Aurelia Butler

The week before Joe Biden’s inauguration, I wrote in my column that the new US president would have to “use the first few months of his presidency for a big push — not just on immediate rescue operations but on structural policies that have staying power and fundamentally restructure the economy”. By all accounts, that was his plan — the 46th president is well known to admire the 32nd, Franklin D Roosevelt, who did just that. Ten months on, what can be said? Has Biden succeeded in a big push? I think that in two senses, he has not. In a third, he has.The intention for a big push was clear from the start, when the Biden administration set out three plans: the American Rescue Plan, the American Jobs Plan and the American Families Plan. Each was of massive scale, and the philosophy behind them was a break with past thinking. As his team explained in clear terms, the idea behind all the big spending programmes was in fact supply-side economics: spending that would boost the productive capacity of the economy, but by using the government rather than by getting it out of the way.The two senses in which these nevertheless do not amount to a big push are the following. First, Biden has had to make the plans a lot less ambitious in order to get them passed by Congress. While the first, the $1.9tn emergency pandemic stimulus plan to rescue the economy, had the smoothest passage, the jobs and families plans were, if not quite changed beyond recognition, at least somewhat disfigured by their run-in with Capitol Hill. The original $2tn Jobs Plan shrank to a $1.2tn infrastructure bill, only about half of it actual new spending. Some, but not all, bits of the $1.8tn Families Plan, and some of the climate incentives that fell out of the Jobs Plan, have been repackaged in the nearly $2tn Build Back Better bill that has now passed the House of Representatives — see the excellent New York Times Upshot illustration of what is in it. And there are well-known issues that may require modification for the bill to pass the Senate.Second, size is not all that matters: Donald Trump’s tax cuts were big too. Even if Biden’s plans had gone through in full, they only partially met my criterion to “have staying power and fundamentally restructure the economy”. Many of the spending programmes are one-offs, which is not necessarily bad but by definition they do not stay indefinitely. Some that could be permanent are made temporary on purpose to flatter the weird deficit scoring used on the Hill. But as David Dayen puts it: “Whether these programs endure will make the difference between a transformative turn toward social welfare and a flash in the pan.”In contrast, Biden has failed to fulfil his campaign promise to raise the minimum wage to $15, which would indeed have been nigh-on irreversible and spurred a deep structural transformation of US labour markets. Instead, that transformation is being driven by labour shortages, and may therefore be as ephemeral as they are. The best example of a Biden policy that does meet my criterion is making the child tax credit refundable (so that even those who pay no or little tax get it), which essentially creates a European-style child benefit, or a universal basic income for families with children. And yet. Compared with what most US presidents get done in their first 10 months, Bidenomics is a big deal. The two packages that have been passed are very large, as is the third, which looks likely to pass soon. The emergency spending contributed to the biggest fiscal stimulus in the developed world. We can see the result in the phoenix-like recovery of US economic output from the pandemic, and the fact that people’s incomes and consumption have held up so well. (We can also see it in inflation, which as I explained last week we should be intensely relaxed about.) For all their flaws, the infrastructure and build back better programmes will increase, by several per cent of national income, spending that should turn the US economy in a healthier, greener and more productive direction. Above all, these packages are big enough to make voters notice a real difference on the ground. It will be up to Biden and his party to claim their electoral reward for it. But at least there will soon be something real and sizeable for them to try to claim a reward for.Other readablesThe obstacle to good fiscal policy in the EU is not bad rules but poor politics, I argue in my FT column this week.Lucy Kellaway reports on the unhealthy degree of interest in crypto speculation among teenage school pupils.Where have all the workers gone? The FT news pages are running a series of in-depth articles on the strange post-Covid labour market.Numbers newsLast week I wrote of the early hints that the big consumption shift from services to goods, which is a big driver of inflation, may be ending. This week came another sign that a reversal back to services is under way. The OECD reported that global goods trade plateaued in the third quarter, while services picked up speed.And yet another sign that inflation is transitory: Claire Jones reports that shipping costs are falling. More

Germany cut the so-called countercyclical buffer for banks to zero at the start of the pandemic but economic growth is now robust and bank lending is rapid, so they should be forced to hold more capital in preparation for a rainy day, the central bank said.”The countercyclical capital buffer should be built up again early on,” Bundesbank Vice President Claudia Buch said in a statement.The buffer, now at 0, was set 0.25% of banks’ total risk exposure before the pandemic but current credit levels suggest that an even higher level may be needed, the Bundesbank added.This buffer does not explicitly take into account the booming residential property market, which requires careful monitoring and potential action by regulators, the Bundesbank said.Property prices continue to soar and indicators suggest that further rises are still ahead, leaving real estate overvalued as price and rent growth outpace incomes.”Price exaggerations in the residential real estate market have tended to increase further,” the bank said. “Bundesbank estimates put them at between 10% and 30% in Germany in 2020.”This means that banks may be overestimating the value of loan collateral, leaving them exposed to large losses in case of a price adjustment.Banks are also vulnerable to interest rate rises as large chunks of their long-term lending is at fixed rates, particularly in the case of mortgages, the Bundesbank added.  More

China says the issue of Taiwan, which it claims as Chinese territory, is the most sensitive in its ties with the United States, the country that is also Taiwan’s most important international backer and arms supplier.Sharp (OTC:SHCAY) differences over Taiwan persisted during a virtual meeting https://www.reuters.com/world/biden-raised-concerns-over-xinjiang-tibet-hong-kong-xi-warns-taiwan-red-line-2021-11-16 earlier this month between U.S. President Joe Biden and Chinese President Xi Jinping. Xi said that those in Taiwan who seek independence, and their supporters in the United States, were “playing with fire”.Asked at a monthly news briefing in Beijing to comment on Sino-U.S. military ties in the light to those talks, Chinese Defence Ministry spokesman Wu Qian said having a healthy and stable relationship was good for both and what the world expected.China is willing to maintain exchanges and cooperation with the United States, he added. “However, for a period of time, the U.S. side has said a lot of irresponsible things and done a lot of provocative things on Taiwan, the South China Sea, and close up reconnaissance by warships and aircraft,” Wu said. China has principles for the development of relations between the two militaries, which is to say its sovereignty, dignity, and core interests cannot be violated, he added. “Especially on the Taiwan issue, China has no room for compromise, and the U.S. side should not have any illusions about this.”Democratically-rule Taiwan has denounced China for its stepped up diplomatic and military pressure to try and force the island into accepting Chinese sovereignty.Taiwan President Tsai Ing-wen has vowed to defend the island, and says only its people can decide its future. More

TOKYO (Reuters) – Japan raised its view on consumption for the first time in 13 months as service spending picked up but downgraded that on exports and production due to persistent supply issues and a slowdown in China’s economy.On that mixed note, the government kept its overall economic assessment unchanged for the second month, while it said full attention should be paid to downside risks from supply constraints and raw material prices.”The economy continue to show weakness in recovery, although severe conditions due to the coronavirus are gradually easing,” the government said in its November economic report approved by Prime Minister Fumio Kishida’s cabinet on Thursday.Among key economic components, the report raised its view on private consumption for the first time since October 2020, attributing it to improved consumer sentiment and increased spending on services such as restaurants and hotels.”The pandemic-induced severe situations, such as in foot traffic, have been easing after the lifting of COVID-19 state of emergency curbs,” a government official told reporters before the cabinet’s approval of the report.Japan has lifted restrictions on restaurant hours, large-scale events and loosened border controls as infections have fallen dramatically and around 76% of its population are fully vaccinated.The government has lowered its assessment on exports for two months in a row based on decreasing Asia-bound shipments, resulting in weak production, which was also downgraded. In addition to carmakers’ output cuts due to a shortage of parts, a slowdown in China’s economy has dampened previously strong orders for production machines, the official said.While disruptions in parts supply from Southeast Asia have abated, “supply constraints still require close attention going forward as the semiconductor shortage still lingers,” the official said. The recent surge in raw material costs also poses a downside risk to corporate profits and household spending, he added.The government cut its view on imports due to declining shipments from Asia.Japan’s economy, the world’s third largest, contracted much faster than expected in the third quarter by an annualised 3.0% as the pandemic and global supply disruptions hit consumption, capital spending and exports.Analysts expect a rebound in the fourth quarter helped by improving consumer demand. To further fuel the recovery, the government unveiled a record $490 billion economic stimulus package on Friday. More

JAKARTA (Reuters) – Indonesia’s Constitutional Court on Thursday ordered the government to amend parts of a new job creation law within two years, citing procedural flaws in how the controversial legislation was handled.The law, which was passed last year and saw the revision of more than 70 existing laws, sparked protests across Indonesia and complaints that it undermined labour rights and environmental safeguards.Ruling on Thursday in a judicial review brought by unions, chief judge Anwar Usman said if changes were not made in two years, the legislation would be deemed “permanently unconstitutional”.The ruling described the way the legislation was handled as procedurally flawed and in some parts, unconstitutional, including changes made after parliamentary approval.While the judges acknowledged the rationale behind some of the government’s actions in pushing through a law designed to attract investment and create jobs, the ruling said proper processes should have been followed.”It doesn’t mean that reaching those goals then could set aside the ways or formal procedures that are in effect,” it said.Airlangga Hartarto, coordinating minister for economic affairs, said the government respected the ruling.”The government will immediately follow up the court’s ruling by preparing for the law revision and carry out as best as we could the court’s instructions,” he told a news conference.The law had been designed to streamline bureaucratic procedures, spur investment and boost labour competitiveness, but critics argued comprehensive revisions took place that were rushed through without sufficient consultation.Deni Ferdiansyah, 43, who joined union members outside the court, said the judges had sided with the workers.”We feared the Constitutional Court would be pro-government, but thank God they still used their conscience,” Deni said.”This law makes laborers suffer, especially when it comes to the minimum wage.”Among other complaints had been rules on severance pay, contract labour and outsourcing, and a stipulation that environmental studies only be required for high-risk investments.Said Iqbal, chief of the KSPI labour union, said workers “highly appreciate” the court, adding “we believe there’s justice to be had.”KSPI lawyer, Said Salahudin, said the whole process of drafting the law should be restarted.”This isn’t a normal ruling, it was very bold for the Constitutional Court to do this,” he said.”Anything related to labor policies that are strategic and have wider implications needs to be suspended.” More

FRANKFURT (Reuters) – Visions of spiralling wage inflation in the euro zone have dominated the talking points of conservative central bankers in recent weeks as they called for a moderation in central bank stimulus. The fear is that high inflation now, even if temporary, will prompt firms to boost wages, perpetuating inflation by increasing consumer demand. On first look, this is not an irrational fear. Wage-price spirals have pushed inflation to unexpected highs in the past, most notably in the 1970s.This could then keep inflation stubbornly above the European Central Bank’s 2% target, potentially forcing the bank to bring the economy back down to earth by tightening policy after years of unprecedented stimulus. “Companies’ complaints about labour shortages have increased significantly, particularly in Germany, but also among our European neighbours,” Bundesbank President Jens Weidmann said.”In the future, such tensions on the labour markets could make it easier for employees and trade unions to push through noticeably higher wages.”LITTLE EVIDENCEBut there is very little evidence out there, from actual wage figures to labour market trends or union demands, to support these fears.Wage growth remains anaemic, though the data are arguably distorted by the pandemic. Copious furlough schemes and wild swings in employment as the economy shut and opened, make it difficult to ascertain just how healthy the labour market is.But union demands for next year’s pay have been underwhelming so far, especially in light of an inflation rate now at 4.1%.Some sectors with a notable skills shortage of course stand out. Germany’s construction industry negotiated a 3.4% increase while in retail, the increase is 2.2%. Still, with inflation likely holding above 2% next year, that is modest, at best, in real terms. Europe stands in stark contrast to the U.S. in this respect. U.S. labour costs increased by the most since 2001 last quarter as companies boosted wages and benefits amid a severe worker shortage, pointing to elevated inflation for some time.Most wage deals in Germany, arguably the bloc’s strongest labour market, so far appear to be in the 1.5% to 2.5% range, which may actually be too low to keep inflation at 2%, economists say.This is primarily because unions are now increasingly prioritising non-wage benefits from more leisure time to increased job security.“The wage agreements that we’ve seen so far this year do not indicate that wage developments are currently posing an increased risk of inflation in Germany,” Sebastian Dullien, an expert at the IMK economic institute, said. “The ongoing negotiations can be described as moderate – especially when you compare them with demands made during the times before the pandemic,” he added.Indeed, labour cost growth in the euro zone was in the 2% to 3% range before the pandemic, yet inflation still fell short of the ECB’s target.The labour market has also yet to recover from the pandemic. Employment is still below the pre-crisis level, hours worked are down 4% and nearly 2.5 million people are still in some sort of job retention scheme, all indicating that there is still plenty of slack. Some even argue that a rise in wage growth would be welcome after the pandemic battered households.”We should not be alarmed if we see signs of a one-off catch-up in wages next year,” ECB board member Fabio Panetta said this week. “Over the medium term it is desirable that we see increases in unit labour costs.”Ironically, Germany’s incoming government and not the ECB could give inflation a big boost. Their plan to raise the minimum wage by around 25% to 12 euros an hour could push wages up across the board, a move heavily criticized by the Bundesbank, which normally refrains from discussing political decisions. “The significant minimum wage increase would affect the lower wage brackets markedly and would have non-negligible spillover effects on the wage brackets higher up,” it said.Finally, the economy is far from healthy. A new wave of the pandemic is forcing economies to restrict economic activity that is likely to squeeze services once again and put downward pressure on economic growth. Rapid wage rises are thus only a theoretical possibility for now, with evidence still heavily skewed towards a more benign outcome. More

The writer is executive vice-president of the European Commission responsible for trade policyMinisters will hold the future of international trade in their hands when they meet in Geneva next week. They have a golden opportunity to breathe new life into the World Trade Organization.Success could accelerate global economic recovery and boost climate action, while failure risks further fragmentation of the global trading system and erosion of trust among its members.The WTO’s core mission is to underpin rules-based international trade. By many economic measures, it has been a success. By joining the WTO, members have, on average, almost tripled their trade. This has in turn helped to lift hundreds of millions of people out of poverty worldwide.In the EU, 38m jobs are supported by international trade — an astonishing 11m more than a decade ago. Today, however, the WTO’s rule book is badly out of date. Its ability to referee trade disputes is paralysed and it is out of touch with current imperatives such as action on climate change and the expansion of digital trade. An irrelevant WTO may lead to a system based on power relations, which harms everybody and benefits no one. This would also hit the interests of those developing countries less integrated in global trade.All our economies are relying on international trade for recovery, but the global rule book needs to catch up with global reality to make a real difference.At their biennial gathering (MC12) next week, trade ministers can get this much-needed process of reform under way. But they must first stop speaking past each other and focus on workable compromises.MC12 can be a game-changer, kick-starting a process that restores the WTO as a negotiation and deliberation forum, with a reformed dispute settlement system.The EU has been leading from the front, publishing a plan for rebooting the WTO earlier this year — one with sustainability at its heart — and working to build coalitions for reform ever since.The wider EU to-do list is clear. With the COP26 climate summit still fresh in our minds, we believe that the global trading system must do more to protect our planet. Real progress on sustainability is within reach at MC12, with a deal to protect oceans and global fish stocks. Specifically, ministers can agree to eliminate harmful subsidies that led to illegal fishing and overfishing.This agreement is tantalisingly close and would represent a victory for both the economy and environment, while sending a strong signal that the WTO is back in business. The EU is ready to do everything it takes to get a result, and is willing to accept new sustainability rules and eliminate subsidies for vessels fishing in the unregulated high seas. We expect other countries to do the same.A successful MC12 must also demonstrate that the WTO can help in the fight against Covid-19. The EU has credibility on this question: we have exported well over half of our vaccine production.We want to see a shared commitment from WTO members to keeping supply chains open, helping to get every citizen vaccinated worldwide. We also need to make sure we are prepared for future pandemics. That is why the EU is committed to helping improve regional production capacity, particularly in Africa.Of course, intellectual property has to be part of the global response, too. The EU is working actively in this area and is advocating a targeted waiver on compulsory licenses. This solution could facilitate production of vaccines and other essential health products while preserving incentives for innovation and investment, which are key for continents such as Africa. We still hope consensus can be found in this crucial matter in the days ahead.On the economic front, the door is also open for an agreement on the regulation of services. The OECD estimates this could save $140bn in trade costs, giving another welcome boost to global recovery.The stakes are high. Real breakthroughs are possible, but only with sufficient political will and a shared sense of urgency. The EU will not be found wanting, but we need others to play their part.Failure to do so would represent an unconscionable dereliction of duty to our citizens, our workers, and to the hopes of a truly sustainable global recovery. More

The writer is president of Queens’ College, Cambridge and an adviser to Allianz and GramercyLooking at the prospects for the economy and markets in the run-up to the November 2022 midterm US elections, I have an unsettling feeling that I may end up watching the repeat of a script from just over a decade ago.A transformational agenda for the US economy is again at risk, as questions also mount for financial markets. Fortunately, there is still time to change the storyline but it’s getting late day in the day. Moreover, the most important and needed policy adjustments lie outside the direct control of the Biden administration.Like Barack Obama back in 2008, President Joe Biden came into the White House with ambitious economic policy proposals. If implemented fully, they would help unleash growth that is not just high and durable but also a lot more inclusive and sustainable.But similar to Obama, Biden’s ability to follow through on these policies is subject to the Democrats’ ability to maintain control of Congress. And just like Obama, the prospects for this goal at the first set of midterm elections in a year’s time is threatened by a misreading of the economic recovery process.Obama’s ability to purse his economic agenda, including a set of jobs-related measures that would have enhanced both productivity and labour force participation, was severely and prematurely curtailed by a midterm election “shellacking” that quickly polarised and paralysed CongressUnderpinning this outcome was a misreading of the economic situation. It took too long for Obama’s economic team to realise that, rather than a very sharp cyclical shock, the 2008 financial crisis had exposed deep structural weaknesses that had been years in the making and required sustained policy attention. This was a secular rather than a cyclical moment for the economy.Two of the three “T’s” principles guiding policies at the time (“timely” and “targeted”) were well framed and absolutely correct. The third, “temporary”, turned out to be inconsistent with the needed emphasis on longer-term efforts to boost inclusive growth.Rather than just one big bang of policies to accelerate a cyclical recovery, what was needed was a sustained structural effort to improve the functioning of many parts of the economy. Absent that, the sense of economic alienation and marginalisation of certain segments of the population grew, turning an important part of the electorate against the Democrats.The problem was not the qualification and experience of the economic team. Rather, it was mindsets that, unconsciously, had become hostage to an economic landscape that had been upended by both the run-up to the financial crisis and its aftermath.As such, it took time to recognise that rather than the economy going through a deep V-shaped contraction and recovery, it was facing a “new normal” of excessively low and unequal growth — or what was later characterised as “secular stagnation”.Biden’s Democratic party risks following the same trajectory if economic officials, and the Federal Reserve in particular, do not quickly pivot to a more open mindset about the economy’s inflationary process and required policy adaptations.As I have argued for months, here and elsewhere, the Fed has consistently and repeatedly mischaracterised inflation as “transitory”. Captive to the wrong mindset, it is also now hostage to a “new monetary framework” designed for the old world of deficient aggregate demand and not the current reality of supply bottlenecks and labour shortages. As a result, the Fed has missed some important policy windows to reduce the risk of unanchored inflationary expectations.The persistence of high inflation would hit the poor particularly hard and undermine economic recovery, both unnecessarily so. It also creates harmful headwinds for the continued implementation of the Biden administration’s economic agenda while also potentially complicating the much-needed general pivot in favour of climate-friendly investments.It is hoped that this week’s revamp of the leadership team at the Fed will provide the central bank with an opportunity to reframe its public assessment of the inflation challenge facing the economy and, with that, pivot quickly as a first step to a meaningful acceleration in the taper of its massive financial asset purchases.Without that, America faces a new risk of delaying yet again policies that enhance both current and future economic wellbeing. More