isabel Hardman (8/1/14)
Fairness and the minimum wage Financial Times (7/1/14)
Osborne wants above-inflation minimum wage rise BBC News (16/1/14)
George Osborne backs minimum wage rise to £7 an hour The Guardian, Nicholas Watt, (16/1/14)
Minimum wage: in his efforts to defeat Labour, Osborne risks mimicking them The Telegraph, Benedict Brogan (16/1/14)
Minimum wage announcement is not just good economics The Guardian, Larry Elliott (16/1/14)

Articles: USA
13 states raising pay for minimum-wage workers USA Today, Paul Davidson (30/12/13)
Minimum wage increase: Wage to rise in 13 states on Jan. 1 ABC15 (30/12/13)
NJ minimum wage sees $1 bump on Jan. 1 Bloomberg Businessweek, Angela Delli Santi (31/12/13)
Minimum wage hike a job killer ctpost, Rick Torres (7/1/14)
A Business Owners Case For Raising The Minimum Wage Grundy Country Herald, David Bolotsky (7/1/14)
Raising the Minimum Wage Isn’t Just Good Politics. It’s Good Economics, Too. New Republic, Noam Scheiber (31/12/13)
Minimum wage rises across 13 US states Financial Times, James Politi (1/1/14)

Information
National Minimum Wage rates GOV.UK
UK minimum wage: a history in numbers Guardian Datablog
List of minimum wages by country Wikipedia

Questions

  1. Draw two diagrams to demonstrate the direct microeconomic effect of a rise in the minimum wage for two employers, both currently paying the minimum wage, where the first is operating in an otherwise competitive labour market and the other is a monopsonist.
  2. What is meant by the term ‘efficiency wage rate’? How is the concept relevant to the debate about the effects of raising the minimum wage rate?
  3. What are the likely macroeconomic effects of raising the minimum wage rate?
  4. What is the likely impact of raising the minimum wage rate on public finances?
  5. Is raising the minimum wage rate the best means of tackling poverty? Explain your answer.
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Taking an annual gaze into the crystal ball

As the old year gives way to the new, papers have been full of economic forecasts for the coming year. This year is no exception. The authors of the articles below give their predictions of what is to come for the global economy and, for the most part, their forecasts are relatively optimistic – but not entirely so. Despite a sunny outlook, there are various dark clouds on the horizon.

Most forecasters predict a higher rate of global economic growth in 2014 than in 2013 – and higher still in 2015. The IMF, in its October forecasts, predicted global growth of 3.6% in 2014 (up from 2.9% in 2013) and 4.0% in 2015.

Some countries will do much better than others, however. The USA, the UK, Germany and certain developing countries are forecast to grow more strongly. The eurozone as a whole, however, is likely to see little in the way of growth, as countries such as Greece, Spain, Portugal and Italy continue with austerity policies in an attempt to reduce their debt. Chinese growth has slowed, as the government seeks to rebalance the economy away from exports and investment in manufacturing towards consumption, and services in particular. It is still forecast to be 7.3% in 2014, however – well above the global average. Japanese growth has picked up in response to the three arrows of fiscal, monetary and supply-side policy. But this could well fade somewhat as the stimulus slows. The table shows IMF growth forecasts for selected countries and groups of countries to 2018.

Much will depend on what happens to monetary policy around the world. How quickly will monetary stimulus taper in the USA and in Japan? Will the ECB introduce more aggressively expansionary monetary policy? When will the Bank of England start raising interest rates?

Growth within countries is generally favouring those on higher incomes, with the gap between rich and poor set to continue widening over the coming years. The pay of top earners has continued to rise considerably faster than prices, while increasingly flexible labour markets and squeezed welfare budgets have seen a fall in living standards of many on low incomes. According to a Which? survey (reported in the Independent article below), in the UK:

Only three in ten expect their family’s situation to improve in the new year, while 60% said they are already dreading the arrival of their winter energy bill. The Which? survey also found that 13 million people could afford to pay for Christmas only by borrowing, with more than four in ten using credit cards, loans or overdrafts to fund their festive spending. A third of people (34%) also dipped into their savings, taking an average of £450 from their accounts.

If recovery is based on borrowing, with real incomes falling, or rising only very slowly, household debt levels are likely to increase. This has been stoked in the UK by the ‘Help to Buy‘ scheme, which has encouraged people to take on more debt and has fuelled the current house price boom. This could prove damaging in the long term, as any decline in confidence could lead to a fall in consumer expenditure once more as people seek to reduce their debts.

And what of the global banking system? Is it now sufficiently robust to weather a new crisis. Is borrowing growing too rapidly? Is bank lending becoming more reckless again? Are banks still too big to fail? Is China’s banking system sufficiently robust? These are questions considered in the articles below and, in particular, in the New York Times article by Gordon Brown, the former Prime Minister and Chancellor of the Exchequer.

Articles
Global economy: hopes and fears for 2014The Observer, Heather Stewart and Larry Elliott (29/12/13)
Looking ahead to 2014 BBC News, Linda Yueh (20/12/13)
Low hopes for a happy new financial year in 2014 Independent, Paul Gallagher (29/12/13)
Brisk UK economic growth seen in 2014 fuelled by spending – Reuters poll Reuters, Andy Bruce (12/12/13)
GLobal Economy: 2014 promises faster growth, but no leap forward Reuters, Andy Bruce (29/12/13)
My 2014 Economic Briefing Huffington Post, Tony Dolphin (27/12/13)
Three UK Economy Stories that will Dominate in 2014 International Business Times, Shane Croucher (27/12/13)
Who You Calling a BRIC? Bloomberg, Jim O’Neill (12/11/13)
Hope and Hurdles in 2014 Project Syndicate, Pingfan Hong (27/12/13)
On top of the world again The Economist (18/11/13)
Digging deeper The Economist (31/10/13)
BCC Economic Forecast: growth is gathering momentum, but recovery is not secure British Chambers of Commerce (12/13)
Eight predictions for 2014 Market Watch, David Marsh (30/12/13)
Stumbling Toward the Next Crash New York Times, Gordon Brown (18/12/13)
Central banks must show leadership to rejuvenate global economy The Guardian, Larry Elliott (1/1/14)
Global economy set to grow faster in 2014, with less risk of sudden shocks The Guardian, Nouriel Roubini (31/12/13)
A dismal new year for the global economy The Guardian, Joseph Stiglitz (8/1/14)

Forecasts and reports
World Economic Outlook (WEO) IMF (October 2013)
Economic Outlook OECD (November 2013)
Output, prices and jobs The Economist
Bank of England Inflation Report: Overview Bank of England (November 2013)

Questions

  1. What reasons are there to be cheerful about the global economic prospects for 2014 and 2015?
  2. Who will gain the most from economic growth in the UK and why?
  3. Why is the eurozone likely to grow so slowly, if at all?
  4. Are we stumbling towards another banking crisis, and if so, which can be done about it?
  5. Why has unemployment fallen in the UK despite falling living standards for most people?
  6. What is meant by ‘hysteresis’ in the context of unemployment? Is there a problem of hysteresis at the current time and, if so, what can be done about it?
  7. Explain whether the MINT economies are likely to be a major source of global economic growth in the coming year?
  8. Why is it so difficult to forecast the rate of economic growth over the next 12 months, let alone over a longer time period?
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The end of the American dream?

Growing inequality of income and wealth is a common pattern throughout the world. In the boom years up to 2008, the rich got a lot richer, but at least those on low incomes generally saw modest rises in their incomes. Since 2008, however, the continually widening gap between rich and poor has seen the poor and many on middle incomes getting absolutely poorer.

The problem is particularly acute in the USA. Indeed, in his 2012 State of the Union address, President Obama said that it was the ‘defining issue of our time.’

No challenge is more urgent. No debate is more important. 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, everyone does their fair share, and everyone plays by the same set of rules.

The good news for the poor in the USA is that at last their incomes have stopped falling, thanks to stronger economic growth. But their share of the growth in GDP is tiny. As The Economist article states:

The main message is a grim one. Most of the growth is going to an extraordinarily small share of the population: 95% of the gains from the recovery have gone to the richest 1% of people, whose share of overall income is once again close to its highest level in a century. The most unequal country in the rich world is thus becoming even more so.

Apart from the ethical question of whether it is desirable for a society, already highly unequal, to become even more so, there is the question of whether this growth in inequality threatens economic recovery. Joseph Stiglitz argues that the rich have a low marginal propensity to consume and that this is threatening recovery.

Then there is the question of investment. Because most Americans have not seen any significant rise in incomes, it is easy for them to believe that the country cannot afford to invest more. And certainly it is difficult to persuade people that higher taxes are warranted to fund education, infrastructure or research.

The following articles consider the problem and its implications and look at various policy alternatives.

Articles and videos
Inequality: Growing apart The Economist (21/9/13)
What is income inequality, anyway? CNN, John D. Sutter (29/10/13)
Inequality is literally killing America Press TV (22/11/13)
It’s Economic Inequality Stupid – What to Do About the Biggest Crisis Facing America Huffington Post, Robert Creamer (14/11/13)
US Inequality Now Literally Off the Chart Truthout, Salvatore Babones (8/6/13)
Inequality moves to the front line of US politics Financial Times, Richard McGregor (20/11/13)
Is wealth inequality slowing growth? BBC News, Linda Yueh (21/11/13)
American Inequality in Six Charts The New Yorker, John Cassidy (18/11/13)
Income Inequality ‘Profoundly Corrosive’ Wall Street Journal, Larry Summers (19/11/13)
21 Charts On US Inequality That Everyone Should See Business Insider, Gus Lubin (12/11/13)

Data, information and reports
Income inequality in the United States Wikipedia
Inequality Data & Statistics Inequality.org
Income Main United States Census Bureau
World of Work Report 2013: Snapshot of the United States ILO
World of Work Report 2013 ILO
StatExtracts OECD (Search for Gini)

Questions

  1. How may income inequality be measured?
  2. Comment on the Gini coefficients in the above link to the StatExtracts site.
  3. Why has inequality grown in the USA?
  4. The Swiss have just voted in a referendum to reject a proposal to limit executive pay to 12 times that of the lowest paid worker in the same company. What are the arguments for and against the proposal?
  5. What features of an unequal society tend to perpetuate or even deepen that inequality over time?
  6. What features of a well functioning market economy would help to reduce income inequality?
  7. Are higher marginal tax rates and higher welfare payments the best way of reducing inequality? What other policy options are there?
  8. Compare the views of Paul Krugman and Joseph Stiglitz on the effects of growing inequality on economic growth. How significant is the difference in the marginal propensity to consume of the rich and the poor in explaining the relatively low rate of US economic growth?
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US budget and debt ceiling deal

You may have been following the posts on the US debt ceiling and budget crisis: Over the cliff and Over the cliff: an update. Well, after considerable brinkmanship over the past couple of weeks, and with the government in partial shutdown since 1 October thanks to no budget being passed, a deal was finally agreed by both Houses of Congress, less than 12 hours before the deadline of 17 October. This is the date when the USA would have bumped up against the debt ceiling of $16.699 trillion and would be in default – unable to borrow sufficient funds to pay its bills, including maturing debt.

But the deal only delays the problem of a deeply divided Congress, with the Republican majority on the House of Representatives only willing to make a long-term agreement in exchange for concessions by President Obama and the Democrats on the healthcare reform legislation. All that has been agreed is to suspend the debt ceiling until 7 February 2014 and fund government until 15 January 2014.

A more permanent solution is clearly needed: not just one that raises the debt ceiling before the next deadline, but one which avoids such problems in the future. Such concerns were echoed by Christine Lagarde, Managing Director of the International Monetary Fund (IMF), who issued the following statement:

The U.S. Congress has taken an important and necessary step by ending the partial shutdown of the federal government and lifting the debt ceiling, which enables the government to continue its operations without disruption for the next few months while budget negotiations continue to unfold.

It will be essential to reduce uncertainty surrounding the conduct of fiscal policy by raising the debt limit in a more durable manner. We also continue to encourage the U.S. to approve a budget for 2014 and replace the sequester with gradually phased-in measures that would not harm the recovery, and to adopt a balanced and comprehensive medium-term fiscal plan.

US default: Congress votes to end shutdown crisis The Telegraph, Raf Sanchez (17/10/13)
US shutdown: Christine Lagarde calls for stability after debt crisis is averted The Guardian,
James Meikle, Paul Lewis and Dan Roberts (17/10/13)
America’s economy: Meh ceiling? The Economist (15/10/13)
Relief as US approves debt deal BBC News (17/10/13)
Shares in Europe dip after US debt deal BBC News (17/10/13)
Dollar slides as relief at U.S. debt deal fades Reuters, Richard Hubbard (17/10/13)
US debt deal: Analysts relieved rather than celebrating Financial Times, John Aglionby and Josh Noble (17/10/13)
Greenspan fears US government set for more debt stalemate BBC News (21/10/13)

Questions

  1. Explain what is meant by default and how the concept applies to the USA if it had not suspended or raised its budget ceiling.
  2. Is the agreement of October 16 likely to ‘reassure markets’? Explain your reasoning.
  3. What is likely to happen to long-term interest rates as a result of the agreement?
  4. Will the imposition of a new debt ceiling by February 2014 remove the possibility of using fiscal policy to stimulate aggregate demand and speed up the recovery?
  5. What is meant by ‘buy the rumour, sell the news’ in the context of stock markets? How was this relevant to the agreement on the US debt ceiling and budget?
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Over the cliff: an update

In a News Item of 1 October, Over the Cliff, we looked at the passing of the deadline that same day for Congress to agree a budget. We also looked at the looming deadline for Congress to agree a new higher ceiling for Federal Government debt, currently standing at $16.699 trillion. Without an agreement to raise the limit, the government will start becoming unable to pay some of its bills from around 17 October.

One week on and no agreement has been reached on either a budget or a higher debt ceiling.

Failure to agree on a budget has led to the ‘shut-down’ of government. Only essential services are being maintained; the rest are no longer functioning and workers have been sent home on ‘unpaid leave’. This has led to considerable hardship for many in the USA. It has had little effect, however, on the rest of the world, except for tourists to the USA being unable to visit various national parks and monuments.

Failure to raise the debt ceiling, however, could have profound consequences for the rest of the world. It could have large and adverse effects of global growth, global trade, global investment and global financial markets. The articles below explore some of these consequences.

U.S. Congress enters crucial week in budget, debt limit battles Reuters, Richard Cowan (7/10/13)
Debt ceiling: Understanding what’s at stake CBS Moneywatch, Alain Sherter (7/10/13)
Q&A: What is the US debt ceiling? BBC News, Ben Morris (3/10/13)
Five Reasons to Fear the Debt Ceiling Bloomberg (6/10/13)
A U.S. Default Seen as Catastrophe Dwarfing Lehma Bloomberg Businessweek, Yalman Onaran (6/10/13)
China tells US to avoid debt crisis for sake of global economy BBC News (7/10/13)
US shutdown is starting to hit business, says Commerce Secretary BBC News (6/10/13)
Why Australia should fear a US government default The Guardian, Greg Jericho (7/10/13)
Could the US default over just $6bn? BBC News, Linda Yueh (11/10/13)
IMF piles pressure on US to reconcile differences and prevent debt default The Guardian, Larry Elliott and Jill Treanor (10/10/13)
Republicans offer to raise US debt ceiling for six weeks The Telegraph, Peter Foster and Raf Sanchez (11/10/13)

Questions

  1. If a debt ceiling is reached, what does this imply for the budget deficit?
  2. How serious are the two current fiscal cliffs?
  3. How would a continuation of the partial government shut-down impact on the US private sector?
  4. What multiplier effects on the rest of the world are likely to arise from a cut in US government expenditure or a rise in taxes? What determines the size of these multiplier effects?
  5. Explain the likely effect of the current crisis on the exchange rate of the dollar into other currencies.
  6. Why might the looming problem of reaching the debt ceiling drive up long-term interest rates in the USA and beyond?
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Over the cliff

For the second time in nine months, the USA has approached a fiscal cliff. This is where the federal government is forced to make government expenditure cuts and/or impose tax rises. There are two types of cliff face. The first is a legal limit on the size of the federal government debt and hence deficit. The second is failure to agree on a budget.

On January 1st this year, a fiscal cliff was narrowly averted by a last-minute agreement to raise the size of the permitted debt. On the 1st October (the beginning of the financial year), however, the US economy ‘fell over the cliff’. This time is was a failure by Congress to reach agreement over the federal budget. The sticking point was an unwillingness of the Republican majority in the House of Representatives to agree to a budget without the government making concessions on its healthcare reform. The government was unwilling to do that and so no budget was passed.

With no budget, much of government has to shut down! In practice, this means that all non-essential workers will cease to be paid. That includes workers in housing, parts of healthcare, the civil law part of the justice system, immigration, regulatory agencies, the passport service, parks and museums. Even workers in essential areas, such as civilian workers in the military, police and social services, are likely to see their pay delayed until the problem is resolved. The articles below look at some of the implications of this partial shut-down.

It is hoped that, within a few days, agreement on a budget will be reached. But that will not be the end of the story because a second fiscal cliff looms. And that is of the first type. There is currently a legal limit to Federal Government debt of $16.699 trillion. Because that limit was reached earlier this year, from May 18 the government has been able to use various ‘extraordinary measures‘ to carry on borrowing. These measures will run out, however, around 17 October. From then, if a new higher debt ceiling has not been agreed by Congress, the government will be unable to pay some of its bills. For example, on 1 November it will get a bill of $67billion for social security, medicare and veterans benefits. As the second Independent article below explains:

In a government shutdown, the federal government is not allowed to make any new spending commitments. By contrast, if we hit the debt-ceiling then the Treasury Department won’t be able to borrow money to pay for spending that Congress has already approved. In that case, either Congress will have to lift the debt ceiling or the federal government will have to default on some of its bills, possibly including payments to bondholders or Social Security payouts. That could trigger big disruptions in the financial markets — or a long-term rise in borrowing costs.

Not surprisingly, financial markets are nervous. Although the direct effect of lost output will be relatively small, provided agreements on the budget and the debt are reached fairly soon, the impact on confidence in the US system of government could be more damaging. Not only could this curb recovery in the USA, it could have a significant effect on global recovery, given the size and importance of the US economy to the rest of the world.

Webcasts
What does the shutdown mean for normal Americans? BBC News, Keith Doyle (1/10/13)
How the government shut down is being reported in the US BBC News (1/10/13)
Shutdown could slam frail U.S. economy Reuters, Bobbi Rebell (1/10/13)
Shutdown Will Cost U.S. Economy $300 Million a Day, IHS Says Bloomberg, Jeanna Smialek & Ian Katz (1/10/13)
How will the US government shutdown affect the global economy? The Guardian, Larry Elliott and Guy Grandjean (1/10/13)
How would a government shutdown affect the rebounding economy? Aljazeera, Duarte Geraldino (30/9/13)
How will the US government shutdown affect the economy? BBC News, Richard Lister (1/10/13)
Shutdown continues as Obama and Republicans fail to agree BBC News, Rajini Vaidynathan (2/10/13)
Former US Secretary of Labor Robert Reich on shutdown BBC News, Robert Reich (2/10/13)
Government shutdown: What’s the cost? CBS News, Rebecca Kaplan (1/10/13)
US shutdown will have ‘minimal impact’ on global economy One News (New Zealand), Dan Zirker (2/10/13)
What is the US debt ceiling? BBC News, Hugh Pym (14/10/13)

Articles
US wakes up to government shutdown as Congress fails to strike budget deal Independent, Nikhil Kumar (1/10/13)
US begins government shutdown as budget deadline passes BBC News (1/10/13)
David Cameron warns on world growth as US government shuts down The Telegraph, Damien McElroy (1/10/13)
Shutdown showdown: A glossary Aljazeera, Ben Piven (30/9/13)
Everything you need to know about how the partial shutdown will work in US Independent, Brad Plumer (1/10/13)
What’s the economic impact of a US government shutdown? BBC News, Kim Gittleson (1/10/13) (follow links at top of screen for further articles)
US government shutdown isn’t the worst of it BBC News, Linda Yueh (30/9/13)
Onset of the storm BBC News, Robert Peston (1/10/13)
The gathering storm? BBC News, Robert Peston (30/9/13)
Government shutdown: what’s really going on – and who’s to blame? The Guardian, Dan Roberts (30/9/13)
Government shutdown threat is getting very old, very fast CNN, Julian Zelizer (30/9/13)
US fiscal cliff fears rattle the markets The Australian, Adam Creighton (1/10/13)
U.S. Government Shutdown Sinks Dollar Forbes, Dean Popplewell (1/10/13)
US Government Shutdown: European Markets Not Fretting Over Temporary Closure International Business Times, Ishaq Siddiqi (1/10/13)
The States to plunge into abyss of debt, off fiscal cliff Pravda, Irina Sabinina (1/10/13)
Shutting down the United States government nothing new The Vancouver Sun, Andrew Coyne (1/10/13)
Christine Lagarde urges US that debt crisis threatens world economy The Guardian, Larry Elliott (3/10/13)
U.S. failure to lift debt ceiling could damage world – IMF Reuters (3/10/13)

Data
US government shutdown: in numbers The Guardian (see also)
US Budget: Historical Tables White House Office of Management and Budget (includes estimates to 2018 as well as historical data)

Questions

  1. If a debt ceiling is reached, what does this imply for the budget deficit?
  2. How serious are the two current fiscal cliffs?
  3. How would a continuation of the partial government shut-down impact on the US private sector?
  4. What multiplier effects on the rest of the world are likely to arise from a cut in US government expenditure or a rise in taxes? What determines the size of these multiplier effects?
  5. Explain the likely effect of the current crisis on the exchange rate of the dollar into other currencies.
  6. Why might the looming problem of reaching the debt ceiling drive up long-term interest rates in the USA and beyond?
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Anyone for Chinese style pork?

The growth of emerging economies, such as China, India and Brazil brings with it both good and bad news for the once dominant countries of the West. With growth rates in China reaching double digits and a much greater resilience to the credit crunch and its aftermath in these emerging nations, they became the hope of the recovery for the West. But, is it only benefits that emerge from the growth in countries like China?

Chinese business has grown and expanded into all areas, especially technology, but countries such as the USA have been reluctant to allow mergers and takeovers of some of their businesses. Notably, the takeovers that have been resisted have been in key sectors, particularly oil, energy and technology. However, it seems as though pork is an industry that is less important or, at least, a lower risk to national security.

Smithfield Foods is a US giant, specialising in the production and selling of pork. A takeover by China’s Shuanghui International Holdings has been approved (albeit reluctantly) by the US Committee on Foreign Investment. While the takeover could still run into obstacles, this Committee’s approval is crucial, as it alleviates concerns over the impact on national security. The value of the deal is some $7.1bn, including the debt that Shuangui will have to take on. While some see this takeover as good news, others are more concerned, identifying the potential negative impact it may have on prices and standards in the USA. Zhijun Yang, Shuanghui’s Chief Executive said:

This transaction will create a leading global animal protein enterprise. Shuanghui International and Smithfield have a long and consistent track record of providing customers around the world with high-quality food, and we look forward to moving ahead together as one company.

The date of September 24th looks to be the decider, when a shareholder meeting is scheduled to take place. There is still resistance to the deal, but if it goes ahead it will certainly help other Chinese companies looking for the ‘OK’ from US regulators for their own business deals. The following articles consider the controversy and impact of this takeover.

US clears Smithfield’s acquisition by China’s Shuanghui Penn Energy, Reuters, Lisa Baertlein and Aditi Shrivastava (10/9/13)
Chinese takeover of US Smithfield Foods gets US security approval Telegraph (7/9/13)
US clears Smithfield acquisition by China’s Shuanghui Reuters (7/9/13)
Go-ahead for Shuanghui’s $4.7bn Smithfield deal Financial Times, Gina Chon (6/9/13)
US security panel approves Smithfield takeover Wall Street Journal, William Mauldin (6/9/13)

Questions

  1. What type of takeover would you classify this as? Explain your answer.
  2. Why have other takeovers in oil, energy and technology not met with approval?
  3. Some people have raised concerns about the impact of the takeover on US pork prices. Using a demand and supply diagram, illustrate the possible effects of this takeover.
  4. What do you think will happen to the price of pork in the US based on you answer to question 3?
  5. Why do Smithfield’s shareholders have to meet before the deal can go ahead?
  6. Is there likely to be an impact on share prices if the deal does go ahead?
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