Barry Eichengreen on the risk from changes in global economic power and influence:

Shifts in global economic and financial power create unfamiliar circumstances, and unfamiliar circumstances create risks. In the 1960s and 1970s the rising powers, Europe and Japan, complained of destabilizing economic impulses emanating from the United States. This source of economic risks has been around for a long time, in other words, although its form continues to mutate. But now, in addition, the U.S. and other advanced economies must worry about the risk of adverse shocks arising out of events in China and other emerging markets. The day when the Chinese economy was too small and isolated to have a first-order impact on the rest of the world is long past, in other words. Policy analysts in the U.S. and other advanced countries need to worry about the impact on their own economy of a sharp economic slowdown in China, of a sudden drop in property prices in that country’s major cities, or of an outbreak of labor unrest. These are not matters on which U.S. policy planning has traditionally focused. It now should.

Dominique Strauss-Kahn has some explaining to do that goes beyond defending himself against sexual assault charges. Maybe it’s just me, but I’m having a hard time squaring DSK’s preference (and financial ability) for living large and his political alliance with socialism. It’s been a long road from the Paris Commune to Porsche, the 21st century symbol of socialism.

It’s been more than two years since the markets hit bottom after the financial crisis of late 2008/early 2009. What a long strange trip it’s been. It may get stranger still. But in the interest of finding some context, it’s useful to compare returns since the trough. Let’s arbitrarily call the end of February 2009 as the bottom. How have markets fared since?

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Today’s update on new housing starts and building permits for April isn’t surprising, but it’s still not encouraging. Permits slipped 4% last month and are down by nearly 13% from a year ago. Housing starts look even worse, falling nearly 11% in April, pushing the seasonally adjusted annual rate down by 24% vs. the year-earlier number.

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Ron Lieber argues that 401(k) plans should offer index funds. “This shouldn’t be a controversial statement,” he writes in a recent New York Times article. “Yet it passes for one in Washington, where regulators and legislators are still mired in a never-ending debate over whether stockbrokers, certain insurance salespeople and others ought to meet that standard, known in legal circles as a fiduciary duty.”

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Manufacturing activity in the state of New York “improved in May, but at a slower pace than in April,” according to this morning’s update of the Empire State Manufacturing Survey from the New York Fed. Meanwhile, the outlook for U.S. economic growth softened a bit according to economists surveyed by the National Association for Business Economics. “NABE panelists revised their projections for economic growth in 2011 downward compared with their February projections,” says Richard Wobbekind, NABE president in a statement. “Real GDP is expected to grow at a moderate pace of roughly 3 percent in the current year and only slightly faster in 2012.”

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Debt ceiling drama starts today
CNNMoney | May 16
Monday’s the day: The federal debt will hit its legal limit and Congress doesn’t plan to do anything about it. That leaves Treasury Secretary Timothy Geithner in a bit of a pickle. It now falls to him to jump through hoops every day to keep the world’s largest economy from defaulting on its legal obligations. Geithner told Congress that he estimates he has enough legal hoop-jumping tricks to cover them for another 11 weeks or so. But then he said that’s it. If lawmakers don’t get it together by Aug. 2, the United States will no longer be able to pay its bills in full.

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● The Next Convergence: The Future of Economic Growth in a Multispeed World
By Michael Spence
Review in The Economist
Never before have so many people grown rich so quickly. Japan was the first country to achieve sustained, high-speed growth, in the post-war years, but it did so alone. A handful of smallish Asian tigers followed. Mr Spence wonders whether that formula can work when 60% of humanity, led by India and China, try the same thing. Globalisation, he notes, has been critical to the rapid growth of emerging markets. But it has also led to rising inequality in the rich countries, and they may now well respond by raising protectionist barriers. Or maybe not. Mr Spence is not sure about this nor, unfortunately, of many of the other issues he tackles. “The Next Convergence” feels less like a book than a transcript of the author thinking out loud about a hotch-potch of contemporary economic issues.

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Headline consumer price inflation (CPI) rose 0.4% last month on a seasonally adjusted basis, or slightly lower than March’s 0.5% increase, the Labor Department reports. That translates into a 3.1% rise over the past year. Inflationary pressures, at least by the government’s reckoning, remain modest. Ditto for the outlook on economic growth, which suggests that inflation isn’t likely to be a major problem for the foreseeable future. The usual suspects will nonetheless scream otherwise, but it’s hard to make that case based on the Labor Department’s numbers.

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Initial jobless claims dropped sharply last week, the Labor Department reports, but we’re still not out of the woods. The recent jump in new filings for jobless benefits went into reverse, but no one can ignore the still-elevated levels for this series. And until we see more reports like this morning’s, there’s going to be some awkward questions.

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