Economist 5/10/16

  1. Data released today show a 2.3% year-on-year rise in consumer prices in April, in China keeping pace with March. Investors worry this might force China to rein in its stimulus. But officials will desist for now because they see inflation as a porcine, not a monetary, phenomenon. Pork prices, up by nearly 30% in the past year, have accounted for a quarter of inflation. China’s hog farms have not kept up with soaring demand. The government last week dipped into its strategic pork reserves to satiate its people. It has also given subsidies to farmers, though many now produce more profitable cash crops.
  2. CHARLES Goodhart best known for his law that economic measures tend to misbehave once targeted, was tackling the issue of why repeated monetary stimulus by central banks had failed to stimulate credit creation.Sure enough, central banks have expanded their balance sheets massively since 2008. But the effect on inflation has been non-existent (and the effect on economic growth is still in dispute). The problem is that base money (currency plus commercial bank reserves) at the central bank has lost its relationship with broad money (credit in the wider economy). The banks were not lending out the newly-created money.In part this was because, in the wake of the 2008 crisis, regulators demanded that banks improve their capital ratios. This had made banks much more cautious about extending new loans to risky borrowers; they have tended to focus on large corporations and on their home markets, the latter approach tacitly approved by central banks.
  3. Meanwhile, holding reserves at the central bank has become more appealing.But the use of quantitative easing (QE) by central banks has brought down long-term yields. Bond yields are at historic lows and the risk of holding government debt, should economies return to normal, seem high. In effect, commercial banks are in a liquidity trap.Mr Goodhart thinks that QE is a “busted flush” – it worked in 2009 when it reduced the risk premium but has had little effect since.And the problem is that commercial banks cannot pass on negative rates to their retail customers, but negative rates do ripple through the markets in the form of lower bond yields and loan rates. The interest income of banks is thus squeezed.In short, the aim of monetary policy has been to expand credit expansion via the commercial banks but the pipeline is blocked.Negative rates might work, Mr Goodhart says, if governments announced outright that their aim was to reduce the nominal value of retail savings; this would give commercial banks the cover to introduce negative rates on deposits. But such a policy would be electoral suicide, alienating millions of bank customers and sparking talk of confiscation.
  4. The poverty threshold for an individual in 2016 is $11,880; for a family of four it is $24,300. Despite many calls for an increase, and Barack Obama’s proposal to raise the minimum hourly rate to $10.10, the wage floor in America has been stuck at $7.25 since 2009.Thirty states already promise their workers more than $7.25 an hour. West Virginians make at least $8.75 and Oregonians get $9.25, while employers in California and Massachusetts must pay their workers a minimum of $10 an hour. Aside from a few localities, the highest minimum wage in America today, $10.50, is found in the District of Columbia. In recent years, several American cities have introduced their own minimum-wage increases. In three big ones on the west coast—Los Angeles, San Francisco and Seattle—the minimum wage is set to rise to $15 over the next few years, and Chicago will be phasing in a floor of $13 by 2019.These reforms have not been universally embraced. Opponents say that however well-intentioned they may be, artificial wage increases distort the labour market and give employers an incentive to make do with fewer workers.The International Franchise Association (representing McDonald’s and Subway shops) sued Seattle for imposing the new wage rules on them four years earlier than they are set to take effect for small businesses. But last week, in an unsigned, one-sentence order, the Supreme Court refused to hear the business leaders’ appeal.
  5. Twice since Mr Scalia’s death the US Supreme Court has performed the judicial equivalent of throwing up its hands.A tie in the high court means that the ruling in the court below stands. But a tie-induced affirmance does not bind other lower courts, and the judgment has no value as a precedent. A tie, in short, leaves everything as it was and as it would have been had the justices never agreed to hear the case in the first place.The Obama administration continues to push Senate Republicans to change their minds and hold confirmation hearings for Merrick Garland, chief judge of the District of Columbia circuit court.But the Republican leadership isn’t budging.Some legal scholars argue that an eight-justice bench isn’t so bad after all and might actually be preferable. Eric Segall, a professor of law at Georgia State University, thinksthe 4-4 ideological divide is pushing justices to moderate their claims in an effort to win votes from their colleagues on the other side.

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