By
Anjani Trivedi
Sept. 2, 2014 2:51 a.m. ET
U.S. dollar notes. The greenback hit long-term highs against the euro and yen. Reuters
The U.S. dollar jumped to long-term highs against the euro and yen Tuesday, accelerating a two-month rally on expectations that U.S. monetary stimulus is near an end as Europe and Japan press ahead with their own.
The dollar climbed to 104.86 yen, the highest in seven months, while the euro dropped as low as $1.3113, the lowest in a year.
The dollar advanced in recent months as improving U.S. economic data rolled in, from improving consumer confidence to better labor market conditions. U.S. Federal Reserve officials signaled late last month that they were on track to end their extraordinary monetary stimulus, dubbed quantitative easing, in October. Quantitative easing in recent years pushed Treasury yields to record lows.
By contrast, investors say the European Central Bank, which meets Thursday, may further cut interest rates or undertake additional stimulus measures, including an asset-backed securities-purchase program, as the region's economy sputters. On Monday, data showed manufacturing activity in the eurozone in August slid to its lowest since last September.
"The market is coming to the view that the U.S. dollar will be stronger," said Khoon Goh, a currency strategist at ANZ in Singapore. There's a "divergence in the outlook for monetary policy and that is supportive of the U.S. dollar and bearish for the euro."
He forecast the euro to keep falling and the U.S. dollar to rise based on his expectation that the Federal Reserve will raise rates sooner than expected. Higher interest rates will likely boost Treasury yields and increase the allure of dollar-denominated bonds.
He's not alone. Bets that the dollar will climb against the euro, yen and pound increased for the sixth consecutive week—to a net $23.4 billion on futures contracts—during the week ending Aug. 26, according to the Commodity Futures Trading Commission. Bets against the euro increased by $1.7 billion to a net $21.6 billion, the highest since June 2012.
If the ECB continues or advances its easy-money policies when it meets in Frankfurt on Thursday, the euro's downward trend will continue, said James Brodie, chief investment officer of Sherpa Funds, a currency fund in Singapore.
"The long-term trend [for the euro] is lower," he said.
Still, Mr. Brodie said he recently cut his bets against the euro versus the dollar because it has become a crowded trade.
Bigger-picture macroeconomic fundamentals are starting to drive the currency markets, said Christopher Brandon, founding partner of Rhicon Currency Management in Singapore.
"We may start seeing more sensitivity to big economic releases," he said. "This should all create more volatility as we break out of the unbelievable complacency that has played markets for the last year."
Mr. Brandon said he recently started buying dollar positions against the yen and is short the euro.
He said he will also watch to see whether the U.S. dollar's strength against the euro and yen translate into strength against the Australian dollar, the pound and other major currencies, which could become a broader market theme for the last quarter of 2014.
Write to Anjani Trivedi at anjani.trivedi@wsj.com
http://online.wsj.com/articles/review-outlook-better-french-macron-economics-1409594239
Updated Sept. 2, 2014 1:24 a.m. ET
Maybe miracles do happen. A member of Francois Hollande's new cabinet, barely two days into the job, took on one of the centerpieces of the country's dysfunctional economic policy: the notorious 35-hour work week.
It's time to rethink labor policy, newly installed Economy Minister Emmanuel Macron said in an interview with Le Point magazine last week. After discussing his desire to simplify measures that force small firms to offer progressively more expensive benefits the more employees they hire, he suggests that the government also could "allow enterprises and branches, with a majority agreement [with workers], to waive the rules on working hours and compensation."
Congratulations to Mr. Macron for starting in the right place. The 35-hour work week, which forces employers to pay overtime or offer compensatory vacation time if employees exceed the limit, was introduced in 2000 as a jobs-creation measure. The Socialist government of the day argued that employers would have to hire more people to produce the same level of output if each worker worked less. Instead it has driven up French labor costs and deterred job-creating investment.
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French Economy minister Emmanuel Macron Agence France-Presse/Getty Images
Unions are furious about Mr. Macron's trial balloon, and President Hollande's skittishness about challenges from the far left of his Socialist Party may deter him from following through. Still, Mr. Macron's clear thinking on this and other issues makes for a refreshing change from predecessor Arnaud Montebourg, whose main economic idea was to chase away foreign investors.
Meanwhile, although Mr. Macron's thoughts on the work week have attracted the most attention, elsewhere in the interview he offered a broader principle that could apply to the Obama Administration as much as France:
"It's a matter of getting out of the trap where the accumulation of rights granted to workers transforms into handicaps for those who don't have jobs, especially young people and those from overseas. . . . We forget that historically the law served to protect the rights of the most vulnerable, but today the superabundance of laws can instead handicap the most vulnerable."
http://blogs.wsj.com/economics/2014/09/02/baby-boom-or-economy-bust-stern-warnings-about-chinas-falling-fertility-rate/?mod=WSJ_EC_RT_Blog&mod=marketbeat
6:52 am ET
Sep 2, 2014
A baby-themed ad in Taizhou.
Reuters
China needs a baby boom—and badly, researchers say.
“Get married soon and have lots of children.” That’s the advice that 49-year-old Huang Wenzheng gave to college students at a recent forum in Beijing about China’s population and urban policy.
Mr. Huang, one of the most outspoken one-child policy opponents in China, along with other activists and economists, said at the forum that China needs babies more urgently than ever before, and the country’s economic fate depends on whether Beijing can do more to encourage child births.
A shirking population would be detrimental to China’s development, “leading to a drop of China’s national power and even a decline of the civilization,” said Mr. Huang, a co-founder of the website Population and the Future, which promotes the right to have more than one child.
China’s total population continues to grow, but the nation’s working-age population—those between the ages of 16 and 59—has dropped two years in a row, raising concerns about a shrinking labor force and economic growth prospects. The share of the elderly, or those who are more than 65 years old, was 9.7% in 2013, up from 9.4% in 2012, official data showed.
A labor shortage in the short run would be followed by diminishing demand, which in the long run will likely hurt China’s job market and decrease the number of jobs being created, said Mr. Huang, who received a PhD in biostatistics at John Hopkins University.
Such a message isn’t falling on entirely deaf ears: late last year, Beijing moved to ease its decades-long one-child policy by allowing couples to have two children if one spouse is an only child.
But the policy’s impact has been limited. By the end of May, only 271,600 couples had applied for permission to give birth to a second child, with 241,300 couples having been given the permit, Yang Wenzhuang, a director overseeing family planning at the National Health and Family Planning Commission, said at a briefing in July.
Economists and researchers say such small steps are far from enough.
“I’ve been traveling to different parts of the country in recent months to find out exactly what changes are taking place in our society…but wherever I go those who actually qualify [to have a second child] is less than 5%,” said Gu Baochang, a professor at Renmin University. The reason why that figure is so low is in part because many rural residents were already permitted to have a second child. Likewise, China’s rules previously allowed individuals who have no siblings to give birth to a second child, so long as they were married to someone who matched those same conditions.
Faced with a rapidly aging population and declining numbers of the working-age, government officials have strongly hinted that they may need to raise the retirement age.
The ratio between the number of people who are paying into the country’s social insurance pool and those who receive pensions rose to 3.09 in 2012, up from 2.90 in 2003, the latest official data showed.
“When you are 60 years old, who would support you?” the silver-haired Mr. Gu said to an audience of about 400 students, researchers and journalists last week.
Results of the most recent census in 2010 showed that China’s fertility rates, or the number of births per 1,000 women, was 1.18. Large cities and Beijing and Shanghai were even lower, at around 0.7.
As China’s urbanization rate increases, with more farmers moving into the city, the fertility rate will drop further due to higher living costs, said Liang Jianzhang, a professor at Peking University.
To make it worse, China is seeing a rising number of “leftover women,” or middle-aged urban Chinese women who cannot find their Mr. Right—and unlike single women in developed nations, unmarried Chinese woman are not willing to have children, said Mr. Liang, who’s also the founder and chairman of Ctrip.com, Chinese online travel company.
“However you look at it, [the outlook of] China’s fertility rate seems more pessimistic than a lot of other countries,” he said, adding that in 10 to 20 years, China’s population will be greying at a pace even faster than that of a decade ago in Japan, where the elderly currently make up 25% of all residents. An aging population has partly contributed to the “lost decade” of the Japanese economy, economists have said.
But others at the forum disputed the notion that China should be encouraging a new baby boom.
“Sounds like we are returning to Chairman Mao’s line of thinking…I think we must not make that kind of mistake,” said Chen Zhiwu, a Yale University professor.
Mr. Huang, however, said that even if the government completely scraps the one-child policy, the country’s fertility rate still won’t be ‘normal,’ and will instead continue to stay low.
“It would be disastrous for China,” he said. “No doubt about that.”
September 2, 2014
The U.S. sugar industry is seeking to limit Mexican sugar imports, claiming that Mexico is the culprit behind falling sugar prices in the United States. But Vincent Smith, visiting scholar at the American Enterprise Institute, writes that the sugar lobby is off-base.
The sugar industry is already the recipient of taxpayer aid, with an expensive subsidy program that sends funds to sugar farmers with incomes above the national average. Still, producers are blaming Mexican imports for a recent fall in sugar prices, insisting that Mexican sugar producers are causing harm to American farmers. But while sugar prices have fallen, Smith explains that the drop is due to global factors:
Mexico has in fact increased its sugar production, as sugar export constraints were lifted in 2008, allowing Mexico to increase its sugar shipments to the United States. Though Mexican sugar imports have risen, total sugar imports into the United States have fallen from 2012 to 2013, making it unlikely that the Mexican imports are responsible for the fall in prices. In fact, Smith writes that the world began to produce more sugar, driving prices downward.
Additionally, Smith notes that Mexico's own sugar consumption has fallen, because the high sugar prices from 2010-2012 pushed food processors to use high fructose corn syrup instead of real sugar to sweeten foods and drinks. Significantly, Mexico gets that high fructose corn syrup from the United States.
Smith calls farm lobby arguments the "Alice in Wonderland world of economic logic."
Source: Vincent H. Smith, "A subsidy for the rich that will have you clutching your head," American Enterprise Institute, August 27, 2014.
A subsidy for the rich that will have you clutching your head
Vincent H. Smith | Real Clear Markets
August 27, 2014
Agricultural lobbies often make economists who care about the general economic wellbeing of society clutch their heads in their hands. Not only do these lobbies seek subsidies that will mainly flow to farmers who are much wealthier and have much higher incomes than the average U.S. household, but they also generally appear to pay little attention to any ancillary damage that may spillover to other sectors of the economy. In addition, many of the subsidy programs they support potentially violate U.S. commitments under international trade agreements which are helpful to consumers and other sectors of the American economy.
The sugar lobby is a current case in point. In March of this year, the American Sugar Coalition filed a petition with the U.S. International Trade Commission claiming that increased sugar imports from Mexico were causing "material injury" to American sugar producers and processors.
What is material injury? The answer, according the American Sugar Coalition, is any decline in sugar prices. And why is Mexico at fault? Because, under the terms of the 1994 North American Free Trade Agreement — NAFTA to most of us — Mexico's sugar industry has had completely open access to U.S. markets since 2008 (after its agreement to a 15-year delay ran out), and Mexico is now legally exporting more sugar to the United States.
But is Mexico really the major cause of lower U.S. sugar prices? The answer is almost certainly "No." Sugar prices in the United States have certainly fallen from recent record high levels in 2010, 2011 and 2012 (59.5 cents per pound at the peak). But the same price increases and price decreases occurred in world sugar prices. In fact, globally and in the United States, sugar prices are now close to their more typical long run average range of 13 cents to 18 cents a pound.
The real question is why were world and U.S. sugar prices so high between 2010 and 2012? The answer is a combination of events. One major reason was poor weather in major regions of the world where sugar cane grows in 2010 and 2011 (for example, the major hurricanes that swept through Central America and the Caribbean and the typhoons that damaged sugar crops in the Pacific). These weather events substantially reduced global sugar production causing world prices to reach record highs, much to the economic benefit of U.S sugar beet and cane farmers and processors.
Another factor was Brazil's extensive use of sugar to produce ethanol. In 2012 and 2013, the weather was better and global sugar production returned to long run trend levels. And, guess what? World sugar prices returned to their long run trend levels too.
So, to make the case that Mexico was the source of the material injury associated with lower sugar prices, one would have to ignore the role of global supply shocks in the world market for sugar.
What has really been asserted by the U.S. sugar lobby is that Mexico has increased its sugar production, through government subsidies, and perhaps allowed for transshipments of sugar from other countries as a means of increasing exports to the United States. Certainly, increased exports augment the amount of sugar supplied to the United States domestic market and put downward pressure on U.S prices. The result is that the U.S. government is then forced to use its price support program to prop up domestic sugar prices at the farm bill legislated intervention (loan rate) price of 24.09 cents per pound for refined sugar from sugar beets.
So, what has actually happened in Mexico since 2008 when constraints on their sugar exports to the U.S. were terminated under NAFTA? Well, Mexico's exports to the U.S. began to increase immediately after 2008, as did exports from many other countries. However, any effects on the U.S. domestic market were barely noticed and largely ignored as world and U.S. sugar prices surged between 2009 and 2012. But, when world prices declined in 2012 and 2013, total U.S. imports of sugar also fell, even though Mexico's exports to the United States continued to increase. It is difficult to believe that U.S. prices declined in 2012 and 2013 because of increased imports from Mexico, since total U.S. sugar imports have actually declined since 2011. The real culprit was the increase in world sugar production, including increased U.S. domestic sugar output.
So why have Mexico's exports of sugar increased since 2008? First, Mexico's sugar production has increased by about 25 percent, not least because of very high global prices between 2009 and 2011 which encouraged expansion of the industry, and also because of the prospect of expanded access to U.S. markets.
Second, over the same period, sugar consumption in Mexico fell by about 1 million tons, mainly because high sugar prices drove Mexico's food processing and soft drink sector to shift from using sugar to high fructose corn syrup (HFCS). Interestingly, about 30 years ago the same thing happened in the U.S. as a result of the U.S. sugar program (which costs 310 million U.S. consumers about $3.4 billion every year to enhance the incomes of about 20,000 sugar beet and cane growers and processors). And where does all that HFCS that Mexico now consumes come from? Answer; mainly the United States!!!
So, more domestic sugar production and less domestic sugar consumption left Mexico with more sugar to export. Though the U.S. sugar lobby would like to claim that Mexico's increased exports are partly caused by illegal shipments of sugar through Mexico from countries whose exports to the U.S. are legitimately constrained under the terms of the current WTO agreement, there is no evidence of that. Mexico's sugar imports from other countries have actually declined quite sharply since 2010.
What the sugar lobby should complain about are increased U.S. exports of HFCS to Mexican processors. In other words, they should complain that U.S. corn prices are relatively low, making HFCS competitive with sugar even at relatively low world sugar prices. And, by the way, the U.S. sugar lobby should also complain about their own members contributing to lower prices by increasing their sugar production substantially in recent years thanks to technical innovations associated in part with the use of GMO technologies.
And now, of course, we realize that once again when it comes to farm lobby arguments we have entered an Alice in Wonderland world of economic logic. The real shame is that in June of this year the U.S. International Trade Commission allowed the US sugar lobby's claims to move forward to a full hearing, finding myopic evidence of "material damage."
Hopefully, sanity will reassert itself; the sugar lobby won't get to restrict sugar imports from Mexico, further reducing the credibility of the U.S. government in its attempts to open markets to U.S. exporters in other sectors through trade negotiations. And, perhaps, the real costs of the U.S. sugar program will become more transparent as taxpayers, not just every consumer in the United States, start to bear more of the costs of subsidizing the U.S. sugar industry.
Vincent Smith is a visiting scholar at the American Enterprise Institute (AEI), and a professor of economics in the Department of Agricultural Economics at Montana State University.
http://online.wsj.com/articles/spains-service-sector-expands-at-fastest-pace-since-2006-1409730902
By
Paul Hannon
Updated Sept. 3, 2014 6:30 a.m. ET
Activity in the eurozone's private sector slowed more sharply in August than expected amid declines in France and Italy, indicating that the currency area is unlikely to emerge soon from economic stagnation.
Data firm Markit's monthly composite purchasing managers index—a measure of activity in the manufacturing and services sectors in the currency bloc—fell to 52.5 from 53.8 in July. The figure is the lowest level in 2014 to date, and lower than a preliminary estimate of 52.8.
As members of the European Central Bank's governing council prepared to gather for their monthly policy meeting on Thursday, the survey of 5,000 manufacturers and service providers also found that businesses in the region continued to cut their prices.
Figures released by the European Union's statistics agency showed retail sales fell 0.4% in July from June, a sign consumer spending remains weak, making it difficult for businesses to raise their prices and help bring a long period of very low inflation to an end.
The eurozone economy stagnated in the three months ending June 30 after slowing in the first quarter. The PMIs for July and August suggest growth is unlikely to accelerate in the third quarter, adding to pressure on the ECB to take measures to boost growth and inflation.
If the central bank's governing council were to take action Thursday, that would set the ECB further apart from other major central banks such as the Federal Reserve, which is expected to tighten policy around the middle of next year, and the Bank of England, which is seen doing so sooner.
Hopes for new measures in Europe to combat dangerously low inflation intensified after ECB President Mario Draghi said Aug. 22 that market-based measures of inflation expectations had weakened and that the ECB would use all its tools to meet its inflation target of just below 2% over the medium term.
While private-sector activity in both Italy and France declined, other parts of the currency area demonstrated more vitality. Activity in Ireland rose at its fastest pace in 14 years, while Spain's climbed at its fastest rate in 7½ years.
In a separate release, Ireland's Central Statistics Office said the rate of unemployment fell to 11.2% in August from 11.3% in July, continuing a steady decline from a postcrisis peak of 15.1% in February 2012.
"The impressive performances of Ireland and Spain will…encourage ECB President Mario Draghi to stress that recoveries in other countries are being held back by the lack of successful structural reforms rather than a lack of central bank stimulus," said Chris Williamson, Markit's chief economist.
Spain's services sector expanded at its fastest pace since the end of 2006 during August, as employment rose for the fifth straight month and new orders also climbed higher, a survey showed Wednesday.
The strong showing by the services sector is likely to ease concerns that Spain's economic recovery may already be moderating in the face of stagnation across the wider eurozone. The PMI for manufacturing fell in August, while figures released Tuesday recorded the first pickup in jobless claims in six months.
Spain's economy grew at its fastest quarterly pace in six years during the second quarter, with gross domestic product increasing by 0.6% from the three months to March. The revival of the Spanish economy—the eurozone's fourth-largest—has been one of the few positive developments for the currency area over the past nine months.
Write to Paul Hannon at paul.hannon@wsj.com
http://online.wsj.com/articles/the-draghi-default-1409861214
Updated Sept. 5, 2014 8:44 a.m. ET
You can't say Mario Draghi isn't doing his part. The European Central Bank President once again fulfilled the pleas of European politicians Thursday with another round of rate cuts and the promise of more monetary easing to come. Too bad the politicians keep using Mr. Draghi as an excuse to dodge their responsibility to pass pro-growth reforms.
Thus we are getting another round of the Draghi Default, in which monetary policy is supposed to do all the heavy growth lifting for Europe. The central banker obliged by cutting the main lending rate to 0.05% from 0.15%, even though he had said in June the central bank was already at "the zero bound." The ECB also increased the so-called negative deposit rate, or the rate banks will pay for holding deposits at the central bank, to minus-0.2% from minus-0.1%, in a bid to force more bank lending.
Mr. Draghi's larger goal is to keep talking down the euro exchange rate against the dollar in a bid to lift inflation in Europe closer to the ECB's 2% target. With inflation at 0.3% year over year in August, and the U.S. dollar getting stronger on the hope of faster U.S. growth, you can at least make a case for easing on monetary grounds within the ECB's mandate to maintain stable prices. Mr. Draghi had already talked down the euro to 1.315 from 1.40 to the dollar since May, and on Thursday it fell again to 1.295 after Mr. Draghi's announcement.
Yet further reductions in interest rates, even into negative territory, aren't enough to assuage euro-zone politicians. So in his press conference Thursday Mr. Draghi also announced a version of quantitative-easing lite. For political and legal reasons, expanded buying of government debt a la Washington, London and Tokyo is more difficult for the ECB. Mr. Draghi says he'll instead buy covered bonds and so-called asset-backed securities, or ABS, which are bundles of corporate and household loans.
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European Central Bank President Mario Draghi. Bloomberg News
Unlike U.S. credit markets, only some €300 billion ($390 billion) of ABS are outstanding in Europe at the moment. Mr. Draghi has been trying to expand such a market with the new cheap, medium-term lending program he announced in June, and perhaps the central bank's cash can stimulate a wider and deeper credit market.
The problem comes from believing that QE is some magic growth elixir. The world's Keynesians have convinced themselves that the U.S. is now growing faster than Europe simply because the Federal Reserve implemented QE while Europe hasn't. That overestimates QE's impact on U.S. growth, which has hardly been gangbusters at a mere 2% average annual rate. But it also underestimates the degree to which European economies are burdened by aging populations, high taxes, regulations on business, and constricted labor markets.
Mr. Draghi understands this, which is why he keeps repeating as he did Thursday that Europe needs "ambitious and important" reforms "first and foremost" to return to growth. Yet those reforms never arrive, and now the politicians have another excuse to delay as they wait for an ABS program to start next year. This has already happened once on Mr. Draghi's watch, when his promise of unlimited sovereign bond purchases in 2012 pushed government bond yields so low so fast that it eased credit-market pressure on governments to reform.
The other danger is that Europe will interpret the ECB's opening for more fiscal policy stimulus as an excuse for more government spending. Mr. Draghi has hinted at easing the EU's deficit limits. This would make sense if politicians followed through with pro-growth tax cuts as Spain has. But another burst of government spending won't spur growth and would only set the euro zone up for more tax-raising austerity later.
Europe's main economic problem is a political class that doesn't want to address the structural impediments to growth that have nothing to do with monetary policy. Mr. Draghi is being asked to perform miracles he can't deliver.
Sep 8, 5:19 AM EDT
Japan says economy contracted 7.1 percent in 2Q
By ELAINE KURTENBACH
AP Business Writer
TOKYO (AP) -- Japan's economy shrank more sharply in the second quarter than first estimated and the latest indicators suggest only a modest bounce back since then.
The world's third-largest economy contracted at an annualized rate of 7.1 percent in the April-June quarter, according to updated government figures Monday. The initial estimate released earlier this month said the economy contracted 6.8 percent. Business investment fell more than twice as much as first estimated.
The economy's contraction was expected after Japan increased its sales tax from 5 percent to 8 percent on April 1.
So far, data for the current July-September quarter suggest any rebound in growth is likely to be modest and slow in materializing.
A government survey of "economy watchers" released Monday showed confidence in the economy's prospects deteriorated in August.
Business activity surged early in the year, with the economy growing 6 percent in January-March, as consumers and businesses stepped up purchases to avoid paying more tax.
Prime Minister Shinzo Abe has championed an aggressive stimulus program aimed at ending chronic deflation that has discouraged corporate investment and dragged on growth. A sustainable recovery will require strong corporate and private spending, since exports and public spending have so far done little to lift growth.
Abe will be watching data from the current quarter as he decides later in the year whether to go ahead with a further 2 point increase in the sales tax to 10 percent in 2015.
Surveys show the public opposes a further tax increase, though increases are needed to counter ballooning public debt, which now is more than twice the size of the economy.
The revised data Monday show business investment fell more than twice as much as estimated before, or 5.1 percent, while private residential spending sank 10.4 percent in annual terms.
"Theoretically, there should be no impact from the consumption tax increase on corporate spending or long-term corporate planning, but a large number of Japanese corporations seemed to see a large impact from the hike on final demand," said Junko Nishioka, an economist at RBS Japan Securities in Tokyo.
"We are not that pessimistic for the future picture of the Japanese economy," Nishioka said, forecasting a "V-shaped recovery," supported by stronger wage growth.
Conditions remained weak in July. Real incomes fell 6.2 percent from a year earlier and household spending dropped.
The survey of economy watches, a grassroots assortment of service industry workers and others thought to have a good real-time sense of business activity, was at 47.4 in August, down from 51.3 in July and the first drop in five months.
"Industrial production was still 2 percent below the second quarter average in July, and we have yet to see a turnaround in capital spending," Marcel Thieliant of Capital Economics said in a commentary.
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http://online.wsj.com/articles/u-s-trade-gap-narrowed-in-july-1409834222
By
Josh Mitchell
Updated Sept. 4, 2014 9:57 a.m. ET
The July petroleum deficit reached the lowest level since July 2009. Here, a Phillips 66 refinery in Los Angeles. Associated Press
WASHINGTON—The U.S. trade gap narrowed in July, reflecting stronger demand for American goods abroad that could boost the factory sector in coming months.
The trade deficit shrank 0.6% to $40.5 billion in July from June as both exports and imports rose, the Commerce Department said Thursday. Exports climbed 0.9% while imports increased 0.7%. Economists surveyed by The Wall Street Journal had forecast a July trade deficit of $42.5 billion.
The report showed growing global demand for American goods such as autos and industrial supplies, a development that could ease concerns of woes in Europe and Asia weighing on the U.S. economy.
Economists indicated they may boost their expectations for third-quarter growth based on the report, which combined with others to show a strengthening American manufacturing sector.
"The gains in both exports and import activity points to continued positive momentum in U.S. economic activity, and also indicates some improvement in global activity and demand," TD Securities economist Millan Mulraine said in a note to clients.
Forecasting firm Macroeconomic Advisers raised its expectation of third-quarter growth to a 3.1% annual rate from 2.7%.
Monthly trade figures are volatile and often revised. And some economists said the latest figures may have overstated strength in the economy.
A smaller trade deficit generally helps the economy over the long term because it means a growing share of money in the U.S. is being spent on goods and services domestically rather than abroad.
Thursday's report showed the U.S. economy continuing to benefit from energy production, with the July petroleum deficit reaching the lowest level since May 2009.
Exports of overall goods reached a record, without adjusting for inflation. That reflected higher shipments of automobiles and car parts, along with industrial supplies and capital goods. Exports of foods and consumer goods fell.
The rise in imports suggests businesses and consumers stepped up spending, though only on certain items, heading into the second half of the year. Imports of cars, industrial supplies and foods climbed. However, imports of consumer goods and capital goods declined.
Consumer and business spending rebounded in the second quarter from a first quarter marred by snowstorms and severely cold weather. Consumer spending has also been bolstered by stronger job growth this year. Economists expect higher household outlays to lead to steady economic growth in the second half of the year.
The economy grew at a 4.2% annual pace in the second quarter after contracting at a 2.1% rate in the first three months of the year. Many economists project growth to clock in at roughly a 3% rate in the current quarter.
Other signs point to a strengthening manufacturing sector. The Institute for Supply Management said earlier this week its purchasing managers index climbed to 59 last month, the best reading since March 2011. Readings above 50 indicate expanding activity in the factory sector. A subindex of exports also climbed, to 55 in August from 53 in July.
Thursday's report showed the trade gap with China expanded 2.7% to $30.9 billion, the highest on record. Exports to China declined while imports from the country to the U.S. rose.
Write to Josh Mitchell at joshua.mitchell@wsj.com
http://online.wsj.com/articles/burton-g-malkiel-are-stock-prices-headed-for-a-fall-1409178881
Are Stock Prices Headed for a Fall?
By
Burton G. Malkiel
Aug. 27, 2014 6:34 p.m. ET
There is a disagreement about the sustainability of current lofty stock market valuations.
One camp argues that the market is dangerously overvalued. The so-called CAPE ratio—the price-earnings multiple for the market based on cyclically adjusted earnings averaged over the past 10 years—stands at over 25, well above its long-run average of about 15. Today's CAPE has been exceeded only during the market peaks of 1929, early 2000 and 2007.
The CAPE does a reasonably good job of predicting 10-year equity returns. High CAPEs predict low future returns. Low CAPEs are often followed by generous stock-market returns. The CAPE is not useful in predicting returns one or two years into the future.
Getty Images/iStockphoto
Another group of forecasters are convinced that stocks are reasonably valued. The main competitors for stocks in individual and institutional portfolios are bonds. And yields on fixed-income securities are at all-time lows. Short-term interest rates are essentially zero, and the yield on the 10-year U.S. Treasury bond is only 2.4%. Investors seeking a reasonable rate of return have few places to go other than equities. This camp believes equities are a particularly attractive option in the menu offered by today's capital markets.
So who is correct? The answer is that both may be.
In principle, stocks should be priced as the discounted present value of the future cash flows from dividends and capital gains. The discount rate that should be used must reflect the rate on low-risk securities, such as 10-year U.S. Treasury issues, plus some premium to reflect the riskiness of the stock market, which at times generates large losses.
If we add three or four percentage points to the current low Treasury yield, we still get a low discount rate that can justify high stock prices. And today's low interest rates may persist. The world is likely to experience a long period of abundant productive and labor capacity with attendant slow growth, along with low interest rates.
While continued low rates can justify high stock prices, the CAPE followers are correct as well. Long-run equity returns from today's price levels are likely to be considerably lower than their 10% long-run average.
So what's an investor to do?
First, recognize that we are likely to be in a low-return environment for some time. Both stocks and bonds are likely to generate lower long-run returns than in the past. If you have established your retirement savings plan assuming double-digit returns, it is time to recalibrate and save more. The same goes for institutional investors hoping to ensure that their pensions are adequately funded.
Second, don't thinking you can time the market and sell your stocks now, hoping to get back in later after there is a correction. No one can consistently time the market, and you are more likely to get it wrong than right.
CAPE ratios were highly elevated when former Federal Reserve Chairman Alan Greenspan made his famous "irrational exuberance" speech in December 1996, but the market rallied strongly through March of 2000. Stay broadly diversified with a portfolio that is consistent with your age, financial obligations and risk tolerance.
Third, within equity and fixed-income markets, look for opportunities that seem relatively well priced and ensure that they have a place in your portfolio.
All equity portfolios should include emerging markets. Emerging markets, accessible through broadly diversified, low-cost, emerging-market exchange traded funds, represent half of global economic activity. They are growing far more rapidly than the developed economies of North America, Europe and Japan and are likely to continue to do so. They generally have less government indebtedness and much younger populations.
Emerging equity markets also have far more attractive valuations. CAPEs for emerging markets at less than 15 are little more than half the levels in the U.S., and they stand at ratios close to their all-time lows. Just as CAPEs do reasonably well predicting long-run returns in the U.S., so they are also effective predictors in emerging markets, and today they signal generous returns.
Within the fixed-income markets, tax-exempt bonds represent unusually good relative value. The bankruptcy of Detroit and the well-publicized problems of over-indebted Puerto Rico have cast a pall over the entire U.S. municipal bond market, leading to lower bond prices and higher yields.
Tax-exempt bonds of municipalities with excellent credit sell at yields higher than those available on Treasury securities. Closed-end investment companies that hold municipal bond portfolios are traded on national exchanges at discounts from their net asset values and with yields over 6%. While they employ moderate leverage, and therefore do involve some extra risk, they are worthy of consideration in a market where opportunities for generous yields are few and far between.
Mr. Malkiel is the author of "A Random Walk Down Wall Street" (W.W. Norton). The revised 11th edition will be available later this year.
http://online.wsj.com/articles/a-tough-lesson-for-college-textbook-publishers-1409182139
By
Josh Mitchell
Aug. 27, 2014 7:29 p.m. ET
Nearly two-thirds of college students have skipped buying a course textbook at least once because it was too expensive. The price of new printed textbooks has jumped an average of 6% a year over the past decade. MCT/Zuma Press
After years of nearly unfettered pricing power, the $7 billion college-textbook industry is being upended by students like Amanda McQueen.
The 24-year-old George Washington University graduate student rarely buys new, printed textbooks—long the bread and butter of publisher profits. She buys the books used—often at half the price—on sites like Amazon, or skips the purchase altogether.
"It's so easy to find somebody posting a scanned copy" on online sites like Scribd, an e-book subscription service that allows members to upload materials, says Ms. McQueen, a North Carolina native working toward a master-of-public-health degree.
Debt-weary college and grad students are opting for cheaper or even free textbook versions, forcing major publishers to revamp their business models. The publishers are shifting toward digital products, such as software that blends textbook material with videos and diagnostic quizzes to track a student's progress mid-semester.
Nearly two-thirds of college students have skipped buying a course textbook at least once because it cost too much, the Student PIRGs, a nonprofit advocacy group, reported earlier this year.
Some opt instead to download textbooks illegally. A report last month by the Book Industry Study Group, an industry trade group, found that 25% of students photocopied or scanned textbooks from other students, up from 17% in 2012. The number of students who acquired textbooks from a pirate website climbed to 19% from 11%.
Those trends come at a time of steadily rising textbook prices. The price of new printed textbooks has jumped an average of 6% a year over the past decade, triple the rate of overall inflation, government figures show, making textbooks among the fastest-growing consumer expenses in the U.S.
Rising prices and changing buying habits have taken a toll.
Sales of new printed textbooks made up 38% of McGraw-Hill Education's higher-ed revenue in 2013, down from 71% in 2010, said Chief Executive and President David Levin.
Meanwhile, sales of cheaper "customized" books—individual chapters modified by professors for a particular course—are rising at a double-digit percentage. So are computer-software programs, which are generally cheaper than print textbooks. They offer the contents of textbooks and track students' progress with quizzes, Mr. Levin said.
"Our business is having to shift," he added. "It probably was slow in shifting. And the last couple of years have seen a radical transformation."
The changing landscape is straining publishers' revenue at a time when they are already grappling with a decline in U.S. college enrollment.
London-based publisher Pearson PSON.LN -0.62% PLC, which derives 60% of its sales from North America, reported last month a 6.5% sales drop in the first half of 2014. That reflected a strengthening British pound relative to the dollar, declining revenue from printed textbooks and lower college enrollments.
Pearson is focusing on new products, including interactive software that offers the same content as traditional textbooks but presents the experience in online games to keep students more interested. The software is intended to improve student outcomes and graduation rates, a growing concern among colleges.
Don Kilburn, president of Pearson's North America unit, says the industry is increasingly being asked by schools to design texts "in a way that actually solves a specific problem or comes up with a measurable outcome around that problem."
"That's been a pretty big shift, at least for Pearson," he said.
Overall student debt has doubled since 2007, reflecting a rise in borrowers along with increasing individual debt burdens. Publishers say textbooks are only a fraction of a student's costs—typically between $600 to $1,200 a semester, studies show—but students still feel the pinch.
Students are spending less on textbooks than several years ago, indicating they are becoming more cost conscious. The average amount students spent on textbooks—whether new, used, rented or electronic—fell 17% between 2010 and this spring, says research firm Student Monitor, which polls students.
One challenge for publishers: Even as print-textbook revenue declines, e-books aren't taking off. Many students still prefer to hold print books so they can write in the margins, dog-ear pages, highlight material and easily refer back to sections, experts say.
Among full-time undergraduate college students, e-textbooks—purchased or rented—made up only 8% of all textbooks purchased, according to Student Monitor.
Still, e-books are growing slowly, and publishers believe software that offers an interactive experience while teaching the content of a traditional textbook will drive sales in the near future.
Luis Cartagenova, a 21-year-old rising senior at Yale University, said he still prefers print textbooks, mainly so he can write in the margins. But he has found a way to cut costs.
During his freshman year, the molecular cellular development biology major says, he spent more than $1,500 on new textbooks. Now, he spends several hundred dollars a semester on textbooks, buying them on Amazon or through a campus-run program that sells used textbooks for charity.
"I'd rather not have to go into debt or really start racking up the credit-card bills on books," he says.
Write to Josh Mitchell at joshua.mitchell@wsj.com
By Byron York | August 27, 2014 | 7:57 pm
Topics: Beltway Confidential Congress Immigration Border Security Law
entral American migrants ride a freight train during their journey toward the U.S.-Mexico border...
Of all the arguments made in the long and contentious debate over immigration reform, the one heard most often, from all sides, is that our immigration system is "broken." President Obama, John Boehner, Harry Reid, Mitch McConnell, Marco Rubio, Chuck Schumer, John McCain, Dick Durbin — just about every politician who has ever weighed in on the issue has said it.
The only problem is, our immigration system is not broken. The part of the system that lets people into the United States is working — not without flaws, of course, but successfully managing the country's immigration needs every day. And while the part that keeps people out of the country, or expels them if they overstay their permission to be here, is not working very well, it's not because the system is broken, but because Congress and the president do not want it to work.
First, the part that lets people in. The United States grants legal permanent resident status — better known as a green card — to about one million people each year. The actual numbers, according to the Department of Homeland Security 2012 Yearbook of Immigration Statistics — the most recent full set of data available — were 1,031,631 in 2012; 1,062,040 in 2011; 1,042,625 in 2010; and so on going back. Legal permanent resident status is what it sounds: a recipient can stay in the United States permanently, and become a citizen if he or she chooses.
"We are the most generous nation on earth to immigrants, allowing over one million people a year to come here legally," wrote Sen. Rubio in 2013. The new million each year come from all around the world, with heavy concentrations in a few places. According to the Yearbook, in 2012, 416,488 came from Asia, while 389,526 came from Mexico, the Caribbean and Central America. That's a lot of the million right there; other sources include 103,685 from Africa and 86,956 from Europe.
Of the total, the vast majority — 680,799 in 2012 — were given green cards because they have family members in the United States. A much smaller group, 143,998, were admitted for employment reasons. The rest were given refugee status, or asylum, or came from the so-called "diversity" lottery.
Under current law — that is, if there is no immigration reform at all — those grants of legal permanent resident status will continue, million after million, year after year, for the foreseeable future. Under the Gang of Eight comprehensive immigration reform bill passed by the Senate last year, the one million each year would increase dramatically, perhaps even doubling to about two million. That's one of the key debates, if not the key debate, about immigration reform: Is it wise to greatly increase the already large number of immigrants admitted to the country each year, especially in a time of high unemployment and economic anxiety?
Of course the U.S. admits many more people from foreign countries each year under different terms. In 2012, the U.S. gave out about 527,000 student and exchange visas. (These numbers come from the State Department and are a little less precise than those from DHS.) In the same year, there were about 690,000 visas granted to temporary workers and their families, a number which included about 135,000 of the much-discussed H-1B visas awarded to skilled workers.
Again, those numbers would increase dramatically under the Gang of Eight reform bill. But the current figures in no way suggest that the system is broken. In fact, they show that it is working, perhaps more effectively than those who favor limiting immigration would like.
Now, the parts of the system that keep people out. Those parts don't work as well, but not necessarily because anything is broken.
The most egregious failure is what is known as the visa entry-exit system. Experts estimate that close to 40 percent of the immigrants currently in the U.S. illegally originally came here legally — and then remained beyond their permission to stay. In the last two decades, Congress has passed several laws that included provisions to stop so-called visa overstays; among them are the Illegal Immigration Reform and Immigrant Responsibility Act of 1996; the Immigration and Naturalization Service Data Management Improvement Act of 2000; the USA PATRIOT Act of 2001; the Enhanced Border Security and Visa Entry Reform Act of 2002; and the Intelligence Reform and Terrorism Prevention Act of 2004.
But virtually nothing has been done in all those years, through both Democratic and Republican administrations and Congresses, which suggests that the U.S. does not stop visa overstays because its political leaders do not want to. The Gang of Eight bill includes a new entry-exit system, which would allegedly crack down on visa overstays. Given recent history, however, there is absolutely no reason to believe that would actually happen were the bill to become law. There's also no reason to say the system is broken if the political leadership of the U.S. government is actively preventing it from working.
Then there is border security and interior enforcement. The 2012 DHS Yearbook includes a figure called "Aliens Apprehended," which counts illegal immigrants caught at the border and in the states. The number has been going down through the Obama administration —from 869,828 in 2009 to 752,307 in 2010 to 641,601 in 2011 to 643,474 in 2012. (The 2012 figure is lower than any year since 1973.) Some of the decrease is due to the fact that a weak U.S. economy attracts fewer illegal immigrants. But much of it is because the Obama administration has made a deliberate decision to downgrade interior enforcement.
As for deportations, the illegal immigrants sent home by the U.S. each year fall into two broad categories: those who are "removed" from the country and those who are "returned" to their home countries. There's a difference. Removal is the more serious of the two; an illegal immigrant is deemed removed from the U.S. based on an order by a judge or immigration authorities and will face criminal penalties if he tries to come back. An illegal immigrant who is returned is sent back to his home country but would not face criminal penalties if he tries to return to the U.S. illegally and is eligible to come to the U.S. legally in the future.
The number of removals has gone up each year pretty steadily for the last 20 years, including during the Obama administration. The most recent numbers were 383,031 removals in 2010; 388,409 in 2011; and 419,384 in 2012. But the number of returns has fallen dramatically under Obama: 474,275 in 2010 to 322,164 in 2011 to 229,968 in 2012. If you add removals and returns together, total deportations have fallen significantly under Obama: 857,306 in 2010 to 710,573 in 2011 to 649,352 in 2012.
Does that mean the system is broken? No — it means the Obama administration has made a policy decision to expel fewer people who entered the country illegally.
There are a number of changes that nearly everyone agrees should be made in the immigration system. The most obvious concerns the green cards handed out each year. Most people involved in the immigration reform debate — for and against — would like to see the balance between family-related green cards and skills-related green cards changed. That is, out of the one million green cards granted each year, many U.S. policymakers would prefer giving more to skilled workers and fewer to family members of people already here. A change like that could be done by specific, targeted legislation that would probably pass both houses of Congress easily, if lawmakers were not so at odds over a larger reform bill.
Most importantly, a change like that would represent a decision to adjust the nation's immigration priorities within a system that is already working, without implementing a grand, far-reaching plan to remake the system under the guise of fixing it.
So if the system basically works — and in some instances, does not work only because American political leaders don't want it to — then why do we hear so often that the system is broken? Because supporters of comprehensive reform believe that is the best way to convince the public that action is urgently needed. Listening to some of the most zealous reformers, an average voter might never know that the U.S. successfully admits so many immigrants, temporarily and permanently, each year.
The immigration reform debate touches on a lot of different subjects. But the heart of the argument is this: Supporters of measures like the Gang of Eight bill want to admit a lot more immigrants into the United States than are admitted under current law. Opponents believe the U.S. admits enough already, especially given today's straitened economic conditions.
The public is certainly with the opponents. In June, Gallup asked a sample of 1,027 Americans this question: "In your view, should immigration be kept at its present level, increased, or decreased?" Forty-one percent said they want to see immigration decreased, while 33 percent wanted it kept at its present level — making a majority of 74 percent who do not want higher levels of immigration. Just 22 percent said they wanted to see immigration increased. Broken down by party, 69 percent of Democrats wanted to see immigration kept the same or decreased, while 73 percent of independents and 84 percent of Republicans felt the same.
Those are overwhelming, compelling majorities opposing the very increases in immigration levels in the Gang of Eight and similar proposals.
But the public's opinion matters only so much. There are still important, and in some cases vastly wealthy, interest groups that want to greatly increase the number of immigrants admitted to the United States. Some genuinely want to bring in more immigrants than the millions currently allowed because they believe it would be good for the country. But for others, a desire for more immigrants just happens to coincide with an advantage to themselves that such an increase would bring: more low-wage workers, or more potential voters or more potential union members.
Given the money and political influence behind one side, and the public opinion behind the other, the debate is not likely to end anytime soon. But in the future the president and lawmakers should at least be honest enough to stop calling the immigration system broken, when in fact they just want to expand a system that is already working.
By
Min Zeng
Aug. 28, 2014 6:49 p.m. ET
Government-bond yields touched new lows in the U.S. and Germany, as investors piled anew into ultrasafe debt amid growing concern about the pace of European growth.
The gains underscore the dynamics that have made government bonds a surprise star performer this year—a winning streak many analysts now expect will continue.
When 2014 started, many Wall Street strategists predicted interest rates would rise, sending bond prices lower, as the U.S. economy picked up speed and the Federal Reserve reduced its monthly stimulus, due to end in October.
Instead, government-bond prices have surged amid softness in Europe's economy and geopolitical tumult, sending yields down to levels rarely seen. Bonds in Europe have gained even more than those in the U.S., fueled by slowing economic growth and fears that trouble in Ukraine could spiral.
The rally in European debt has made U.S. government bonds look like a relative bargain, some investors say.
That is a concept many analysts and traders would have scoffed at not long ago, amid concerns about U.S. finances and fears accommodative central-bank policy would unleash long-quiescent inflation.
"There will be people looking for higher income in the U.S. bond market," said Larry Milstein, a bond trader at R.W. Pressprich & Co. in New York. "We are still in a low-yield world."
Thursday's bond-price rally was driven by expectations the European Central Bank will follow in the footsteps of the U.S. Federal Reserve and commit to purchasing bonds to boost economic growth. Expected ECB bond purchases drive up prices by adding a new source of demand, traders said.
Data released Thursday showed German inflation stabilized at a very low rate in August, while Spanish consumer prices fell at an accelerated pace.
The yield on the benchmark U.S. 10-year note fell to 2.334%, the lowest closing level since June 2013. Yields fall as prices rise.
The 10-year German yield settled at 0.885%.
Bond buyers shrugged off upbeat U.S. data showing the nation's economy advanced at a brisk 4.2% annualized clip last quarter, while pending purchases of existing homes rose 3.3% in July.
Investors often sell bonds in response to strong economic news, expecting that vigorous growth will lead to higher inflation and rising interest rates, which tend to reduce bond prices.
"Global growth remains weak,'' said James Camp, head of fixed income at Eagle Asset Management, which has about $31 billion in assets under management.
Mr. Camp said he has bought more long-dated Treasury bonds in recent weeks and has dialed back his exposure to riskier bonds.
Separate reports showing a drop in business and consumer confidence in the euro zone—as well as a slight uptick in German unemployment—underscored the fragility of the world's second-largest economic region and signaled that, after stalling in the second quarter, the economy looks likely to struggle to expand much this quarter.
ECB President Mario Draghi last week flagged concerns about falling inflation expectations. Some investors say the ECB may buy sovereign bonds to reduce the risk of deflation—falling prices that sap economic growth by discouraging spending by consumers and businesses.
U.S. bonds offer superior yields compared with those of some other developed countries.
Adding to the appeal of U.S. bonds for buyers from other countries, the dollar has strengthened by about 1.5% this month against the euro, this week hitting its highest level since September 2013.
"The lower the German yields go, the more attractive U.S. yields look by comparison," said Jim Caron, global fixed-income portfolio manager at Morgan Stanley Investment Management, which had $396 billion in assets under management on June 30.
Also adding to gains in U.S. 10-year debt: the expectation that shorter-maturity notes will be hit harder in any bond selloff should rates rise.
The extra yield an investor obtains to own a 10-year Treasury note rather than a two-year note was 1.83 percentage points Thursday, the smallest since June 2013.
Treasury bonds maturing in a decade or more have produced a total return, reflecting price appreciation and dividend or interest payments, of 16.6% this year through Wednesday, according to Barclays BARC.LN +0.16% PLC.
The S&P 500 total return this year is 9.7%, according to FactSet.
Some investors caution the tide could turn. Brian Schneider, head of U.S. rates portfolio management at Invesco, which has $798.8 billion in global assets under management, said strong U.S. growth could prompt the Fed to raise rates sooner than previously anticipated.
Many investors expect the Fed some time next year to begin raising rates, which have been held near zero since the height of the financial crisis in late 2008.
Others cite the risk the ECB will disappoint investors by taking less action than forecast.
But Mr. Milstein of R.W. Pressprich said he believes the 10-year U.S. yield could fall to 2% if euro-zone bond yields continue to slide.— Emese Bartha contributed to this article.
By
Phil Gramm And
Michael Solon
Aug. 29, 2014 6:58 p.m. ET
In forging Turkey out of the ruins of the Ottoman Empire, Mustafa Kemal Atatürk warned his countrymen in 1923 that all they had accomplished hung in a most tenuous balance: "No matter how great they are, political and military victories cannot endure unless they are crowned by economic triumphs." Ninety years later, Atatürk's wisdom applies not just to Turkey at its inception but to all people, in all times, who seek to win and preserve freedom and independence.
There is no better modern example of the power of an economic triumph than the experience of Ukraine and Poland in the post-Cold War era. With the fall of the Berlin Wall and the collapse of the U.S.S.R., both nations—which emerged from Soviet domination with virtually identical economic and political systems—suddenly faced the rarest of Central European conditions: independence.
Enlarge Image
A homeless man begs for money in central Kiev in 2012. Corbis
Ukraine has largely squandered its economic potential with pervasive corruption, statist cronyism and government control. With budget deficits as high as 14.4% of GDP, hyperinflation and an underground economy approaching 50% of all economic activity, Ukraine's economy since 1992 has grown about one-fifth as much as the economy of its smaller neighbor Belarus. The per capita income of Ukraine, in U.S. dollar equivalence, has grown to only $3,900 in 2013 from a base of $1,570 in 1990.
Today, the whole world is painfully aware that Ukraine's economic failure has endangered its freedom and independence, and forced it to courageously fight for both.
By most conventional measures, Ukraine should be a wealthy country. It has world-class agricultural land, it is rich in hydrocarbons and mineral resources, and it possesses a well-educated labor force. Yet Ukraine remains poor, because while successful Central European nations have replaced their central-planning institutions with market-based reforms, Ukraine has never been able to break the crippling chains of collectivism. Only now is Ukraine seriously attempting to limit government, control spending, stop the growth of its national debt, and stabilize the value of its currency.
These are reforms that Poland instituted almost a quarter of a century ago, and dramatically transforming its economy. By employing free-market principles and unleashing the genius of its people, Poland has triggered an economic triumph as per capita GDP, in U.S. dollar equivalence, soared to more than $13,432 by 2013 from $1,683 in 1990. Today Poland is the fastest-growing economy in Europe. Its economic success and democratic reforms have earned it European Union membership, and Poland's once fleeting sovereignty is now anchored in NATO.
The man largely responsible for Poland's transformation is Leszek Balcerowicz, the former finance minister who was later governor of Poland's Central Bank. In transforming a nation from a state-based collectivist economy to a market-oriented economy, Mr. Balcerowicz in 1989 had no manual to read or modern example to follow.
He faced two choices: act boldly using what he called "shock therapy" or act slowly and incrementally. Bold action had little chance of success but incrementalism had no chance of success. As Mr. Balcerowicz put it, "a very risky option is always better than a hopeless option."
The concept of free markets was foreign to the Polish people, but Mr. Balcerowicz understood that economic freedom was a necessary condition for prosperity and, ultimately, for the preservation of political freedom and national independence. The Balcerowicz Plan was built around permitting state firms to go bankrupt, banning deficit financing, and maintaining a sound currency. It ended artificially low interest rate loans for state firms, opened up international trade and instituted currency convertibility.
His plan was signed into law on December 31, 1989 and within days, inflation—which had reached an annual rate of 17,000%—started to plummet. Poland pegged the value of the zloty to the dollar, permitting redenomination of the zloty five years later by crossing out four zeros. Once the reforms were in place, goods started showing up first in the trunks of cars, then in street stands, in small shops and ultimately in large stores. A miracle transition was under way and the rest is history.
By crowning its great political victory in achieving independence with economic triumph, Poland has established itself as a Western nation. Whereas the people of Ukraine are divided by language and heritage, in Poland people are united by prosperity and a shared hope for the future. By using its political victory to remake its economy, Poland created the prosperity that has strengthened and solidified its freedom and independence.
Atatürk's dictum is a warning that without economic growth and prosperity, political and military victories can be transient and historically inconsequential. President Obama has won historic political victories. ObamaCare, the Dodd-Frank financial reforms, the largest stimulus program in American history and the most pervasive expansion of regulatory authority in three quarters of a century largely fulfilled a progressive agenda that predated the 20th century. While Mr. Obama has transformed American society, his program has failed to produce an economic triumph, a failure that a free society will not long tolerate.
The Reagan program, begun in the early 1980s, dominated the economic policy of America for a quarter century because it produced broad-based prosperity in what now seems to have been a golden age. While the Reagan program has been largely repealed, in the midst of the current failed recovery the memory of its success burns ever more brightly.
But more than it needs memories, America needs a new generation of leaders who are ready, as Ronald Reagan and Leszek Balcerowicz were, with a plan of action when America turns again—as it inevitably will—to the system of freedom and opportunity that made us the greatest nation in the history of the world.
Mr. Gramm, a former Republican senator from Texas, is senior partner of US Policy Metrics and a visiting scholar at the American Enterprise Institute. Mr. Solon, a former adviser to House Minority Leader Mitch McConnell, is a partner in US Policy Metrics.
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