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Economy

Why the U.S. Risks Repeating 2009’s Mistakes as the Economic Rebound Slows – The New York Times

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Trillions of dollars in federal aid to households and businesses has allowed the U.S. economy to emerge from the first six months of the coronavirus pandemic in far better shape than many observers had feared last spring.

But that spending has now largely dried up and hopes for a major new aid package ahead of the Nov. 3 election are all but dead, even as the virus persists and millions of Americans remain unemployed. Already, there are signs that the economic rebound is losing steam, as some measures of consumer spending growth decelerate and job gains slow. Applications for jobless benefits rose last week, with about 825,000 Americans filing for state unemployment benefits.

The combination of a moderating economic rebound and fading government support are an eerie echo of the weak period that followed the 2007 to 2009 recession. In the view of many analysts, a premature pullback in government support back then led to a grinding recovery that left legions of would-be employees out of work for years. In recent weeks, prominent economists have warned that both the United States and Europe, where many early responses are drawing to a close, were at risk of repeating that mistake by cutting off government aid too soon.

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“The initial response was good, but we need more,” said Karen Dynan, who was chief economist at the Treasury Department in the Obama administration and now teaches at Harvard. The decision to pull back on spending a decade ago, she said, “really prolonged the period of weakness after the great recession.”

In Europe, some national governments that have spent aggressively to subsidize wages and curb layoffs are wrapping up those efforts. While large countries including Germany have indicated that they remain willing to provide more support, some economists warn that continued aid announced in France and elsewhere might fall short of what is needed in the near term.

In the United States, the situation is more immediately worrying. Leaders of both major political parties have expressed support, at least in theory, for additional aid. But the parties remain far apart, with Democrats pushing for a large package and Republicans arguing that a smaller plan will suffice.

The ability to reach a compromise in the coming weeks has been further complicated by a looming confirmation battle to replace Ruth Bader Ginsburg on the Supreme Court.

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“That’s my great concern, that we’re going leave and not have a stimulus Covid package put together,” Senator Roy Blunt, Republican of Missouri, said Thursday.

Top Democrats, responding in part to growing concern among moderate lawmakers about the stalemate over providing aid, were working on a scaled-back package, according to a person familiar with the plans. It remains unclear whether the House will vote on such a measure, which would provide roughly $2.4 trillion in aid, or whether negotiations will resume in earnest.

One factor making a quick agreement even less likely: The economic revival is slowing, but not as sharply as some economists predicted would happen once expanded unemployment insurance and other programs began to ebb.

Credit…Amr Alfiky/The New York Times

Job growth slowed in July and August but remained positive. Consumer spending, which rebounded sharply once federal money started flowing in April, has likewise seen a more gradual rebound but has not fallen. Layoffs, as measured by claims for unemployment insurance, have continued to trend down, although they remain high by historical standards.

But many economists said that allowing the economy to slow at the current moment — with millions out of work or underemployed — could lead to long-term economic scarring. Employers have still hired back less than half of the 22 million workers they laid off in March and April, and the unemployment rate is higher than the peak of many past recessions. Even optimistic forecasts imply that gross domestic product will shrink more this year than in the worst year of the last recession.

“A stalling recovery when we’re stalling at near the worst point of the great recession is a terrible outcome,” said Tara Sinclair, an economist at George Washington University.

Jerome H. Powell, the Fed chair, made clear during congressional hearings this week that the economy, while recovering, would likely need more support.

“The power of fiscal policy is unequaled, by really anything else,” Mr. Powell said during testimony before a House subcommittee on Wednesday. “We need to stay with it, all of us,” adding, “the recovery will go faster if there’s support coming both from Congress and from the Fed.”

Credit…Pool photo by Kevin Dietsch

His colleague Eric Rosengren, president of the Federal Reserve Bank of Boston, said Wednesday that additional fiscal policy “is very much needed” but noted it “seems increasingly unlikely to materialize anytime soon.”

Some economists warn that the economy could begin to shrink again if Congress doesn’t act. Many households were able to save in the spring, thanks to federal aid and shutdown orders that kept them from spending money on restaurant meals and hotel stays. Households socked away about one-third of their disposable incomes in April, and while the savings rate has come down since, it remained sharply elevated from pre-crisis levels through July. That should create some buffer.

But those funds won’t sustain jobless families indefinitely now that extra unemployment benefits have expired and a partial supplement supported by repurposed federal funds is on the brink of running out. And businesses that were kept afloat during the summer may struggle when colder weather puts an end to outdoor dining and other activities.

There is an alarming precedent for what happens when support fades in the midst of an uncertain economic moment.

In the early stages of the 2008 financial crisis, Congress and the White House — first under President George W. Bush, then under President Barack Obama — pumped billions of dollars into the economy in the form of tax cuts for individuals and companies, infrastructure spending, extended unemployment benefits and other measures.

But Mr. Obama was unable to win approval for further large-scale stimulus efforts, and by 2010 Congress had effectively ceded to the Federal Reserve the job of managing the still-tenuous economic recovery.

“The lesson from the last crisis is that we had elevated unemployment for years, and it was a slow grind to work that down,” Robert S. Kaplan, president of the Federal Reserve Bank of Dallas, said in an interview Monday, explaining that he supports extending fiscal aid. “We have a chance here, if we act quickly, to mitigate the lasting damage that we saw.”

The post-financial crisis pullback in government spending was even more dramatic in Europe, where austerity was enforced across countries with weaker economies and higher debt levels, and where the European Central Bank raised interest rates in 2011, removing monetary support years before the Fed first lifted rates in late 2015. Another slump ensued across European economies, bringing with it years of high unemployment, low inflation and weak growth.

There are important differences between the two crisis eras, especially in the United States. The economy was far stronger before the pandemic hit than in 2007, when inflated home prices, risky lending and financial engineering left the banking system vulnerable. And policymakers responded far more quickly and aggressively this time around.

The Fed cut interest rates close to zero in March, before data showing widespread economic damage had even begun to emerge. In the last crisis, the Fed didn’t take that step until the end of 2008, a year after the recession had begun. The European Central Bank rolled out massive bond-buying programs, something monetary policymakers in the currency block resisted in the immediate aftermath of the 2009 crisis.

But central banks have less room to adjust their policies to bolster growth now than they did a decade ago. Interest rates and inflation have fallen to low levels across advanced economies, stealing potency from monetary policy tools that work by making credit cheap.

That’s where fiscal policy — elected officials’ ability to tax and spend — comes in. Economic theory suggests that fiscal policy can be effective at times when monetary policy is not.

Initially, policymakers across advanced economies seemed far more willing to spend heavily and amass huge deficits than they were during the last crisis, at least in part because the same low interest rates robbing central banks of their power have made payments on government debt cheaper.

In the early days of this crisis, Congress approved legislation that sent direct payments to most American households, established a small-business assistance program and added $600 a week to unemployment checks, while expanding the system to cover millions more jobless workers. Together, the programs dwarfed the response to the last recession.

Credit…Joseph Rushmore for The New York Times

The aggressive response was successful. After shedding millions of workers in March and April, companies began bringing them back in May and June. Stimulus checks and that extra $600 per week lifted personal incomes in April and May, buoying spending. A predicted wave of foreclosures and evictions largely failed to materialize. By August, the unemployment rate had fallen to 8.4 percent, defying expectations that it would remain in double digits into next year.

Mr. Powell said government spending should get “credit” for the pace of the rebound but warned that risks remain if key programs are allowed to permanently lapse. As unemployed workers run through their savings, they might pull back on spending and lose their homes, he said during Senate testimony on Thursday.

Without more help “we’ll see sooner or later, probably sooner, that the economy has a hard time sustaining the growth that we’ve seen — that’s the risk,” he said.

Economists said Mr. Powell appears to have learned a lesson from the aftermath of the last recession: When the Fed is forced to try to rescue the economy on its own, the result is a painfully slow recovery that takes years to reach many of the most vulnerable households.

The consequences of another slow recovery would almost certainly fall disproportionately on low-income families, many of them Black and Hispanic. Those workers were among the last to benefit from the plodding recovery after the last recession, and have been among the hardest hit by the current crisis.

“This pandemic, and our efforts here, could very well create even greater inequality in our nation than there was even before the pandemic,” said Representative Andy Kim, Democrat of New Jersey and a former Obama administration official. “Some are going to be able to get through this much, much better than others, and those that are not? This is one of those once in a lifetime situations that could very well cripple them for a generation if we don’t take some of the necessary steps in the next few weeks and months.”

Peter S. Goodman and Emily Cochrane contributed reporting.

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Economy

Britain's economy went into recession last year, official figures confirm – The Globe and Mail

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Open this photo in gallery:

People walk over London Bridge, in London, on Oct. 25, 2023.SUSANNAH IRELAND/Reuters

Britain’s economy entered a shallow recession last year, official figures confirmed on Thursday, leaving Prime Minister Rishi Sunak with a challenge to reassure voters that the economy is safe with him before an election expected later this year.

Gross domestic product shrank by 0.1 per cent in the third quarter and by 0.3 per cent in the fourth, unchanged from preliminary estimates, the Office for National Statistics (ONS) said on Thursday.

The figures will be disappointing for Mr. Sunak, who has been accused by the opposition Labour Party – far ahead in opinion polls – of overseeing “Rishi’s recession.”

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“The weak starting point for GDP this year means calendar-year growth in 2024 is likely to be limited to less than 1 per cent,” said Martin Beck, chief economic adviser at EY ITEM Club.

“However, an acceleration in momentum this year remains on the cards.”

Britain’s economy has shown signs of starting 2024 on a stronger footing, with monthly GDP growth of 0.2 per cent in January, and unofficial surveys suggesting growth continued in February and March.

Tax cuts announced by finance minister Jeremy Hunt and expectations of interest-rate cuts are likely to help the economy in 2024.

However, Britain remains one of the slowest countries to recover from the effects of the COVID-19 pandemic. At the end of last year, its economy was just 1 per cent bigger than in late 2019, with only Germany faring worse among Group of Seven nations.

The economy grew just 0.1 per cent in all of 2023, its weakest performance since 2009, excluding the peak-pandemic year of 2020.

GDP per person, which has not grown since early 2022, fell by 0.6 per cent in the fourth quarter and 0.7 per cent across 2023.

Sterling was little changed against the dollar and the euro after the data release.

The Bank of England (BOE) has said inflation is moving toward the point where it can start cutting rates. It expects the economy to grow by just 0.25 per cent this year, although official budget forecasters expect a 0.8-per-cent expansion.

BOE policy maker Jonathan Haskel said in an interview reported in Thursday’s Financial Times that rate cuts were “a long way off,” despite dropping his advocacy of a rise at last week’s meeting.

Thursday’s figures from the ONS also showed 0.7 per cent growth in households’ real disposable income, flat in the previous quarter.

Thomas Pugh, an economist at consulting firm RSM, said the increase could prompt consumers to increase their spending and support the economy.

“Consumer confidence has been improving gradually over the last year … as the impact of rising real wages filters through into people’s pockets, even though consumers remain cautious overall,” Mr. Pugh said.

Britain’s current account deficit totalled £21.18-billion ($36.21-billion) in the fourth quarter, slightly narrower than a forecast of £21.4-billion ($36.6-billion) shortfall in a Reuters poll of economists, and equivalent to 3.1 per cent of GDP, up from 2.7 per cent in the third quarter.

The underlying current account deficit, which strips out volatile trade in precious metals, expanded to 3.9 per cent of GDP.

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How will a shrinking population affect the global economy? – Al Jazeera English

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Falling fertility rates could bring about a transformational demographic shift over the next 25 years.

It has been described as a demographic catastrophe.

The Lancet medical journal warns that a majority of countries do not have a high enough fertility rate to sustain their population size by the end of the century.

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The rate of the decline is uneven, with some developing nations seeing a baby boom.

The shift could have far-reaching social and economic impacts.

Enormous population growth since the industrial revolution has put enormous pressure on the planet’s limited resources.

So, how does the drop in births affect the economy?

And regulators in the United States and the European Union crack down on tech monopolies.

The gender gap in tech narrows.

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John Ivison: Canada's economy desperately needs shock treatment after this Liberal government – National Post

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Lack of business investment is the main culprit. Canadians are digging holes with shovels while our competitors are buying excavators

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It speaks to the seriousness of the situation that the Bank of Canada is not so much taking the gloves off as slipping lead into them.

Senior deputy governor, Carolyn Rogers, came as close to wading into the political arena as any senior deputy governor of the central bank probably should in her speech in Halifax this week.

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But she was right to sound the alarm about a subject — Canada’s waning productivity — on which the federal government’s performance has been lacklustre at best.

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Productivity has fallen in six consecutive quarters and is now on a par with where it was seven years ago.

Lack of business investment is the main culprit.

In essence, Canadians are digging holes with shovels while many of our competitors are buying excavators.

“You’ve seen those signs that say, ‘in emergency, break glass.’ Well, it’s time to break the glass,” Rogers said.

She was explicit that government policy is partly to blame, pointing out that businesses need more certainty to invest with confidence. Government incentives and regulatory approaches that change year to year do not inspire confidence, she said.

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The government’s most recent contribution to the competitiveness file — Bill C-56, which made a number of competition-related changes — is a case in point. It was aimed at cracking down on “abusive practices” in the grocery industry that no one, including the bank in its own study, has been able to substantiate. Rather than encouraging investment, it added a political actor — the minister of industry — to the market review process. The Business Council of Canada called the move “capricious,” which was Rogers’s point.

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While blatant price-fixing is rare, the lack of investment is a product of the paucity of competition in many sectors, where Canadian companies protected from foreign competition are sitting on fat profit margins and don’t feel compelled to invest to make their operations more efficient. “Competition can make the whole economy more productive,” said Rogers.

The Conservatives now look set to make this an election issue. Ontario MP Ryan Williams has just released a slick 13-minute video that makes clear his party intends to act in this area.

Using the Monopoly board game as a prop, Williams, the party’s critic for pan-Canadian trade and competition, claims that in every sector, monopolies and oligopolies reign supreme, resulting in lower investment, lower productivity, higher prices, worse service, lower wages and more wealth inequality.

(As an aside, it was a marked improvement on last year’s “Justinflation” rap video.)

Williams said that Canadians pay among the highest cell phone prices in the world and that Rogers, Telus and Bell are the priciest carriers, bar none. The claim has some foundation: in a recent Cable.co.uk global league table that compared the average price of one gigabyte, Canada was ranked 216th of 237 countries at US$5.37 (noticeably, the U.S. was ranked even more expensive at US$6).

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Williams noted that two airlines control 80 per cent of the market, even though Air Canada was ranked dead last of all North American airlines for timeliness.

He pointed out that six banks control 87 per cent of Canada’s mortgage market, while five grocery stores — Sobeys, Metro, Loblaw, Walmart and Costco — command a similar dominance of the grocery market.

“Competition is dying in Canada,” Williams said. “The federal government has made things worse by over-regulating airlines, banks and telecoms to actually protect monopolies and keep new players out.”

So far, so good.

The Conservatives will “bring back home a capitalist economy” — a market that does not protect monopolies and creates more competition, in the form of Canadian companies that will provide new supply and better prices.

That sounds great. But at the same time, the Conservative formula for fixing things appears to involve more government intervention, not less.

Williams pointed out the Conservatives opposed RBC buying HSBC’s Canadian operations, WestJet buying Sunwing and Rogers buying Shaw. The party would oppose monopolies from buying up the competition, he said.

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The real solution is to let the market do its work to bring prices down. But that is a more complicated process than Williams lets on.

Back in 2007, when Research in Motion was Canada’s most valuable company, the Harper government appointed a panel of experts, led by former Nortel chair Lynton “Red” Wilson, to address concerns that the corporate sector was being “hollowed out” by foreign takeovers, following the sale of giants Alcan, Dofasco and Inco.

The “Compete to Win” report that came out in June 2008 found that the number of foreign-owned firms had remained relatively unchanged, but recommended 65 changes to make Canada more competitive.

The Harper government acted on the least-contentious suggestions: lowering corporate taxes, harmonizing sales taxes with a number of provinces and making immigration more responsive to labour markets.

But it did not end up liberalizing the banking, broadcasting, aviation or telecom markets, as the report suggested (ironically, it was a Liberal transport minister, Marc Garneau, who raised foreign ownership levels of air carriers to 49 per cent from 25 per cent in 2018).

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The point is, Canada has a competition problem but solving it requires taking on vested interests. Conservative Leader Pierre Poilievre has indicated he is willing to do that, calling corporate lobbyists “utterly useless” and saying he will focus on Canadian workers, not corporate interests.

“My daily obsession will be about what is good for the working-class people in this country,” he said in Vancouver earlier this month.

Even opening up sectors to foreign competition is no guarantee that investors will come. There are no foreign ownership restrictions in the grocery market (in addition to the five supermarkets listed above, there is Amazon-owned Whole Foods). When the Competition Bureau concluded last year that there was a “modest but meaningful” increase in food prices, it recommended Ottawa encourage a foreign-owned player to enter the Canadian market. It was a recommendation adopted by Industry Minister Francois-Philippe Champagne, to no avail thus far.

But it is clear from the Bank’s warning that the Canadian economy requires some shock treatment.

Robert Scrivener, the chairman of Bell and Northern Telecom in the 1970s, called Canada a nation of overprotected underachievers. That is even more true now than it was back then.

It’s time to break the glass.

jivison@criffel.ca

Get even more deep-dive National Post political coverage and analysis in your inbox with the Political Hack newsletter, where Ottawa bureau chief Stuart Thomson and political analyst Tasha Kheiriddin get at what’s really going on behind the scenes on Parliament Hill every Wednesday and Friday, exclusively for subscribers. Sign up here.

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