By Martin Hutchinson The author is a Reuters Breakingviews columnist. The opinions expressed are his own. The U.S. housing recovery shows it’s time to trim subsidies. The market finally looks close to bottoming out. Prices are reasonable and rates for borrowing mortgages are ultra-low. Mortgage interest tax deductions, loan guarantees and even some foreclosure assistance are looking increasingly unnecessary.

Take, for example, the delinquency rate. It dropped to 7.4 percent in the first quarter, according to the Mortgage Bankers’ Association. That’s almost a full percentage point below last year. The number of new homes being built is a third higher than this time last year, while sales of both new and existing homes are also on the up. And the National Association of Homebuilders index is 20 points above its nadir and now at its highest level since the end of 2007.

All this suggests that much of the assistance the state gives to the housing market is no longer needed. The home mortgage tax break, for example, is a pre-crisis crutch that primarily benefits those who don’t need the help – wealthier borrowers, who get more back simply because they pay more tax. Scrapping the deduction completely risks causing hardship to those borrowing more modest amounts, but capping it at $10,000 would limit its market distortion without removing a prop from middle-market housing.

The most obvious distortions to eliminate are the outsize guarantees on home loans provided by government-backed mortgage agencies. Fannie Mae and Freddie Mac backstop qualifying loans up to $625,500, while the Federal Housing Authority’s limit of $729,750 is even more excessive. These are both hangovers from the crisis. Capping guarantees at the old rate of $420,000, or even lower, would limit the subsidy to middle-class borrowers. That could then mark the first step in reducing the overall influence of the agencies on the market.

There’s no quick and easy fix for the housing market. But it’s looking healthier each month. That makes keeping some of these more egregious distortions in place harder to justify. Cutting them would restore some balance to the market and allow the cash to be put to more productive uses.

By Martin Hutchinson The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Barack Obama can at last say he has presided over increased employment in America’s private sector, if not in government, since he arrived in the White House in January 2009. But the slowing pace of job creation evident from Friday’s monthly report and declining labor force participation could make for a tough sell in November’s elections.

To be fair, the jobs picture for April is better than the headline 115,000 increase suggests. Another 53,000 jobs were added through revisions to numbers for February and March, and a tick downward in the unemployment rate to 8.1 percent also helped the narrative. And with government shedding 15,000 positions last month, private sector gains were larger than the top-line figure. They were sufficient, in fact, to put jobs in private businesses 35,000 into the black since his inauguration – a landmark of sorts.

There are, however, still 607,000 fewer federal, state and local government workers than in January 2009. At last month’s pace, Obama may be able to claim by November that employment has recovered to a higher overall level than when he took office. The story, though, is undermined by a pace of job addition so slow that an updated Breakingviews calculator indicates it would take until almost 2030 to achieve full employment in the United States.

Meanwhile, with jobs hard to come by, participation in the labor force declined further to the lowest level since September 1981. The only age group becoming more likely to work in recent years is the 65s-and-over. Politicians should worry about the decline in participation by young and traditionally working-age people. It foreshadows long-term disengagement and potential social problems.

That backdrop may well dog the next president whether it’s Obama or Mitt Romney, the Republican challenger. Which man makes it to the White House will depend partly on economic and employment trends in the next six months, both real and perceived. Obama will be hoping the soft patch for jobs gives way to a brighter picture in short order.

By Martin Hutchinson The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Ben Bernanke seems to be just hoping for the best. Wednesday’s Federal Open Market Committee statement talks about a pick-up in growth even as inflation declines from the current run-rate above the Federal Reserve’s 2 percent target. These trends aren’t apparent from recent data, and the U.S. central bank needs contingency plans if things don’t pan out so conveniently.

The Fed’s expectation that growth, though now subdued, will gradually build seems inconsistent with the latest report on U.S. durable goods, which showed orders down 4.2 percent – and with relatively weak employment data for March. Furthermore, Fed Chairman Bernanke acknowledged the headwind facing the U.S. economy with the expiry of tax cuts enacted in 2001 and 2003 and the start of spending cuts mandated by the debt ceiling deal in Congress last August.

On the inflation side, inflation measured using personal consumption expenditures was 2.3 percent in the year to February and core PCE inflation, excluding food and energy, was 1.9 percent. The FOMC’s forecast, which ranges upwards to about 2 percent, appears optimistic particularly as quickening growth would normally lead to an acceleration in inflation.

Energy prices could provide a caveat. If oil gets cheaper in the United States, joining domestic gas whose price has been torpedoed by a glut, the U.S. economy could benefit beyond the energy sector, restoring manufacturing jobs and reducing costs in energy-intensive industries. But encouraging large-scale oil drilling isn’t Bernanke’s turf, even if it might help vindicate the Fed’s forecast.

That means the Fed needs contingency plans to deal with lower-than-anticipated growth or unexpectedly high inflation. It’s notable that 10 out of 17 FOMC participants (not all of whom vote each year on policy) expect the federal funds rate to be 1 percent or higher by December 2014 – suggesting that the Fed commitment to keeping rates below 0.25 percent until then is already fading, in reality if not yet on paper. That’s a welcome hint of needed policy flexibility at an uncertain time.

By Martin Hutchinson

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Cambodia must solve two big problems to achieve the kind of rapid, sustained growth Asia’s tiger economies have delivered. Opening its stock exchange on April 18 is a good start – it shows the country is relatively friendly to foreign investors and markets. But meeting the needs of a rapidly growing population will be expensive, and Cambodia’s corruption is both dreadful and pervasive.

Cambodia’s economic performance, at first glance, looks decent. It is expected by the Asian Development Bank to grow at 6.5 percent in 2012, around the same rate as in 2011. But with Cambodia’s population growing 1.7 percent annually, GDP per capita is increasing at less than 5 percent. That means living standards are increasing more slowly than in richer Asian countries like Vietnam, India and China.

Feeding, educating and housing ever more Cambodians will be a challenge. Cambodia’s population is increasing faster than the 1.1 percent annual growth in Vietnam and 1.3 percent in India, and will require large additional investments in infrastructure and services before growth can take off. The new stock market might assist at the margins by bringing in more foreign capital; more reliable pension provisions, making large families less of a necessity, would help too.

Corruption is the real enemy. Even for Asia, the country’s property rights are poor, and it ranks with the worst global slums on Transparency International’s Corruption Perceptions Index. The World Bank has ranked Cambodia one of the most difficult countries in which to start a small business, in terms of both time and cost. Solving the problem requires action at the top as well as a clean-up campaign throughout the various layers of state bureaucracy.

With a new stock exchange, Cambodia is at least showing its willingness to modernize – though in truth it might get better results from bunking up with a nearby major exchange such as Singapore’s. Even this may not bring in the capital needed to deliver rapid growth for a steadily rising number of Cambodians. If 20-year ruler Hun Sen wants to secure that sort of legacy, getting rid of graft must be the top priority.

By Martin Hutchinson

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Europe is mostly unrecognizable from the U.S. Republican rhetoric. Presidential hopefuls Mitt Romney, Rick Santorum and Newt Gingrich, who face off again in Tuesday’s trio of primaries, often accuse Barack Obama of leading America to “European-style socialism.” The monolithic pejorative works to a point but conveniently overlooks the many economic achievements throughout the continent. On this matter, voters shouldn’t take the candidates seriously, and the candidates might do well to consider Europe more so.

Certain features of the continent’s political economy are of course anathema to U.S. conservatives. For example, U.S. public spending of 42 percent of GDP last year was still lower than all but four of the 27 EU members. And while the mostly state-run healthcare systems in Europe are cheaper than in the United States, ones like Britain’s NHS limit available treatments and involve long waiting times for many procedures. The EU bureaucracy also has a tendency to micromanage in a way that would make Republicans run screaming.

But the nominee wannabes either artfully or ignorantly miss the desirable aspects of Europe’s many and varied economies. Imagine the jubilation if the United States could attain the 4.3 percent growth experienced by Poland last year. Romney and Santorum surely would swap jobs pictures with the Netherlands, where the unemployment rate was 6 percent in February. And for austerity-minded Republicans, euro zone fiscal discipline as a whole is better than in the United States. The euro zone’s 2012 budget deficit is projected by the European Commission to be 3.4 percent of GDP, compared to the Economist’s consensus U.S. forecast of 7.8 percent.

What’s more, a big slug of the GOP agenda seems to be something of a blueprint from Berlin. With a healthy current account surplus, inflation at around 2 percent, unemployment under 7 percent, a budget deficit of just 1.5 percent and a savings rate over 11 percent, Germany offers much to admire.

With America still trying to find its economic way, U.S. presidential candidates ideally should seek ideas anywhere they can find them. The political expediency of making Europe a bad word doesn’t help.

By Martin Hutchinson

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The quest for quality of life may one day dethrone cities like New York and London. They’re still the most global cities, according to A.T. Kearney’s biennial ranking, with Paris and Tokyo next. But Vienna, rated only 13th among global cities, tops Mercer’s current quality of living survey. As technology makes location less critical, life quality may matter more.

A.T. Kearney’s survey measures business activity, human capital, information exchange, culture and political engagement. These factors naturally favor big cities, so the dominance of melting-pot metropolises isn’t surprising. The lead of the top few over the rest suggests the Big Apple, London and the rest won’t be dethroned quickly.

But in a decade or two, the survey reckons, cities that are now emerging could reach the top of the list. Chief among these are Beijing and Shanghai, where rising wealth, expanding infrastructure and improving business conditions may well outweigh negatives like pollution and the political environment.

Mercer’s report on the quality of life offers a different view of the future. A good lifestyle doesn’t match with global prominence. None of Mercer’s top five cities features in A.T. Kearney’s top 10. And the most global centers are far from the most livable.

Decision-makers and the wealthy presumably value lifestyle. And global communications have made it easier to do business remotely. The logical extension of that is that cities with a high quality of life should, over time, move up the rankings for global influence. Of course, some factors work the other way: the largest cities are generally better connected, and the very rich can overcome their cost disadvantages, which deter the merely affluent.

By Martin Hutchinson

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

What do the millions of Americans lining up for the record $540-million Mega Millions jackpot have in common with rogue traders on Wall Street? Plenty, as it turns out. Mega Millions punters are fixating on what they’ll do with their winnings. This economically regressive and socially destructive behavior also drives the gambling business. In financial markets the same impulse creates bubbles and encourages excessive risk-taking.

Humans love to daydream. And lotteries cause them to ponder the wonderful things they could buy if they won (in this columnist’s case, a $329,000 Bentley Mulsanne, described by Top Gear as “the archetypal Marmite car”). This behavior was described in Charles Mackay’s 1841 investment classic “Extraordinary Popular Delusions and the Madness of Crowds” and is an important driver of both lottery participation and market conduct.

There is solid evidence that lotteries and gambling are especially attractive to those on the lower rung of the socio-economic ladder, as they have few other ways to attain even modest coveted possessions through normal means. That makes these activities economically regressive and, since the activity is addictive, potentially damaging to society’s fabric, as gamblers become impoverished and subject to other social pathologies.

Indeed, states promoting lotteries and casino gambling often fail to balance adequately the short-term lottery and tax revenue they receive with the long-term costs to their economies from the social impact of gambling.

The pathology isn’t all that different in markets. When dot-com stocks, for example, appeared a sure-fire way of making money, both professionals and amateur day-traders leveraged as much as possible to achieve their “dreams,” pushing prices higher and enabling even the most fly-by-night schemes to obtain financing.

By Martin Hutchinson and Christopher Swann The authors are Reuters Breakingviews columnists. The opinions expressed are their own. Money supply is rising fast, so where is the inflation? U.S. consumer prices rose 0.4 percent in February, but that was mostly gasoline. Year-on-year, inflation is above the Fed’s 2 percent target but not by much. Yet money supply is going through the roof. Either inflation is on the way, or Milton Friedman should lose his Nobel prize.

Friedman argued that “inflation is always and everywhere a monetary phenomenon.” He proposed that central banks should increase money supply at a constant annual rate, ignoring economic cycles, so as to minimize self-reinforcing bouts of inflation and deflation.

What has happened in recent years is a long way from Friedman’s recommendation. Broad money supply, whether by the so-called M2 measure or the St. Louis Fed’s money of zero maturity – a proxy for the M3 metric – is up almost 10 percent over the past year, while the adjusted monetary base, a narrower measure of money, is up over 18 percent. Friedman’s idea was that the money supply should increase at the same rate as real GDP. Other things being equal, the implication of money supply rising at 10 percent while real GDP has expanded less than 2 percent over the past year is that inflation should be running at more than 8 percent.

The relationship can be delayed. For instance, U.S. monetary policy became unusually expansive around 1965, whereas inflation did not hit 5 percent a year until 1969 and only topped 10 percent in 1974. The so-called velocity of money, essentially the pace at which each dollar is spent and recycled, is also a factor. The 2008 crash and the subsequent deleveraging process may have subdued velocity.

Nevertheless, assuming as recent data suggest that the U.S. economy is now recovering from the 2008 shock, velocity should rise to more normal levels. Applying Friedman’s theories, that in turn could bring a rapid acceleration of inflation.

Meanwhile, Federal Reserve Chairman Ben Bernanke and most of his colleagues believe that inflation will remain muted, justifying near-zero interest rates until late 2014. If Bernanke proves right, he’ll look smarter than the 1976 Nobel Committee.

By Martin Hutchinson

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The Federal Reserve’s bank stress test results have renewed the debate about whether dividends should trump stock buybacks. JPMorgan and Wells Fargo have both increased dividends and announced large buybacks. But in an industry suffering from slow growth, increasing dividend payout ratios makes more sense for shareholders than repurchasing stock.

Wells will, at least, now be paying out more annually on an absolute basis than in 2007, by 15 percent. And JPMorgan will be handing out just a tenth less than its pre-crisis $5 billion dividend. But their payout ratios are low, at 27 percent of trailing earnings for JPMorgan and 31 percent for Wells Fargo.

That’s not far off the one-third of earnings that most banks regard as a good target. But U.S. banking has become a slow-growth business, and the raft of new regulations coming in should make them less risky than they used to be. So the need to retain a large portion of earnings should be modest – though some banks, such as JPMorgan, are still investing in their business.

Banks have clearly cottoned onto this, hence their requests to boost buybacks. And repurchasing stock can boost both equity returns and earnings per share. Take JPMorgan’s proposed $15 billion stock buyback. At Tuesday’s closing price, that would snap up 346 million shares. Based on fourth-quarter results, that would increase EPS, and presumably the stock price, by 4 percent.

Compare that to the effect of increasing the dividend payout ratio to two-thirds of expected 2012 earnings. JPMorgan’s annual payout would jump to $12 billion, and Wells’ to $11.4 billion, making for yields of 7.3 percent and 6.5 percent respectively.