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Updated: 1 hour 35 min ago

Will a worsening outlook for inflation force the ECB to act?

Thu, 02/28/2019 - 15:42

PATIENCE, PERSISTENCE and prudence: the latest incarnation of the European Central Bank’s policy guidance appears to take a leaf out of early Christian writings on virtue. The central bank has counselled that, because it takes time for pricing pressures to recover from crisis years, it will keep interest rates unchanged at least through the summer of this year.

Its waiting game, though, is being sorely tested. Underlying pricing pressures have been doggedly low for years. Now gloomy economic news risks further delaying their recovery. At its monetary-policy meeting on March 7th the bank will have to consider whether to ease policy.

The headline inflation rate, which stood at 1.4% in January, has been buffeted around by movements in oil prices. But core inflation, which strips out volatile components such as food and energy prices, has proved difficult to budge. It has hovered around 1% since 2015. That is subdued compared with its average level in 2000-07, and far off the bank’s target of headline inflation below, but close to, 2%.

The bank had hoped that above-trend economic growth would drive up wages and eventually force companies to put up their consumer prices. Indeed, economic growth was robust in 2017 and early 2018; annual wage growth had risen to 2.5% by the third quarter of 2018, a percentage point...

Governments use receipt lotteries to boost tax compliance

Thu, 02/28/2019 - 15:42

PEOPLE PAY taxes because governments say they must and society says they should. But what if tax compliance became fun? Governments around the world are encouraging consumers to ask for receipts by turning them into lottery tickets. Taiwan was an early experimenter, in 1951. The past decade has seen a flurry of such schemes: China, the Czech Republic, Lithuania, Portugal, Romania and Slovakia all now have them. Latvia will launch one later this year.

The aim is to make it harder for retail businesses to evade taxes. Worldwide, 20-35% of government revenue comes from value-added taxes (VAT) or similar levies on consumption. But as much as a third of what should be collected is thought to be forfeited because businesses under-report revenues. The problem is not business-to-business transactions; firms can usually reclaim any VAT they pay if they keep proper records. But when selling direct to consumers, it is tempting to accept cash without recording the sale. A tax-dodging retailer can undercut law-abiding rivals or pocket a higher margin.

The idea of a receipt-lottery scheme is to give customers an incentive to ask for receipts, thereby forcing sales to be recorded and taxed. Receipts might be printed with a code that can then be submitted into a central draw. Prizes range from decent sums of money to cars and holidays...

The Federal Reserve reviews its monetary-policy framework

Thu, 02/28/2019 - 15:42

SARA GORATH was a little surprised when she was asked to speak at an event held by the Dallas Federal Reserve. What could a woman who runs a food bank have to say about monetary policy? On February 25th she found herself describing to Richard Clarida, vice-chairman of the Federal Reserve, the problems her customers face, including “how do you cut open a butternut squash if you don’t have a sharp knife?”

The event was the first of many “Fed Listens” sessions, part of an official review of the Fed’s monetary-policy framework. In addition to the likes of Ms Gorath, the Fed will hear from business and trade-union leaders, as well as academics. If the economy were a squash, monetary policymakers want advice on how to carve it.

Key questions will include whether the Fed should expand its toolkit and improve its communication. Also up for discussion is whether there might be better ways to meet its 2% inflation target (the level of the target itself will be taken as given). Perhaps, for example, rather than aiming for 2% regardless of recent history, policymakers should try to make up for past misses and aim for an average of 2% instead?

One could ask why the review is happening now; economists have argued over the Fed’s framework for years. The first official answer is that economic conditions are ripe for some chin-...

New data sources make it harder for executives to mislead investors

Thu, 02/28/2019 - 15:42

“GO STRAIGHT to the source” is a useful rule for anyone seeking accurate information. It suggests that equity investors can best glean insight into a firm by quizzing its chief executive. But bosses are not always reliable narrators. Their position encourages them to be overly optimistic about their company’s outlook. Sometimes they are clueless. And occasionally they are careless about what they tweet.

On February 25th the Securities and Exchange Commission (SEC), America’s financial-market regulator, asked a federal judge to hold Elon Musk, the chief executive of Tesla, a carmaker, in contempt. Mr Musk’s troubles with the SEC began in August when his tweet claiming that he had secured funding to take Tesla private caused the firm’s share price to soar. When the claim proved false, the SEC sued him for securities fraud. They settled in October, when Mr Musk stood down as Tesla’s chairman (he remains chief executive), paid a $20m fine and agreed to have his tweets approved by Tesla’s lawyers. He violated that last condition on February 20th by tweeting that Tesla would produce 500,000 vehicles this year—a claim he later had to clarify—without consulting the firm.

Regulators are not the only ones frustrated by Mr Musk’s antics. Investors have long clamoured for more insight into Tesla’s operations. Happily for investors...

Narendra Modi’s most distinctive economic policies were his worst

Thu, 02/28/2019 - 10:48

NARENDRA MODI, India’s prime minister, stormed to power so decisively in 2014 that it is difficult now to imagine any other outcome. But try. Imagine that the United Progressive Alliance (UPA), a tired coalition led (if that is the word) by the Congress party, had limped to victory instead. What economic policies might it have pursued in a third term? This is not an entirely idle question. Any assessment of Mr Modi’s economic record in his first stint as prime minister requires a counterfactual scenario against which to measure it. A third UPA government is one such baseline.

A Congress-led government would no doubt have built on some of its existing pet initiatives, such as a job guarantee, providing employment on public works to rural households, and an identification scheme, giving every Indian a unique identity number based on a fingerprint or an iris scan. It presumably would have allowed the central bank to continue to fight against inflation, aided by a drop in oil prices.

A third UPA government would surely have shied away from reforming India’s onerous labour laws or privatising poorly run public enterprises, like Air India. It probably would also have dallied with resolving the banking system’s bad loans, fearing it might otherwise be condemned for bailing out crony companies.

As the next election...

Why a global manufacturing slump is a recurring threat

Wed, 02/27/2019 - 17:39

THE GLOBAL economy had an inauspicious start to 2019. Markets went into a tailspin and America’s government was locked in a seemingly interminable shutdown. But matters have not played out as dismally as they might have. The government in Washington is open again. America and China appear close to a trade deal which, although modest in its achievements, would nonetheless reflect a welcome easing of tension between the world’s two biggest economies. Markets have smiled on these developments: the MSCI index of global shares has risen by 10% so far this year.

Good news notwithstanding, many economic indicators have undergone a remarkable downward shift since early 2018. Back then economists were celebrating the emergence of a broad-based expansion. When it assessed the world economy in January last year, the IMF hailed the “broadest synchronised global growth upsurge since 2010”. Now the progress on trade talks is occurring against a darker economic backdrop.

Global manufacturing activity has slowed (see chart). Economies that are especially reliant on trade, such as Germany and Japan, have suffered. Industrial production in the euro area has fallen over the past year. Both Japan and South Korea reported tumbling exports in January. The World Trade Organisation’s global trade outlook index has been falling for the past...