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Economy

Divided Government Will Doom the Economy – The Atlantic

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An illustration of a red and blue Capitol divided.
SHUTTERSTOCK / THE ATLANTIC

Congress has failed since the spring to pass much-needed additional economic stimulus. The ousted Trump administration has lost interest in pushing for a new bill. With just a few working weeks left in their lame-duck session, House Democrats want a $2 trillion to $3 trillion measure, while Senate Republicans are recommending a skinnier $500 billion to $650 billion measure. The two sides might fail to come to an agreement, and once President-elect Joe Biden is inaugurated, obstructionist Republicans will have even less incentive to get a deal done.

As Washington dithers, the country will suffer. The novel coronavirus, fueled by indoor transfer over the winter holidays, will continue to maim and kill. States and cities will buckle under their budget gaps, and slash more jobs and social services. Millions of Americans will lose work. And the country’s unemployment-insurance expansion, student-loan-deferral program, and eviction moratoriums will expire, leaving the poor families bearing the brunt of this recession even more vulnerable. A double dip is possible, given that the recovery is already slowing down.

None of this might come to pass, of course. House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell might work out a middle-of-the-road stimulus measure, helping to speed the recovery. Democrats might take both of the Georgia seats in the January runoff, thus clinching control of the Senate. Biden—a congressional veteran who is legitimately liked on both sides of the aisle and has a history of bipartisan dealmaking—might break the logjam. The economy might recover faster than expected without additional support from Washington, as businesses adjust and reopen.

But the 2020 electoral outcome—Democratic White House, Republican Senate—was the worst one in terms of getting anything done in the Capitol, and is thus a pending disaster for the country’s sick, unemployed, and poor. A Trump win likely would have eased the passage of a small but important stimulus. A Biden blowout would have allowed Democrats to pass something huge. Instead, Washington has that old 2011 feeling again.

A decade ago, the world learned what a Democratic White House and a Congress under partial Republican control could do together: nothing, or very close to it. At the time, the economy was slouching out of the worst recession since the Great Depression. The $800 billion American Recovery and Reinvestment Act, passed in the early days of the Obama administration, had shored up state and local finances, expanded unemployment insurance, and aided failing businesses. But it was too small by roughly half, economists estimate. With Republicans in control of the House as of 2010 and with a filibustering minority in the Senate until they won it outright in 2014, they crushed every attempt to rectify the problem.

No American Jobs Act. No cloture on even noncontroversial bills. The point was to damage the Democrats’ electoral chances, more than anything else. And the tactic worked, arguably. But it also slowed the recovery down. The United States took 10 long years to return the unemployment rate back to its prerecession low.

Similar dynamics are now at play: The economy needs more. Roughly 10 million fewer Americans are working now than were in February, wages are down sharply, and more than 1 million people are losing their jobs each month, even as the unemployment rate drops. The large, successful stimulus programs created by Congress in the spring are ending, and the cash Uncle Sam distributed is drying up. The slowing recovery might slow further, and households might become far more strained—even as the pandemic reaches deadly new heights.

Yet the real state of the economy does not seem to matter much to partisans on the Hill. On Friday, McConnell described the October jobs report—a very good one, but not one that signals an economy even close to healed—as a “stunning indication of a dramatic comeback” and justification for a smaller stimulus.

As happened a decade ago, Republicans are newly interested in tackling deficits and the debt instead of spending to boost the economy. Having spent four years not paying for anything, including giant tax cuts for rich people and corporations, they have suddenly, predictably rediscovered their concern for the supposed fiscal burdens the old are placing on the young. Senator Lindsey Graham, for instance, said that you would see him “trying to find common ground that would benefit all of us, and a good place to start, I think, would be the debt,” as well as infrastructure and immigration. Soon enough, some prominent politician will suggest a bipartisan, blue-ribbon commission to figure out the tough math, and start talking about trading pennies of short-term spending boosts for dollars of long-term debt reduction.

The only capable body left standing? The Federal Reserve, which has already cut interest rates to zero, set up new programs to help calm the financial system, and purchased trillions of dollars of government debt. Yet, as a decade ago, it cannot do what Congress can, and put money directly in American families’ pockets. “It’s for Congress to decide the timing, size, and components of further fiscal support for the economy,” Fed Chair Jerome Powell said at a press conference this month. “I do think it’s likely that further support is likely to be needed.” A divided government is a hobbled government, and one that will hobble the recovery.

Four years of Trump have surely changed the Democratic Party, which has become less concerned about debt and become more concerned about the structure of Congress preventing legislation from passing. Statehood for Washington, D.C., and Puerto Rico; the elimination of the filibuster; expanding the Supreme Court; ending gerrymandering; stopping voter suppression: These are much more pressing concerns for liberals. But have four years of Trump changed the Republican Party? If so, it has become only more antidemocratic and obstructionist. The way back for Republicans means denying President Biden any victories at all, and particularly bipartisan ones. The country’s workers, as always, will be the biggest losers.

We want to hear what you think about this article. Submit a letter to the editor or write to letters@theatlantic.com.


Annie Lowrey is a staff writer at The Atlantic, where she covers economic policy.

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Economy

Biden's Hot Economy Stokes Currency Fears for the Rest of World – Bloomberg

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As Joe Biden this week hailed America’s booming economy as the strongest in the world during a reelection campaign tour of battleground-state Pennsylvania, global finance chiefs convening in Washington had a different message: cool it.

The push-back from central bank governors and finance ministers gathering for the International Monetary Fund-World Bank spring meetings highlight how the sting from a surging US economy — manifested through high interest rates and a strong dollar — is ricocheting around the world by forcing other currencies lower and complicating plans to bring down borrowing costs.

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Opinion: Higher capital gains taxes won't work as claimed, but will harm the economy – The Globe and Mail

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Open this photo in gallery:

Canada’s Prime Minister Justin Trudeau and Finance Minister Chrystia Freeland hold the 2024-25 budget, on Parliament Hill in Ottawa, on April 16.Patrick Doyle/Reuters

Alex Whalen and Jake Fuss are analysts at the Fraser Institute.

Amid a federal budget riddled with red ink and tax hikes, the Trudeau government has increased capital gains taxes. The move will be disastrous for Canada’s growth prospects and its already-lagging investment climate, and to make matters worse, research suggests it won’t work as planned.

Currently, individuals and businesses who sell a capital asset in Canada incur capital gains taxes at a 50-per-cent inclusion rate, which means that 50 per cent of the gain in the asset’s value is subject to taxation at the individual or business’s marginal tax rate. The Trudeau government is raising this inclusion rate to 66.6 per cent for all businesses, trusts and individuals with capital gains over $250,000.

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The problems with hiking capital gains taxes are numerous.

First, capital gains are taxed on a “realization” basis, which means the investor does not incur capital gains taxes until the asset is sold. According to empirical evidence, this creates a “lock-in” effect where investors have an incentive to keep their capital invested in a particular asset when they might otherwise sell.

For example, investors may delay selling capital assets because they anticipate a change in government and a reversal back to the previous inclusion rate. This means the Trudeau government is likely overestimating the potential revenue gains from its capital gains tax hike, given that individual investors will adjust the timing of their asset sales in response to the tax hike.

Second, the lock-in effect creates a drag on economic growth as it incentivizes investors to hold off selling their assets when they otherwise might, preventing capital from being deployed to its most productive use and therefore reducing growth.

Budget’s capital gains tax changes divide the small business community

And Canada’s growth prospects and investment climate have both been in decline. Canada currently faces the lowest growth prospects among all OECD countries in terms of GDP per person. Further, between 2014 and 2021, business investment (adjusted for inflation) in Canada declined by $43.7-billion. Hiking taxes on capital will make both pressing issues worse.

Contrary to the government’s framing – that this move only affects the wealthy – lagging business investment and slow growth affect all Canadians through lower incomes and living standards. Capital taxes are among the most economically damaging forms of taxation precisely because they reduce the incentive to innovate and invest. And while taxes on capital gains do raise revenue, the economic costs exceed the amount of tax collected.

Previous governments in Canada understood these facts. In the 2000 federal budget, then-finance minister Paul Martin said a “key factor contributing to the difficulty of raising capital by new startups is the fact that individuals who sell existing investments and reinvest in others must pay tax on any realized capital gains,” an explicit acknowledgment of the lock-in effect and costs of capital gains taxes. Further, that Liberal government reduced the capital gains inclusion rate, acknowledging the importance of a strong investment climate.

At a time when Canada badly needs to improve the incentives to invest, the Trudeau government’s 2024 budget has introduced a damaging tax hike. In delivering the budget, Finance Minister Chrystia Freeland said “Canada, a growing country, needs to make investments in our country and in Canadians right now.” Individuals and businesses across the country likely agree on the importance of investment. Hiking capital gains taxes will achieve the exact opposite effect.

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Nigeria's Economy, Once Africa's Biggest, Slips to Fourth Place – Bloomberg

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Nigeria’s economy, which ranked as Africa’s largest in 2022, is set to slip to fourth place this year and Egypt, which held the top position in 2023, is projected to fall to second behind South Africa after a series of currency devaluations, International Monetary Fund forecasts show.

The IMF’s World Economic Outlook estimates Nigeria’s gross domestic product at $253 billion based on current prices this year, lagging energy-rich Algeria at $267 billion, Egypt at $348 billion and South Africa at $373 billion.

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