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  • Author: Derek M. Scissors
  • Publication Date: 01-2014
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: New data published in the American Enterprise Institute-Heritage Foundation China Global Investment Tracker show that China continues to invest heavily around the world. Outward investment excluding bonds stood at $85 billion in 2013 and is likely to reach $100 billion annually by 2015. Energy, metals, and real estate are the prime targets. The United States in particular received a record of more than $14 billion in Chinese investment in 2013. Although China has shown a pattern of focusing on one region for a time then moving on to the next, the United States could prove to be a viable long-term investment location. The economic benefits of this investment flow are notable, but US policymakers (and those in other countries) should consider national security, the treatment of state-owned enterprises, and reciprocity when deciding to encourage or limit future Chinese investment.
  • Topic: Security, Foreign Policy, Development, Economics, Emerging Markets, International Trade and Finance, Foreign Direct Investment, Sovereign Wealth Funds
  • Political Geography: United States, China, Asia
  • Author: William C. Greenwalt
  • Publication Date: 12-2013
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: The Pentagon has been undergoing major procurement reform since 1984, but hoped-for results have not been achieved. Bipartisan acquisition reform legislation was passed in the 1990s, but these positive changes did not hold. At the heart of the current procurement dilemma is too much faith in central planning and too little faith in the free market. Policymakers must first remedy the incentives underlying reform, and five overarching categories are driving the misplaced incentives: trust in central planning leading to increased bureaucracy, preference for defense-unique versus commercial solutions, distrust of the defense industry and profit motives, fear that the workforce is incapable of exercising discretion, and finally, preoccupation with cost certainty and maintaining low prices over achieving results and value. By reaching out to and incentivizing the private sector, the Pentagon can help reform the procurement system by lowering costs, restoring competition, and delivering taxpayers the best value for their money.
  • Topic: Defense Policy, Economics, Markets, Reform
  • Political Geography: United States
  • Author: Patrick Keller
  • Publication Date: 10-2013
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: The "grand narrative" of German security policy since the end of the Cold War has oscillated between Germany's reluctance to use hard power and Germany's desire to be seen as supportive of its American and European allies. This is reflected in the varying decisions it has made during foreign military operations and in the manner in which Germany's military has conducted those operations. At the same time, the German military has undergone a series of reforms designed to modernize German forces and to make them more flexible and deployable. But a stagnant and low level of defense expenditures has made carrying out these reforms an ongoing challenge to the German military and German defense ministry. Germany has a vital interest in a stable and liberal international order and, hence, in having a military capable of helping maintain that order. As Europe's leading economic power and, increasingly, as Europe's central political actor, Germany could and should take the lead in reversing the precipitous decline in European hard power.
  • Topic: Defense Policy, Economics, International Security, Reform
  • Political Geography: Africa, Europe, Germany
  • Author: Andrew Shearer
  • Publication Date: 08-2013
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: Like many other Western states, following the Cold War, Australia cut its defense budget, resulting in significant shortfalls in key military capabilities. Since the mid-1990s, successive Australian governments have outlined plans intended to boost the capabilities of Australia's armed forces. However, these strategic ambitions have in recent years been undercut by changes in government spending priorities and shortfalls in the national budget, jeopardizing the long-standing technological advantage Australian forces have enjoyed over other states in the region. As major Asian states such as China continue to grow their economies and modernize their armed forces, Australia must commit sufficient resources to its modernization agenda or risk losing its ability to help shape the Asia-Pacific ­security environment and risk fulfilling its role as a key US partner in America's pivot to Asia.
  • Topic: Foreign Policy, Defense Policy, Cold War, Economics, Armed Forces
  • Political Geography: Africa, United States, China, Asia, Australia
  • Author: John H. Makin
  • Publication Date: 03-2011
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: The array of postbubble stresses and uncertainties identified in the January 2010 Economic Outlook (“The Year Ahead”) promised that the new year would see plenty of volatility in markets. That is exactly what is playing out as we move through the first quarter. As risks accumulate, it may be that 2010 is shaping up as a mirror image of 2009, reversing last year's down-then-up pattern with an up-then-down pattern this year.
  • Topic: Economics, International Trade and Finance, Markets, Monetary Policy, Financial Crisis
  • Political Geography: United States, Japan, China, Europe
  • Author: John H. Makin
  • Publication Date: 06-2011
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: Market conditions in the United States, Japan, China, and Europe portend a weakening global economy. While not dramatic in any one region save an earthquake-burdened Japan, these conditions could accumulate to create a problematic loss of momentum for global growth, especially compared to current upbeat consensus views for the second half of 2011.
  • Topic: Economics, International Trade and Finance, Global Recession
  • Political Geography: United States, Japan, China, Europe
  • Author: John H. Makin
  • Publication Date: 04-2010
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: January ended on a note of diminished hope for a sustainable global recovery as stock markets retreated from their midmonth highs. Since mid-February, however, higher hopes for a sustainable global recovery have returned. Equity markets have rallied along with markets for corporate and global sovereign bonds. Some mitigation of perceived risks facing global investors has provided a chance for hope to “float up,” and it has done so. Tension over the cohesion of the European Monetary Union and, in particular, concerns over a possible sovereign-debt default by Greece have eased, and investors continue to hope that the debt problems in Greece will not spread to the rest of Europe.
  • Topic: Economics, International Political Economy, International Trade and Finance, Markets, Financial Crisis
  • Political Geography: Europe, Greece
  • Author: John H. Makin
  • Publication Date: 02-2010
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: February always brings with it the president's proposals for taxing and spending in the coming fiscal year. The president's budget proposals are accompanied by congressional and administration estimates of the path deficits and government debt are expected to take in coming years. Last year, those projections, especially a three-year string of actual and projected deficits over a trillion dollars from 2009 through 2011, excited widespread comment and handwringing about runaway deficits and their allegedly damaging effects in the form of lower growth, higher inflation, and higher interest rates.
  • Topic: Debt, Economics, Political Economy, Politics
  • Political Geography: United States
  • Author: John H. Makin
  • Publication Date: 01-2010
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: We can expect 2010 to be a volatile year. This likelihood is underscored by looking back at 2008 and 2009. Two thousand eight was a highly volatile year leading up to the collapse of Lehman Brothers in September, which was followed by the risk of a total systemic meltdown. That sharp and obvious risk spike prompted massive policy responses that were simply the largest that central banks, with rate cuts and liquidity provision, and governments, with tax cuts and spending increases, could manage. The result—beginning in March 2009—was a linear rise in the prices of risky assets, the result of massive relief once the slip into a global depression had been averted and the acute phase of the crisis in the financial sector had passed.
  • Topic: Economics, International Trade and Finance, Markets, Financial Crisis
  • Political Geography: United States, Japan, China, Europe
  • Author: John H. Makin
  • Publication Date: 01-2009
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: On December 16, 2008, Federal Reserve chairman Ben Bernanke exercised decisive leadership at a watershed meeting of the Federal Open Market Committee (FOMC). In its official statement after the meeting, the committee pledged to “employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.” The pledge to preserve price stability was not a commitment to fight inflation, as is typical, but a highly unusual commitment to fight deflation.
  • Topic: Economics, Markets, Political Economy
  • Political Geography: United States
  • Author: John H. Makin
  • Publication Date: 02-2009
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: The global financial and economic crisis that emerged in August 2007 has entered a dismaying fourth phase. The January 17–18, 2009, weekend edition of the Financial Times, which has been a major chronicler of the crisis and its many aspects, laid out a frightening timeline of an accelerating and intensifying oscillatory cycle of crisis and failed policy response that started just fifteen months ago. Each phase begins with a shock and ends with a seemingly decisive policy measure meant to contain or “fix” the crisis. Each phase is shorter than the previous one and culminates in a much larger policy response. Throughout the crisis, the losses of financial institutions have steadily grown at an accelerating pace as the underlying conditions in the financial sector and, since September 2008, in the underlying global economy deteriorate more rapidly. Such a disturbing pattern must be truncated by a large, coordinated global policy response to arrest the accelerating erosion of the market capitalization of multinational banks and insurance companies that has resulted.
  • Topic: Debt, Economics, Markets, Political Economy
  • Political Geography: United States
  • Author: John H. Makin
  • Publication Date: 03-2009
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: As the global financial and economic crisis has grown increasingly dire—the deterioration just since the November U.S. election is breathtaking—market participants and policymakers alike have looked to three past crisis models as part of an intensifying search for ways out of the current crisis. First, the Great Depression of the 1930s is being examined ever more closely for possible lessons now that commentators have moved past an under- standable reluctance to mention that experience as relevant to today's situation. Second, the Scandinavian financial crisis of the early 1990s, which included a proactive move toward bank nationalization by the Swedish government, is also widely discussed. Finally, many allusions have been made to the disquieting parallels between today's U.S. experience and that of Japan during its “lost decade” (1991–2001) of recession and deflation, especially after 1998.
  • Topic: Economics, Markets
  • Political Geography: United States, Japan
  • Author: John H. Makin
  • Publication Date: 04-2009
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: On March 18, Federal Reserve chairman Ben Bernanke intensified the important battle against global deflation with a commitment to expand the Fed's balance sheet by an extra $1.15 trillion. With some luck and persistence, that step could boost growth by a percentage point or more and, even more important, substantially reduce the risk of deflation.
  • Topic: Economics, Markets, Political Economy
  • Political Geography: United States
  • Author: John H. Makin, Vincent R. Reinhart, Peter J. Wallison
  • Publication Date: 09-2009
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: One year ago, on September 14, Lehman Brothers declared bankruptcy. The next day the Dow fell five hundred points. Soon thereafter, the government essentially nationalized AIG, made Goldman Sachs and Morgan Stanley into bank-holding companies, and petitioned Congress for aid. In early September, Fannie Mae and Freddie Mac had been placed in government conservatorship. These events followed the bursting of the housing bubble. We present here three essays written by AEI scholars in the spring and summer of 2009 on the origins of the financial crisis whose reverberations we continue to feel today. Vincent R. Reinhart sets the stage by reminding us of the importance of getting the story of what happened right, as policy recommendations flow from our understanding of what occurred. He also tells us that “the narrative first written about the Great Depression was wrong in many important respects.” John H. Makin and Peter J. Wallison focus on the misguided policies that contributed to the crisis. In a new Economic Outlook, Makin discusses three important lessons of the financial crisis that should be understood in order to enable a faster, more effective policy response to future crises.
  • Topic: Economics, Markets, Financial Crisis
  • Author: John H. Makin
  • Publication Date: 08-2009
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: China's economic statistics have become the envy of the world. On July 15, China reported a 7.9 percent growth rate for the second quarter of 2009 compared to the same period a year earlier. Meanwhile, China's stock markets are on fire, and its property markets are heating up fast as well. Shanghai's two stock markets are up 75 percent and 95 percent respectively so far this year. The more widely traded Hong Kong Index is up 27 percent, a stellar performance compared to largely flat stock markets in the United States, Europe, and Japan. In even stronger contrast, Russia, which is one of China's emerging-market peers, has seen its economy drop by 10.1 percent during the first half of this year, while its stock market has struggled as well.
  • Topic: Economics, Emerging Markets, International Political Economy
  • Political Geography: Russia, United States, Japan, China, Europe, Hong Kong
  • Author: John H. Makin
  • Publication Date: 05-2009
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: Governor Zhou Xiaochuan's comment is an open acknowledgement that the “adverse feedback loop,” in which financial-sector problems hurt the real economy, which in turn intensifies negative conditions in finance, has hit China hard. China's real growth rate, which peaked at 13 percent in 2007 and is heavily dependent on exports, plunged to 6.1 percent on a year-over-year basis in the first quarter of 2009. Nominal growth, a measure of the current money value of goods and services, fell even more sharply, from 21.4 percent in 2007 to 3.6 percent in the first quarter of this year. The fact that the nominal growth rate is 2.5 percent below the real growth rate suggests that, at least as far as output is concerned, deflation has taken hold at a 2.5 percent rate in China.
  • Topic: Economics, Emerging Markets, International Political Economy
  • Political Geography: China
  • Author: John H. Makin
  • Publication Date: 07-2009
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: The recent steps by the Federal Reserve to preempt deflation have—ironically and unexpectedly— prompted a surge in inflation fears both inside the United States and abroad, especially in China. Specifically, the Fed's measures to go beyond the stimulus inherent in a zero percent federal funds rate by purchasing Treasury and mortgage securities has conjured visions—especially in the eyes of major buyers of Treasury securities, China foremost— of massive money printing to underwrite trillions of dollars of additional government borrowing at low interest rates. As markets have shown, if that were the Fed's intention—which it decidedly is not—the effort would fail because excessive money printing—creating a money supply larger than the quantity of money demanded— would push up interest rates as inflation expectations rose.
  • Topic: Economics, International Political Economy, International Trade and Finance, Monetary Policy
  • Political Geography: United States, China
  • Author: John H. Makin
  • Publication Date: 09-2009
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: More than two years have passed since the U.S. housing bubble burst. That event ushered in a financial crisis that was not only intense but also stunning. So stunning in fact, that in August of last year, just a month before the collapse of Lehman Brothers, the global economy was close to a crisis worthy of comparison with the Great Depression, yet neither the markets nor the Federal Reserve had much of an inkling of what was to come. The Standard and Poor's (S) 500 Index had come down to about 1,300 from its October 2007 high of 1,576. Positive growth had just been reported for the U.S. economy during the second quarter of 2008 at an annual rate of 2.8 percent (later revised down to 1.5 percent). Almost one percentage point of that growth came from U.S. consumption, and government spending also contributed. The wave of relief after the Bear Stearns scare in March 2008 had provided a nice boost to the economy and to markets. That boost was further enhanced by the substantial contribution to growth from net exports (2.9 percentage points) thanks to what was, then, continuing strength in the global economy, especially in China, which had reported blistering 10.1 percent year-over-year growth in the second quarter of 2008. These and other positive components more than offset a drag from inventories and residential investment. In short, the real economy had not shown much evidence of damage emanating from the chaos that was churning in the financial sector.
  • Topic: Economics, International Political Economy, International Trade and Finance, Markets, Monetary Policy, Financial Crisis
  • Political Geography: United States, China
  • Author: John H. Makin
  • Publication Date: 11-2009
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: The only thing scarier than the slide of the dollar, which has dropped by 15 percent since March, would be an attempt by the Federal Reserve to stop it. Such an attempt would show that we have learned nothing from the Bank of Japan's disastrous premature exit from a zero-interest policy in August 2000. Closer to home, it would resemble the Fed's premature move to mop up “excess” reserves by doubling reserve requirements in three steps between August 1936 and May 1937, which was followed by the third-worst recession of the twentieth century, from May 1937 to June 1938.
  • Topic: Economics, International Political Economy, International Trade and Finance, Monetary Policy, Financial Crisis
  • Political Geography: United States, Japan
  • Author: John H. Makin
  • Publication Date: 10-2009
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: Wall Street is dancing again to the music of a sharp rise in stock prices. The question that remains is whether Main Street, currently languishing in a sad world of job losses, unavailable credit, and weakened balance sheets, will get to join the party. To put the question more precisely, will the “adverse feedback loop” that saw a financial collapse last fall that crushed the real economy work in reverse, so that a financial bounce boosts the real economy in coming quarters? The jury is still out on this important question.
  • Topic: Economics, Markets, Financial Crisis
  • Political Geography: United States
  • Author: John H. Makin
  • Publication Date: 02-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: Now that Wall Street and the Federal Reserve have finished congratulating themselves for not having been alarmists—in other words, for failing to recognize that a recession was looming—they are now facing up to the onset of a U.S. recession and a rapidly spreading financial crisis. Having been late to reach that conclusion, they now grudgingly admit that we may have a brief "V-shaped" recession and are apparently hoping that Fed rate cuts and a fiscal stimulus package will quickly solve the economy\'s problems.
  • Topic: Economics, Political Economy
  • Political Geography: United States
  • Author: John H. Makin
  • Publication Date: 01-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: Japan experienced a disastrous decade of economic stagnation and deflation from 1991 to 2001 after bubbles in its stock market and land market collapsed. While some economic pain was unavoidable—given a 60 percent plunge in equity prices between late 1989 and August 1992, accompanied by the onset of what ultimately became a 70 percent drop in land values by 2001—the "lost decade" was not an inevitable outcome. It required a series of persistently wrong economic policy decisions that ignored the lessons learned in America's Great Depression of the 1930s and the subsequent research on the causes of that painful period.
  • Topic: Economics, Human Rights, Human Welfare, Humanitarian Aid, Markets
  • Political Geography: United States, Japan, America, Asia
  • Author: John H. Makin
  • Publication Date: 04-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: In October 1907, J. P. Morgan stemmed a financial panic by coercing other banks to join him in providing credit to Wall Street brokerage firms teetering on the edge of bankruptcy.[1] This year, over the weekend including March 15—the ominous Ides of March—James Dimon, head of JPMorgan Chase, was the one to act. With the Federal Reserve squarely behind him and assuming the risk, he prevented a Bear Stearns bankruptcy by agreeing to purchase the firm, providing it with a decent burial, at a price of $2 per share. Bear Stearns's stock had been valued at over $160 per share just a year ago. The $2 price virtually wiped out the value of that stock, one-third of which is owned by its 14,000 employees. This was clearly not a bailout for Bear Stearns shareholders, and whether or not the steps taken by the Fed on March 16 were sufficient to arrest a further collapse of available credit and the economy remains to be seen. As long as house prices keep falling, the underlying problem for credit markets and the economy remains.
  • Topic: Economics, Government, Markets
  • Political Geography: United States
  • Author: John H. Makin
  • Publication Date: 05-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: The desire to enhance and store wealth has been present ever since income rose above subsistence levels. In ancient times, prior to the creation of symbolic financial claims on wealth, wealth storage was, quite literally, the storage of intrinsically valuable articles in temples, pyramids, or other such formidable structures. Even today in Tibet, which was long a theocracy, a major repository of wealth can be seen in religious statues of solid gold resting in temples.
  • Topic: Civil Society, Economics
  • Political Geography: United States
  • Author: John H. Makin
  • Publication Date: 01-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: The bursting of every bubble is followed by statements suggesting that the worst is over and that the real economy will be unharmed. The weeks since mid-March have been such a period in the United States. The underlying problem—a bust in the residential real-estate market—has, however, grown worse, with peak-to-trough estimates of the drop in home prices having gone from 20 to 30 percent in the span of just two months. Meanwhile, the attendant damage to the housing sector and to the balance sheets tied to it has grown worse and spread beyond the subprime subsector.
  • Topic: Economics, Government, International Trade and Finance, Political Economy
  • Political Geography: United States
  • Author: John H. Makin
  • Publication Date: 07-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: The Fed is in a bind, pulled toward easier monetary policy by a weak economy and fragile credit markets, while simultaneously needing to resist higher inflation. On Monday, June 9, after a weekend of headlines regarding a half-percentage-point rise in the unemployment rate, Federal Reserve chairman Ben Bernanke gave a pathbreaking speech entitled "Outstanding Issues in the Analysis of Inflation" at the Federal Reserve Bank of Boston's fifty-third Annual Economic Conference. In that speech, after suggesting that the risks of a substantial  economic downturn had diminished over the past month and citing further progress in the repair of financial and credit markets, he proceeded to address the problem of rising inflation. In two sentences, he contributed to a sharp, fifty-basis-point rise in two-year bond yields and boosted the market's assessment of the chance of a fifty-basis-point rise in the federal-funds target rate at the September 16 meeting of the Federal Open Market Committee (FOMC) from virtually zero to nearly 70 percent.
  • Topic: Economics, International Trade and Finance
  • Political Geography: United States
  • Author: Megan Davy
  • Publication Date: 05-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: Latin American and Caribbean (LAC) economies, usually susceptible to international financial turmoil, are especially vulnerable to even minor tremors in U.S. markets. Regional policymakers and entrepreneurs, therefore, have been closely watching the current U.S. subprime credit crisis. Here is the good news: all signs point to relatively minor symptoms in LAC countries—despite a rocky financial history during the 1980s and 1990s—thanks in large part to reforms undertaken in response to previous financial crises, as well as continued high commodity prices that will likely buoy export markets. Although the economic downturn in the United States and other global markets will likely expose lingering weaknesses in the region's economy, this latest crisis can provide an impetus to complete the unfinished business of building more modern, resilient economies.
  • Topic: Development, Economics, Emerging Markets
  • Political Geography: United States, South America, Latin America, Central America
  • Author: Andrew G. Biggs
  • Publication Date: 03-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: Until recently, Senator Barack Obama (D-Ill.) was surprisingly responsible regarding Social Security, noting the urgency of reform and saying all options should be on the table. But having cornered himself with Democratic activists whose attitudes toward Social Security reform range from demagoguery to denial, his solution to the system's problems has veered leftward. He now plans to fix Social Security exclusively with higher taxes. The new Obama plan would not only fail to resolve the system's long-term problems, but would also impose significant costs on the economy as a whole.
  • Topic: Demographics, Economics, Politics
  • Political Geography: United States
  • Author: Amity Shlaes, Vincent R. Reinhart, Allan H. Meltzer, John L. Chapman
  • Publication Date: 04-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: How fragile is our financial system? What are the implications of the Fed's actions on Bear Stearns? Do we need new ways of thinking about the risks the system entails? In recent articles, four AEI scholars have looked closely at the evidence of what went wrong and what is ahead.
  • Topic: Economics, Government
  • Political Geography: United States
  • Author: Alan D. Viard
  • Publication Date: 04-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: Buried in the 227-page Social Security trustees' report are some dramatic numbers about Social Security's future promises. AEI resident scholar Alan D. Viard tells us that "a typical worker retiring in 2050 has been promised 47 percent more than today's retirees, and one retiring in 2080 has been promised more than double today's benefits." To address the program's financial problems, he says, the rules need to be changed to link future retirees' benefits to inflation. That move, he says, would go a long way toward solving the system's problems.
  • Topic: Security, Economics, Political Economy
  • Political Geography: United States
  • Author: N. Gregory Mankiw
  • Publication Date: 04-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: Income inequality is rising, and in this article, AEI visiting scholar N. Gregory Mankiw looks at the statistical evidence and causes. Government policy, he says, is unlikely to be the culprit because inequality has risen in Democratic and Republican administrations--we need to look instead at skills-based technological change and educational attainment. Education, Mankiw says, is key to understanding the broader trends, but it cannot fully explain the incomes of the super-rich.
  • Topic: Economics, Education
  • Political Geography: United States
  • Author: Vincent R. Reinhart
  • Publication Date: 05-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: The Senate Banking Committee approved legislation on May 20 that would empower the Federal Housing Administration to provide relief to mortgage borrowers teetering on the brink of default. The House has already passed similar legislation. Only two months ago, mortgage aid was viewed as unlikely, but the odds now favor it becoming law. For this change of fortune, the legislation's chief sponsors, Senator Chris Dodd (D-Conn.) and Representative Barney Frank (D-Mass.), should thank one person in particular: Federal Reserve chairman Ben Bernanke.
  • Topic: Economics, Government
  • Political Geography: United States
  • Author: Lawrence B. Lindsey
  • Publication Date: 06-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: America has not had a nationwide housing crash since the 1930s. At one point during that calamity, an estimated 60 percent of all mortgages were in technical default. The rather primitive housing credit system of the time, which relied on five-year balloon mortgages, certainly exacerbated the problem, but the bulk of the problem was related to the general economic downturn. There have been some regional housing crashes that were short and relatively mild, most notably in California, Texas, and New England in the late 1980s and early1990s. Most of those were caused by declines in key local industries: oil in Texas, aerospace and defense in Southern California and Massachusett.
  • Topic: Economics, Markets
  • Political Geography: United States, California, England
  • Author: Frederick M. Hess, Kevin Carey
  • Publication Date: 06-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: What if, instead of borrowing, students could arrange for investors to pay their college bills in exchange for a fixed percentage of their future income? In this article, Kevin Carey and AEI's Frederick M. Hess answer this provocative question. The time has come, they say, to think more creatively about financing college, especially because Congress seems more inclined to pour more money into loans and grants.
  • Topic: Economics, Education
  • Author: Lawrence B. Lindsey
  • Publication Date: 06-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: Two AEI scholars have recently assessed the merits of Senator Barack Obama's approach to fixing the Social Security system's problems. In a March On the Issues, Andrew G. Biggs argued that the senator's plan would not fix the system's long-term problems and would impose significant costs on the economy as a whole. To read Biggs's article, visit www.aei.org/publication27704/. In June, Lawrence B. Lindsey wrote that requiring higher-end workers to pay additional taxes without getting additional benefits linked to their extra contributions would be “a big step toward turning Social Security from a contributory pension scheme into just another welfare program.” Below, Lindsey spells out the details.
  • Topic: Economics, Political Economy, Politics
  • Political Geography: United States
  • Author: John H. Makin
  • Publication Date: 01-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: The good news about the problems in the financial sector and the larger economy in the United States emanating from the persistent drop in house prices is that they will eventually end, and the underlying resiliency of the U.S. economy will reemerge. The bad news about these problems is that they are going to continue for some time and get worse before they improve. Efforts to address them so far have been ineffective because they have been aimed at containing a subprime credit crisis, not at containing a rapidly spreading primecredit, solvency crisis that is leading the U.S. economy into recession.
  • Topic: Economics, International Trade and Finance, Markets
  • Political Geography: United States
  • Author: Amity Shlaes
  • Publication Date: 01-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: Democratic presidential candidates are invoking the New Deal as a model for addressing infrastructure, economic, and employment problems in the United States. But a careful look at New Deal spending suggests, in the words of Amity Shlaes, “not how much the public works achieved . . . [but] how little.” Advocates for new federal government spending on highways, buildings, and roads should carefully weigh the need against the damage that comes from projects and jobs created for political reasons.
  • Topic: Economics, Human Welfare, Political Economy
  • Political Geography: United States
  • Author: John H. Makin
  • Publication Date: 08-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: The annual report of the Bank of International Settlements (BIS)—the central bankers' central bank—which appeared in late June, was somewhat schizophrenic. On the one hand, the BIS called for world interest rates to rise in order to deal with a “clear and present threat” from global inflation while, on the other hand, it warned that the global economy may be close to a “tipping point” into a “slowdown severe enough to transform the current period of rising inflation into a period of falling prices.” The simultaneous rise in oil prices and the fall in yields in government securities occurring as the BIS released this ambivalent statement captured well the tensions inherent in the stagflationary crosscurrents facing the global economy. Against this ominous background, the release of the BIS report coincided with the onset of a global bear market in equities.
  • Topic: Economics, Markets, Oil, Political Economy
  • Political Geography: United States
  • Author: John H. Makin
  • Publication Date: 09-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: Speaking on August 22 at the Federal Reserve Bank of Kansas City's Annual Economic Symposium in Jackson Hole, Wyoming, Federal Reserve chairman Ben Bernanke entitled his important address “Reducing Systemic Risk.” Bernanke outlined three key elements of the Fed's response to what he described as “one of the most challenging economic and policy environments in memory.” First, the Fed has eased monetary policy, cutting the federal funds rate from 5.25 percent to 2 percent. Second, the Fed has expanded its liquidity support by developing new special lending facilities to mitigate “very severe strains in short-term funding markets.” The third and, as yet, unfinished element of the Fed's strategy involves “a range of activities and initiatives undertaken in our [the Fed's] role as financial regulator and supervisor.”
  • Topic: Economics, International Trade and Finance, Markets, Political Economy
40. Panic
  • Author: John H. Makin
  • Publication Date: 09-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: The credit crisis that followed the collapse of the housing bubble turned into a financial panic on Wednesday, September 17, 2008. There was a run by households out of money-market funds and into safe Treasury bills, pushing their yields to zero for the first time since the Great Depression. There was a liquidity trap in the interbank market, in which banks that are supposed to lend to each other hoarded cash for fear of runs by their depositors and the insolvency of other banks. Financial markets simply froze in the midst of chaos.
  • Topic: Economics, Markets, Political Economy
  • Political Geography: Middle East
  • Author: John H. Makin
  • Publication Date: 10-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: Over the past several months as central banks and treasuries have struggled to manage a financial panic and avoid or diminish its soon-to-appear devastating impact on the global economy, I have often thought about the efforts of two great economists to understand the lessons of the Great Depression. John Maynard Keynes's monumental General Theory of Employment, Interest and Money, published in 1936, showed how a failure to understand the nature of the demand for money contributed to the Great Depression. “The importance of money essentially flows from being a link between the present and the future,” Keynes said.
  • Topic: Economics, Markets, Political Economy
  • Political Geography: United States
  • Author: John H. Makin
  • Publication Date: 12-2008
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: President-elect Barack Obama faces the most difficult economic challenge confronting an incoming American president since the election of Franklin Delano Roosevelt seventy-six years ago in 1932. When he assumes office on January 20, Obama will need to act decisively with heretofore unprecedented fiscal policy steps, in conjunction with measures by the Federal Reserve to increase the money supply and lower long-term interest rates. All of this must be done to help contain and reverse the accelerating global slowdown by halting the rapidly deepening American recession. We can only hope that other national leaders and central banks will follow suit.
  • Topic: Economics, Markets, Political Economy
  • Political Geography: United States, America
  • Author: Mark Falcoff
  • Publication Date: 04-2007
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: Since its financial crisis six years ago, Argentina has faded somewhat from the headlines. This is no doubt due in large part to the disproportionate space our media outlets now devote to Iraq and Iran, but also to the fact that other Latin American news stories—particularly Fidel Castro's surgery and the antics of Venezuela's clownish president Hugo Chávez—have dominated coverage of the area. Argentina is not, however, a negligent regional actor.
  • Topic: International Relations, Economics, Government
  • Political Geography: Iraq, Iran, Argentina, South America, Latin America, Venezuela
  • Author: John H. Makin
  • Publication Date: 12-2007
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: It is important at the outset to define the terms “financial firms” and “too much risk.” By “financial firms,” I mean commercial banks, investment banks, brokerages, and insurance companies that solicit and manage funds for the public. By “too much risk,” I mean actions undertaken by managers of financial firms that result in substantial losses for the shareholders (owners) of such firms. On an aggregate level, I call “systemic risks” those that emerge when regulators and policymakers are forced to choose between either reinforcing (with bailouts) the venturesome investing that created the problem or allowing substantial damage to depositors and shareholders in financial firms, and possibly to the economy as a whole.
  • Topic: Economics, International Trade and Finance, Markets
  • Political Geography: United States
  • Author: John H. Makin
  • Publication Date: 11-2007
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: Just as Wall Street was celebrating the presumed end of the latest financial crisis by pushing stocks to record highs, proclaiming continued strong earnings growth, and continuing to recite the mantra “slowdown, but no recession,” Treasury Secretary Henry Paulson provided a vivid reminder that the housing and mortgage crisis is not over. On Monday, October 15, while Citibank was reporting that compared with last year's results its third-quarter earnings had fallen by 57 percent, the Treasury's “super-SIV” plan was revealed. It seems that the Goldman Sachs alumni at Treasury—Paulson and his under secretary for domestic finance, Robert Steel—had become concerned that the offbalance- sheet special investment vehicles (SIVs) held by commercial banks might not be financeable. That would mean that not enough investors could be found to provide the short-term financing necessary to sustain SIVs, the repositories of hardto- value securitized mortgages that continue to plague bank balance sheets.
  • Topic: Economics, International Trade and Finance, Markets
  • Political Geography: United States
  • Author: John H. Makin
  • Publication Date: 10-2007
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: The global economic and financial picture is changing rapidly. A review of some of the key elements is in order, as the U.S. economy has slowed rapidly and the Federal Reserve has responded aggressively with rate cuts, while the Bank of England's tough policies pushed one of the United Kingdom's largest mortgage lenders, Northern Rock, to the brink of collapse as a bank run on that suddenly beleaguered institution ensued. Meanwhile, Japan, still the world's second-largest economy—though perhaps the least dynamic of the major ones—slipped into negative growth at a 1.2 percent annual rate in the second quarter after having initially reported growth over 2 percent. The rate-boost-obsessed Bank of Japan finally decided to stop raising rates, and, to add to the complexity of the picture, Japan's relatively new prime minister Shinzo Abe resigned, unable to provide the leadership sorely needed in a nation lacking economic and political direction.
  • Topic: Economics, International Trade and Finance, Markets
  • Political Geography: United States, Japan, United Kingdom, England
  • Author: John H. Makin
  • Publication Date: 09-2007
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: During a 10:00 a.m. conference call on August 17, 2007, Federal Reserve vice chairman Donald Kohn and New York Federal Reserve president Timothy Geithner were urging Citicorp chief executive Chuck Prince and his fellow big bank CEOs to use the Fed's discount window, which is set up to alleviate liquidity pressures on individual banks or on the banking system as a whole. Prince, the head of the world's largest bank (Or is it the second largest? No one really knows since bank balance sheets are so full of securities that cannot be priced.) may have been wishing that he had not chosen to offer a chillingly clear characterization of the global financial system a little more than five weeks earlier in a Financial Times interview on July 9, three weeks before the global credit markets began to seize up.
  • Topic: Economics, International Trade and Finance, Markets
  • Political Geography: United States
  • Author: John H. Makin
  • Publication Date: 08-2007
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: In a July 9 interview in Tokyo with the Financial Times about the surging, liquidity-driven financial sector, Citigroup chief executive Chuck Prince characterized the situation in global financial markets more insightfully than some investors might have wished: “When the music stops, in terms of liquidity, things will get complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing.” Prince elaborated further, saying that (as the article paraphrased it) “the way big Wall Street banks and hedge funds had picked up troubled subprime mortgage lenders was an example of how 'liquidity rushes in' to fill the gap as others spot a buying opportunity.”
  • Topic: Economics, International Trade and Finance, Markets
  • Political Geography: United States, Tokyo
  • Author: John H. Makin
  • Publication Date: 07-2007
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: The bond “conundrum” that Alan Greenspan spoke of toward the end of his tenure at the Federal Reserve is disappearing. Chairman Greenspan was drawing attention to unusually low longterm interest rates worldwide on bonds.1 More recently, however, in less than a month interest rates on U.S. ten-year notes have risen by 60 basis points with no change in expected inflation. The shift is all the more unusual because of its abruptness and relative magnitude: in statistical terms, it is a rise of three standard deviations in “real” (inflation-adjusted) rates in a market that has been quiet over the past five years. Moreover, the few “surprise” moves since the tech-stock bubble burst in 2000 have mostly been in a downward direction.
  • Topic: Economics, International Trade and Finance, Markets
  • Political Geography: United States
  • Author: John H. Makin
  • Publication Date: 06-2007
  • Content Type: Policy Brief
  • Institution: American Enterprise Institute for Public Policy Research
  • Abstract: The American consumer is a very persistent spending machine. It is American consumption growth running at higher than 4 percent annualized— well above its long-term average—that has kept the economy comfortably out of recession for the past six months as the housing slowdown has subtracted more than a percentage point from growth. Even with a substantial additional drag on the U.S. economy from other areas—inventory liquidation, weakening net exports, and rapidly rising gasoline prices—the American consumer's spending surge has still been enough to keep GDP growth in positive territory.
  • Topic: Economics, International Trade and Finance, Markets
  • Political Geography: United States, America