• Dodger mania (New Yorker)

• Reducing the invitation to crime (Vox)

• This is the connected states of America (GOOD)

• Incentives and debt (Micheal Pettis)

Of course, the euro zone also faces a significant unemployment problem, which was always likely to constrain price growth. And commodity prices have fallen considerably from their spring highs, making it quite likely that headline inflation, which the ECB follows, will soon fall below the central bank's target. Indeed, the latest inflation figures are already showing a plateau in the statistics. What's more, most European data points indicate that a broad economic slowdown is underway. Most of the periphery is back in or approaching recession.

And what's most discouraging is the fact that European deleveraging has scarcely begun. Over indebted European households have made less progress on their debts than Americans. And European governments are just beginning an epic period of fiscal consolidation.

Those counting on the magic of expansionary austerity have fewer hope shreds to grasp today, according to an IMF paper flagged by Paul Krugman. You may recall that Alberto Alesina and Silvia Ardagna made news last year with a paper on the potential for budget cuts to improve growth prospects. That view was challenged aggressively at the time, and this latest piece of IMF research, by Jaime Guajardo, Daniel Leigh, and Andrea Pescatori, suggests that the purported relationship is largely an artefact of statistical mismanagement. The abstract reads:

This paper investigates the short-term effects of fiscal consolidation on economic activity in OECD economies. We examine the historical record, including Budget Speeches and IMF documents, to identify changes in fiscal policy motivated by a desire to reduce the budget deficit and not by responding to prospective economic conditions. Using this new dataset, our estimates suggest fiscal consolidation has contractionary effects on private domestic demand and GDP. By contrast, estimates based on conventional measures of the fiscal policy stance used in the literature support the expansionary fiscal contractions hypothesis but appear to be biased toward overstating expansionary effects.

Mr Krugman elaborates:

It basically shows that results purporting to show economic expansion following spending cuts and/or tax increases were based on a statistical illusion: an expanding economy can often lead to rising revenue and/or falling spending (e.g. because safety-net spending falls or because the government cuts back in an attempt to cool off inflationary pressures). And as a result, what the Alesina-Ardagna results capture is muddle by reverse causation.

Austerity is contractionary, and significant austerity is significantly contractionary. This will come as no surprise to the Greeks in the audience.

Given the present weakness in the European economy, and given the looming contractionary impact of austerity, and given the moderation in commodity prices, the biggest risk to European prices would seem to be substantially to the downside. The ECB should be on alert, all right, but on the watch for a dangerous slowdown rather than runaway inflation. And yet, rates are going up.

One might venture that this is not the way to convince people they ought to sacrifice to stay within the single currency.

Until now, the relentless march of technology and globalization has played out hugely in favor of high-skilled labor, helping to fuel record-high levels of income and wealth inequality around the world. Will the endgame be renewed class warfare, with populist governments coming to power, stretching the limits of income redistribution, and asserting greater state control over economic life?

There is no doubt that income inequality is the single biggest threat to social stability around the world, whether it is in the United States, the European periphery, or China.

That sounds serious. Yet, Mr Rogoff cautions, governments should be reluctant to do too much to address issues of income inequality. Innovations yesterday may have substantially benefited the high-skilled few, but innovations tomorrow may turn the tables. After all, markets have a strong incentive to find and develop alternatives to relatively expensive inputs (like pricey labour). Yet there's something about Mr Rogoff's thesis that's a bit troubling. See if you can identify it:

My Harvard colleague Kenneth Froot and I once studied the relative price movements of a number of goods over a 700-year period. To our surprise, we found that the relative prices of grains, metals, and many other basic goods tended to revert to a central mean tendency over sufficiently long periods. We conjectured that even though random discoveries, weather events, and technologies might dramatically shift relative values for certain periods, the resulting price differentials would create incentives for innovators to concentrate more attention on goods whose prices had risen dramatically.

Eventually, prices mean revert! Though of course, that "eventually" might mean a few years, or a generation, or a century or more. I don't doubt Mr Rogoff's findings. But the time horizon with which today's unfortunate workers are interested is their working life, if we're being generous. A great many struggle to see past the next paycheque. It's difficult to reconcile a view that inequality is an enormous threat to social stability with the belief that its impact can be assuaged by reassuring today's poor that in a few decades or so relative prices will probably shift in their favour.

Mr Rogoff doesn't quite say that. He concludes:

Yes, we need genuinely progressive tax systems, respect for workers’ rights, and generous aid policies on the part of rich countries. But the past is not necessarily prologue: given the remarkable flexibility of market forces, it would be foolish, if not dangerous, to infer rising inequality in relative incomes in the coming decades by extrapolating from recent trends.

It's good to encourage progressive tax systems and so on. But I worry that Mr Rogoff is actually feeding a complacency about the dangers of inequality. And my concern is that serious inequality may undermine support for a liberal economy, thereby making it harder for the market forces that may eventually solve the problem to operate. 

SCARCELY has one bubble deflated when another threatens to pop. While America's housing bust—the crash that began the global financial crisis—is near an end, adjustments elsewhere are incomplete. In a few countries, like China and France, values look dangerously frothy. There is always trouble somewhere. And because buying a house usually involves taking on lots of debt, the bursting of this kind of bubble hits banks disproportionately hard. Research into financial crises in developed and emerging markets shows a consistent link between house-price cycles and banking busts.

The Economist has been publishing data on global house prices since 2002. The interactive tool above enables you to compare nominal and real house prices across 20 markets over time. And to get a sense of whether buying a property is becoming more or less affordable, you can also look at the changing relationships between house prices and rents, and between house prices and incomes.

This is setting up to be the story of 2012 and it is setting up to be a doozy. Inflation creeping higher despite the Feds best efforts to tamp it down. A possible explosion in the growth rate if we get a virtuous cycle of more construction job leading to more household formation, leading to more construction jobs.

I'd say that it's likely housing begins contributing strongly to growth within the next few quarters. But I'm less worried about a runaway inflationary boom. One of the main ways monetary policy typically works is through the residential investment channel. If rising rents push up inflation, the Fed will quickly raise rates. That will quickly reduce the appetite for new construction and dampen the upward cycle.

But for the first time in some years, a well of substantial pent-up demand seems to be building. That could shift the recovery toward the kind of growth seen after the 1982 recession, if things play out the way Karl Smith sees it. And if the Fed allows it.

Reducing peak-time congestion would not only save transport costs (smoothed occupancy would mean less half-empty off-peak trains, which cost as much to run as crowded peak ones); it would also save time for transport users, potentially improving productivity at work and economic output.

The government of the city state of Singapore—11m public transport journeys a day, average commute time 35 minutes—is planning to pilot an incentive scheme later this year to do exactly that. Commuters will earn credit for each journey taken (triple credit for off-peak journeys) to earn a chance of cash prizes in weekly lotteries.

The scheme would be the first city-scale application of an idea toyed with in 2008 by Infosys, an Indian software company, to encourage commuters to its main research site in Bangalore to use the company’s off-peak buses. That scheme, the work of Stanford academic Balaji Prabhakar, doubled the number of off-peak commuters, significantly reducing congestion on the Infosys peak-time buses.

Mr Prabhakar says his idea, a system of lotteries, relies on the behavioural-economics insight that the average person is risk-seeking when stakes are small. Offer individuals 20p to leave the house an hour earlier, and most will say no. But a 1-in-50 chance of winning £10 may seem more enticing.

The risk-seeking effect is amplified in small networks: regularly hearing about other winners leads individuals to overestimate their own chances of success. This worked particularly well in Bangalore, where Infosys commuters shared a workplace, and scheme winners were advertised through the company. The scheme in Singapore would aim to create a social network among users to produce a similar effect.

The hope is that the project will eventually be self-funding. Infosys managed just that in Bangalore, where the prize pot of 100,000 rupees a week could have been quadrupled before eating up the savings generated from running 8 fewer buses. Singapore has expanded the capacity of its public transport system signifcantly in recent years at great cost, so the potential for savings is huge.

The general principle that small rewards can generate positive behaviour, and pay for themselves in the long-run, has wide implications. In addition to the Singapore project, Mr Prabhakar is running a pilot to reduce traffic on the Stanford campus with funding from the US Department of Transportation. Rewards-based schemes are more politically appealing than punitive charges. Several cities have tried to implement congestion charges (fixed fees to drive into crowded areas) but most have failed. Such charges are seen as little more than additional taxes, and if there is only one tariff, they hit the poor the hardest. Rather than fuel resentment, incentive schemes could encourage commuters to change behaviour voluntarily, and even gladly.

• Working papers are not working (Development Impact)

• US scores major trade case victory over China (On the Money)

• The Chinese art of elegant bribery (OpenEconomy)

• Are stocks overvalued? (Scott Sumner)

• Revenue raisers that aren't tax increases (Capital Gains and Games)

Greg Linden, Jason Dedrick and Kenneth L. Kraemer, a troika of scholars who have made a careful study in a pair of recent papers of how the iPod has created jobs and profits around the world. The latest paper, “Innovation and Job Creation in a Global Economy: The Case of Apple’s iPod,” was published last month in The Journal of International Commerce and Economics.

One of their findings is that in 2006 the iPod employed nearly twice as many people outside the United States as it did in the country where it was invented — 13,920 in the United States, and 27,250 abroad.

You probably aren’t surprised by that result, but if you are American, you should be a little worried. That is because Apple is the quintessential example of the Yankee magic everyone from Barack Obama to Michele Bachmann insists will pull America out of its job crisis — the remarkable ability to produce innovators and entrepreneurs. But today those thinkers and tinkerers turn out to be more effective drivers of job growth outside the United States than they are at home.

So, to review: Apple is a wildly successful technology company that employs almost 14,000 Americans. Why, exactly, is that worrisome? Ostensibly, it's because Apple created even more jobs in China. But so what? Since when is the desire that companies maximise their employment in America anything other than vulgar mercantilism?

Ms Freeland's eventual point is a little subtler than that. While Apple has fewer workers in America than it does abroad, its salary payments overwhelmingly go to American workers. The issue is not so much job distribution as it is the fact that in a globalised world, the returns to innovation and entrepreneurship flow overwhelmingly to the innovators and entrepreneurs. Production workers capture very little of the gains to innovation and growth, by contrast. Their compensation has stagnated while that for a select group of world-beaters has soared.

I understand this point and am sympathetic to it. Stagnating median wages are a problem. They're a problem because we'd like to see living standards rise, and they're a problem because they undermine support for a liberal economic system. What isn't a problem, it's critical to recognise, is Apple. All Apple has done has put thousands of people to work making products consumers love. We can look at Apple and ask why it hasn't created jobs in the way Detroit did decades ago, but that's a stupid question. Detroit's employment machine depended on a set of technologies and prices that vanished long ago. We can have those technologies and prices back if we want, but we have to give up Apple—and many of the luxuries we now take for granted, not to mention a healthy chunk of current incomes.

The question is not why Apple doesn't employ more Americans. The question is why there aren't more Apples. Maybe it's insufficient demand. Maybe it's technological stagnation. Maybe it's a dearth of qualified workers, and maybe it's poor regulatory policy. There's little harm in trying to do better on all of those counts. What is harmful is to look at one of the great American corporate success stories and fret over its audacity in providing good jobs for workers in America and in China. How dare they!

I actually think the issue goes beyond the increasing unwillingness of Chinese authorities to even pretend to listen to Western complaints about human rights. Unless you buy the Nouriel Roubini argument, and I don't, China is going to be the world's largest economy within ten or 15 years, bigger than America or the euro-zone. And, in case anyone has failed to notice, it's a Communist country. Every year China continues to grow, the case that countries need to be democracies in order to become wealthy and developed becomes more tenuous. In fact, what's happening both in America and in the EU at this point is raising the possibility that democratic governance may in some modern situations be inimical to competent economic stewardship. The incentive structure created by democratic political competition in an internet-era media society may actually be driving countries towards fiscal self-destruction. We're increasingly getting a polarised, viciously divisive, intellectually bankrupt, wildly irresponsible populism that lives up to every negative caricature of multiparty democracy that a CCP ideological hack could dream up. That's certainly what the behaviour of the tea-party-driven GOP and the Party for Freedom suggests.

China's economy will soon be the world's largest, but that's largely because China's population is the world's largest. If you can't manage to produce more with 1.3 billion people than Americans produce with 310m, you're doing something terribly wrong. Relatedly, China's recent growth rates have been fast because China was previously so poor. And China was previously so poor because its authoritarian government embraced atrocious economic policies for decades. It's certaintly true that, "democratic governance may in some modern situations be inimical to competent economic stewardship". This is not a new development. Just as hoary a chestnut is the generalisation of the above quote: governance may in some situations be inimical to competent economic stewardship. What's true of presidents and prime ministers was also true of Chairman Mao. And many kings, queens, pharoahs and chieftains of old.

Here's the deal. For all its competent stewardship, China's government runs a country where the average citizen is only about 15% as rich as the average American. And if we look at the world's richest large countries (say those with 10m people or more) in terms of per capita GDP, we see that the league tables are dominated by democracies. In order: America, the Netherlands, Australia, Canada, Belgium, Germany, Taiwan, Britain, France, Japan, South Korea, Spain, Italy, Greece, Cyprus, Czech Republic. The first non-democratic large country to make the list? Saudi Arabia. And I don't think we need to chalk its wealth up to sound macroeconomic management.

It is possible to grow rapidly as an authoritarian country. It's even possible to become wealthy as an authoritarian country, though it helps to be small and resource-rich. Becoming democratic is no guarantee of economic riches, either. But it appears to take a democratic system of governance to build and sustain high levels of national wealth. Maybe China will challenge this record some day. It has a lot more growing to do first.

• If you haven't already visited our current debate, on the importance of a manufacturing base to national prosperity, do have a look.

• China's ticking debt bomb (The Diplomat)

• Could we have had a bigger stimulus? (Ezra Klein)

• The sorry and the pity of another liquidity trap (Bloomberg)

• 30 ways to be an economist (INET)

There's a spike, followed by a decline, followed by a higher spike, followed by a decline to a higher trough, and so on. European leaders keep taking steps to avert disaster, and each time markets are less assuaged.

The latest spike corresponds to the stalemate over the IMF's willingness to continue making bail-out payments without a new, long-term rescue package in place (and the corresponding disagreement over how to rollover Greek debt, plus the drama surrounding the passage of Greece's new austerity plan). The IMF agreed to keep paying, French and German banks seemed willing to sign on to a rollover plan, and Greece got its new austerity programme through parliament. But it wasn't long before trouble kicked up again.

Moody's and Standard and Poor's have both suggested that the agreed-upon rollover plan might well constitute a default. Since that's precisely the outcome European leaders were hoping to avoid, this news has sent everyone scurrying to come up with a new and better deal. Meanwhile, Moody's has cut Portugal's debt rating to junk. Portugal may well need a new rescue package, which will surely include debate over the fate of creditors, which will mean more questions about bank finances and more brinksmanship. And the European economy continues to slow, even as the European Central Bank continues to tighten policy.

I don't know that there's any broad lesson here, other than: for all the steps already taken by European leaders, the euro zone hasn't really gotten any closer to solving the underlying issues of insolvency and institutional weakness.

Does this seem like a good use of human resources? And what this chart only begins to hint at is that these high rates have been sustained for a long period, and are unlikely to return to normal levels anytime soon. One in five young Europeans is out of a job and the story isn't much better in America. These are the world's two largest economies. The economic costs are staggering, and the potential political economy impact isn't very comforting either.

A normal Republican Party would seize the opportunity to put a long-term limit on the growth of government. It would seize the opportunity to put the country on a sound fiscal footing. It would seize the opportunity to do these things without putting any real crimp in economic growth...

But we can have no confidence that the Republicans will seize this opportunity. That’s because the Republican Party may no longer be a normal party. Over the past few years, it has been infected by a faction that is more of a psychological protest than a practical, governing alternative.

The members of this movement do not accept the logic of compromise, no matter how sweet the terms. If you ask them to raise taxes by an inch in order to cut government by a foot, they will say no. If you ask them to raise taxes by an inch to cut government by a yard, they will still say no.

The members of this movement do not accept the legitimacy of scholars and intellectual authorities. A thousand impartial experts may tell them that a default on the debt would have calamitous effects, far worse than raising tax revenues a bit. But the members of this movement refuse to believe it.

The members of this movement have no sense of moral decency. A nation makes a sacred pledge to pay the money back when it borrows money. But the members of this movement talk blandly of default and are willing to stain their nation’s honor.

It goes on like that, if you can believe it. And yes, that's David Brooks, not Paul Krugman. To review, Democrats have signed on to trillions in spending cuts. They appear to be offering to accept closed loopholes and eliminated tax expenditures, as opposed to rate increases, as the revenue side of the deal. And we learned yesterday that Democratic leaders are apparently willing to put tens of billions in cuts to Medicare and Medicaid, on top of reduced spending growth rates already offered, on the table.

The Republican response? Leaders are now considering adding to their demands and making a vote on a balanced budget amendment to the constitution part of the final deal. But at this point, Democratic leaders can have little confidence that additional concessions will bring them any closer to a deal. The parties aren't moving toward each other; Democrats are following Republicans to the right, and closer to the cliff's edge.

It is becoming ever more difficult to write about this ongoing negotiation (if you can call it that). Journalists can't see the actual discussions between the two parties and grab at whatever leaks come their way to try and construct a narrative. The economists have mostly concluded that a default would be disastrous, and are keeping themselves busy watching financial markets, looking for any sign that they're becoming worried. It's difficult to know what to look for, however; how would you hedge against default of the world's bedrock, risk-free asset?

In all probability, America won't default; it's still difficult to imagine that it cold come to that. The bigger danger, I think, is that the Republican strategy will either lead Democrats to accept short-term cuts large enough to endanger recovery or will result in a short period of "prioritisation", in which spending is suddenly and dramatically cut back to prevent a default once the money runs out (on or about August 2nd). America may make it through this episode with its credit rating intact and still sustain significant economic damage.

If the intention was to reduce prices in the medium- or long-term, it has failed. The price of Brent crude fell $5 on the announcement but has rallied since. The price of West Texas Intermediate (mainly produced in America) is trading higher than before the IEA announcement (see chart).

If the intention was to punish speculators, there is also cause for concern. Some speculators who were long oil may have lost big, but only those whose long positions were due for delivery in the few days after June 23rd, when the price was significantly depressed.

In the meantime, the IEA releases have created an opportunity for another potential speculative play. Some IEA members, including Japan and Britain, released their reserves directly to industry. Some even released refined products, such as diesel or jet fuel, which is only of use in specific industrial settings. In contrast America released 30m barrels (half of the IEA total) of unrefined crude, to public auction.

Oil traders are free to bid for it. And it seems they did. The Department for Energy says its auction was heavily oversubscribed with bids from more than 90 parties. For reference, there are 148 refineries in America, but most are owned by a few major players such as Exxon, who would do the actual bidding.

Traders who anticipate the oil price will rise, and have the capacity to store oil, can buy physical stocks now, and sell oil forward. As long as the price rises enough to cover storage costs, they will turn a profit. If a trader was able to purchase West Texas Intermediate—the oil held in America's Strategic Petroleum Reserve (SPR)—at the spot price on June 24th, they would already be sitting on a tidy profit.

Much will depend on the price paid to the Department for Energy for SPR oil. Given that the oil price rallied so quickly, but the auction process took a week to complete, which price will the Department charge buyers? No answer on that today from the Department of Energy, officials from which are presumably celebrating America's 235th birthday. But a press release last week did say that prices (and purchasers) would be made public once all contract awards are completed—on July 11th. One to watch.

The economist Craig Pirrong is not surprised that traders might have been interested in speculative buying. He opines on his blog that “if the decision makers didn’t see this coming, they should not be making decisions”. However, Mr Pirrong thinks traders might be wary of stockpiling oil, because of the threat of future SPR releases.

In normal times an unexpected and temporary increase in the immediate availability of oil (which would include a one-off SPR release) would be split between consumption and storage. But the threat that the SPR will be used again discourages storage; the supply glut may not be a one-off, and SPR releases could keep prices continually low.

Many analysts have noted that it would be difficult for the American government to consistently intervene in the market. The 30m barrels released from the SPR was 5% of the total reserve. Given global consumption runs at around 90m barrels a day, that is not much firepower. But it is certainly enough to keep traders thinking. The added variable for traders to ponder may increase volatility, and therefore speculation.

Suppose that Greece had never adopted the Euro and the terms of its external borrowing had remained subject to “market discipline”, as it had been in the 1990s. Would Greece today be better off or worse off, in real terms, looking forward?

The question is impossible to answer, obviously, but it's worth thinking about all the same. As Mr Waldman indicates, Greece was able to borrow on unrealistically good terms for most of the last decade; somewhat surprisingly, national interest rates converged in the wake of the adoption of the euro. This contributed to Greece's accumulation of debt, and only when market forces began to reassert themselves and peripheral yields diverged from core yields did it become clear that Greece's debt burden was unsustainable.

Of course, market discipline isn't the only discipline around. Entrance into the euro zone was contingent on Greece's accomplishing certain reforms and achieving a required level of macroeconomic prudence. Greece clearly fell short of the standards of good behaviour other euro-zone members had in mind, but economic research indicates that even when fiscal rules don't strictly bind they can nonetheless have a positive effect. The process of entering the euro zone didn't turn Greece into Germany, but it may have left Greece in better institutional shape than it otherwise might have been. 

As a euro-zone member, Greece gave up monetary independence. As it turned out, the super-responsible ECB spent the 2000s making a monetary policy that fit the laggardly German economy, and which was actually too loose for Greece's economic situation (according to a simple Taylor rule). On the other hand, from 1999 to 2010, Greek inflation topped 4% only twice. Between 1980 and 1998, by contrast, Greek inflation was never below 4%. Indeed, for all but 4 of those years, inflation was in double digits. Would Greece have contained its inflation problem outside the euro zone? And if it hadn't, what impact might that have had on growth?

The current austerity plans being foisted on Greece are too severe, but they nonetheless include many needed reforms. Greece will probably make it through this episode with a smaller and more manageable state, a broader and more reliable tax base, and a less encumbered private sector. Without heavy outside pressure, the Greek government might never have undertaken these measures.

I don't claim that this all amounts to a clear positive answer to Mr Waldman's question. Greece's outlook may well be worse than it otherwise would have been. But for all the current pain, it's not obvious that the euro zone hasn't been a net plus for Greece. Consider this chart:

This image compares the path of real per capita output for Greece with that for Britain and Denmark—two countries in the European Union but not the euro zone. These levels are normalised; in absolute terms, Denmark and Britain are a bit richer than Greece. But Greece clearly enjoyed catch-up growth during its euro stint. And while some of that growth has been given back during the brutal recession years, it remains (and is projected by the IMF to remain) closer to British and Danish income levels than when it joined the single currency. Might it have caught up anyway? Certainly. This is simply to show that the decision to join wasn't obviously a big mistake.

What is certain, however, is that Greece's outlook should be better and would be better within a better euro zone. But you don't build good supranational institutions overnight. Today, Americans are celebrating a federation that, after 235 years, only mostly works and then only some of the time. Whether Greeks should be heartened or discouraged by the American experience is another very good question.

Standard & Poor’s said today a rollover plan serving as the basis for talks between investors and governments would qualify as a distressed exchange and prompt a “selective default” grade. That may leave the bondholders unwilling to complete the exchange and the European Central Bank unable to accept Greek government debt as collateral, impairing the lifeline it has provided the country’s banks.

The biggest problem with a default—indeed, the main reason explicit bondholder haircuts aren't on the table—is the second reason given above: in the event of a default, the European Central Bank may no longer accept Greek government debt as collateral. The ECB would not be "unable" to do so, as S&P has it. It has simply threatened that it won't. So while the headlines all say that S&P is throwing a wrench in the latest plans, the real difficulty begins with the ECB.

Why would the ECB behave this way? Perhaps its leaders feel they've put enough on the line and that now they must do what they can to accelerate a closer fiscal union within the euro zone. The best way to do that, they may figure, is to close off all other options. But the ECB's anti-haircut stance, in combination with its dangerously contractionary monetary policy is sure to place the euro zone under extreme stress. Maybe a closer union will be forged under the pressure. Or maybe the whole thing will fly apart.

UPDATE: Industrial producer prices in the euro zone fell in May. Do you suppose the ECB will reconsider its intention to raise interest rates again in July?

And then there's Larry Summers:

HOBSON: That's not true? You weren't pushing for a less-than $1.2 trillion stimulus?

SUMMERS: No, I mean it's a much more complicated story, but those reports are not accurate. It was my judgment as an economist that there was no danger of doing too much stimulus and one should achieve as much stimulus as possible. There were a set of political calculations having to do with what the Congress could accept that were mostly determined by the president's political advisers and ultimately by the president which pointed towards the size of the program that was ultimately passed. But the economic advice that I gave was that the stimulus program should be as large as it could be.

HOBSON: Do you think it was too small in the end?

SUMMERS: I think it in the end we would've been better served if there had been more push to the economy. We would've been better served if the measures that the president put forward in the fall of 2009 for expanded infrastructure investment, for expanded support for state and local governments that passed through the House had also passed the Senate... But the choices that were made were made in a given political context and I think given the slender margins of one vote by which the Recovery Act was passed I suspect an effort to push it to a higher level might well have backfired...

That's what the old administration hands are saying. What's their former boss saying?

Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs.

That's a wow statement. It's profoundly uneconomic. Government doesn't face the same borrowing constraints as a household. It seems clear that the government can afford current levels of spending. It wasn't that long ago that government revenues were far higher than they currently are. And there is precious little evidence that the confidence-creating impact of deficit reduction, if there's one at all, will compensate for the contractionary impact of budget cuts. It seems quite clear that cutting government will be a net negative for the current economy.

I don't know why Barack Obama is making these claims. The most straightforward explanation is that he believes it. At this point, it hardly matters. The president has adopted this framing of the current economic situation, and his policy choices will be constrained by it going forth; whether the choice was made out of heartfelt belief or a sense of political necessity is irrelevant.

Economically speaking, however, I think Mr Summers' line is one that ought to inspire a lot of reflection:

It was my judgment as an economist that there was no danger of doing too much stimulus and one should achieve as much stimulus as possible.

I've been trying to think of a situation in which a country like America—rich, with good institutions and able to borrow in its own currency—has dangerously overstimulated its economy. When has a country like America and in America's position opted to do too much fiscally or monetarily, such that it found itself in a dangerous and irreversibly inflationary situation? There aren't that many data points, but I don't believe there's been such a case. Mr Summers is right; the risk to doing too much was minimal, while the risk to doing too little was significant. There was a strong case for policymakers to say, look, we'll continue to act until we've solved the problem or markets demand that we stop. Would there be the potential for waste and inefficiency in this approach? Absolutely. There is no question that more government involvement in the economy would have generated some misallocation of resources. At the same time, America has come nowhere close to making all of the positive-return public investments available. And the real economic cost of the present sustained, long-term employment is frightfully high. Stimulus sceptics have not demonstrated, haven't come close really, that stimulus can't raise employment or that increased employment wouldn't be preferable to the status quo.

There is uncertainty over the precise way stimulus can work and over the multiplier associated with expansionary fiscal policy. This is not an exact science. But it's difficult to avoid the conclusion that the balance of risks weighed strongly in favour of more action.

On the monetary side, the story is the same. It seems clear that QE2 prevented a fall toward deflation last summer and provided at least some short-term boost to the economy. The message the Fed has been sending lately is that this—preventing deflation—is enough; that's all it can or should be expected to do. But this approach dodges the all-important question: if the Fed could have improved the economy's employment potential without meaningfully increasing medium-term inflation expecatations, shouldn't it have? And boy, it sure seems like it could, particularly now, when emerging market tightening is taking the steam out of commodity markets. Weighing upside risks with downside risks, how has the Fed arrived at the choice to prevent a Japanese-style deflationary episode...and then stop at that?

There's a lot that economists can't say with great certainty where stimulus is concerned. The profession will be wrestling with questions about macroeconomic stability policy for years to come. But I hope some academics will also focus their attention on the institutional shortcomings that contributed to such incautious timidity in America's government and elsewhere. All throughout this crisis, American officials played it safe, and in doing so they almost certainly made the economic situation more painful than it needed to be. Four years since the recession began and two years into recovery, they still haven't learned their lessons.

Slowing growth in China has grabbed attention, given recent headlines about debt loads and unrest there. China's PMI dipped from 52 to 50.9, barely in expansionary territory, in June. That's not entirely a bad thing, however. Chinese inflation has been running uncomfortably high, and the government has been working to slow the economy's growth. The story is the same in India, where activity also slowed, and in Brazil, where production actually fell in June.

As the chart at right indicates, the Indian and Brazilian economies have been running especially hot. (You can see an interactive chart of the factors that make-up the index here.) Depending on the pace of the slowdown over the next few months, there are sure to be worries about hard landings. Emerging market governments have little choice but to combat destabilising inflation.

The good news for the rich world is that slowing emerging market growth will keep commodity prices. That, in turn, will dampen inflationary pressures and free central banks to respond more appropriately to domestic economic conditions. In Europe, those conditions are weak and getting weaker. Manufacturing activity for the euro zone decelerated sharply in June. The big core economies, Germany and France, weren't spared. But matters are worse around the periphery.

Greece and Spain were already suffering from falling manufacturing activity in May and continued to do so in June; Spain's economy contracted faster in June than in the month prior. Italy and Ireland had been enjoying some manufacturing growth in May, but activity fell back into decline last month.

Unsurprisingly, unemployment worsened in Spain and Italy, and held steady at a high level in Portugal, Ireland, and Greece. And according to a flash estimate, euro-zone headline inflation held steady at 2.7% in June. Given ongoing retrenchment in commodity markets, not to mention widening economic weakness, inflation will soon begin falling.

But that's not going to stop the European Central Bank from raising interest rates yet again in July. The ECB's stance here is truly remarkable; if I didn't know better I'd swear its leaders wanted the euro zone to fall apart. At any rate, we'll soon see whether dramatic austerity and interest rate increases are the route to prosperity, as some claim. Sadly for the Europeans, history suggests a much darker economic outlook will result.

Both of these cases are often used to highlight India’s lamentable performance in attracting Foreign Direct Investment (FDI). (India bucked the emerging market trend to record a fall in FDI last year.) For India’s many market fundamentalists, meddling bureaucrats are impeding major investment, which could transform the efficiency of the economy. They are only right to a certain extent.

First some background. The Vodafone case relates to the 2007 acquisition of Hutchinson Essar, an Indian mobile network, then owned by a Hong Kong firm. The purchase was executed in the Cayman islands to avoid tax, but India’s government won a court order in 2010 imposing a retrospective $2.5 billion bill for capital gains. Vodafone is worried the charge will be doubled due to fines for late payment, if India’s Supreme Court does not overturn the decision.

Vedanta, a London-listed FTSE 100 firm, first bid for Cairn’s oilfields in the northwestern state of Rajasthan at the start of the year. The Indian cabinet decided to take a closer look, apparently due to concerns about Vedanta’s owner, the self-made Indian billionaire Anil Agarwal. Mr Agarwal is accused of flouting environmental laws in past business ventures in his home country.

Both cases have been time consuming, non-transparent and at times overtly politicised. India’s lower court took three years to deliberate on the Vodafone tax bill. The Supreme Court will not consider it until July. In the meantime Vodafone has stalled further investment in India. The latest round of government pressure coincided neatly with a bribery scandal over the auction of mobile-phone spectrum. What better time to appear tough on taxing foreign giants?

The Vedanta case has sat in the cabinet for months, where it is subject to competing interests and claims from ministers representing different parties in the Indian coalition. Why a major commercial decision should be subject to cabinet haggling, rather than taken by a responsible minister or regulator is unclear.

Clearly neither of these cases encourages other companies considering significant ventures into India. Why pour money into the country if you might face an unexpected tax bill down the line, or if you will have to wait several months for politicians to decide whether to accept it.

However the picture is more nuanced than Delhi’s critics would have it. Vodafone argues the Indian government has no jurisdiction over a transaction between two foreign companies occurring on foreign soil. But the asset transacted was wholly India-based and serves only Indian customers. In the Vedanta case, the Indian government is not the only one with concerns about the propriety of London-listed commodity companies. Only this week Sir Richard Lambert, one of the people who helped launch the FTSE three decades ago, has questioned the governance of holding companies which have made it on to the index in recent years.

The control of foreign investment is an important sovereign issue, especially in a country whose history of FDI includes Union Carbide and Bhopal. India should not abandon quality control. However the process by which foreign investments are evaluated needs to be transparent, stable and, above all, much, much faster. Otherwise investors will continue to grimace, while they wait on the sidelines.

And yet, the yield on the 10-year bond is at 3.2%—precisely where it was in December of last year, and June of last year, and May of 2009, and November of 2008. The yield on the 10-year got down this low for a brief moment in 2003; before that, rates were well above the current level going back to the Eisenhower administration. As recently as February the yield was above 3.7%. When politicians began worrying about the arrival of bond vigilantes early in 2010, the yield was around 4%.

What I'm trying to say is that yields on American debt are low, low, low. And yet, it seems likely that economic writers will soon be fretting about those bond vigilantes once again. Why? Over the past week, the yield on the 10-year bond has risen about 12%. In the scheme of things, that's a wiggle, and it's primarily associated with the same good-news trend that's driven equities up sharply over the same period. Sub-3% yields are a sign of market fear and doubt. As those doubts and fears have receded, markets have been slightly more willing to put their money in riskier places, and Treasury yields have risen.

But in the thick of an intense Washington fiscal debate, those nuances are unlikely to matter much. Rising yields will probably be seized upon as evidence that the fiscal crisis is approaching. The question is: how might that misunderstanding be interpreted? The spectre of bond vigilantes might finally prove useful if it encourages Washington to conclude a deal more quickly. Rising yields might also make Republicans look more ridiculous still for refusing to even consider revenue increases as a deficit-reduction tool. Either way, it would be ironic if the same tales of looming bond-market bears that led Washington to take its eye off of the unemployment problem last year saved a recovering economy from catastrophe by facilitating a debt-ceiling deal this year.

That worrisome outcome is not entirely out of the question, but it is looking less likely by the day. Japan's post-disaster economic slump seems to be ending, and American firms impacted by the disruption of supply chains are gearing back up. High automobile prices, due again to supply disruptions, dragged down auto purchases and pushed up inflation, but these trends too seem to be reversing. Petrol prices have dropped about 40 cents since the beginning of May, providing much needed relief to American consumers. And housing markets are showing some signs of life.

The good news is translating into good data. Industial production surprised to the upside in June, according to figures released today. Home prices ticked up in April and, according to one survey, in May as well. Serious delinquencies continue to decline, and pending sales rose in May for the first time in over a year. Labour markets remain shaky, but initial jobless claims, while still high, have backed away from their recent peak near 500,000. Equities are following the good news; stocks are up over 5% since mid-June.

So what happens now? In the hopeful scenario, the reversal of the first half's negative trends brings a return to the stronger job growth seen early in the year—the 235,000 new jobs seen in February rather than the 54,000 added in May. And ideally, these job gains support more spending and continued recovery in housing markets. One hopes, in other words, that the economy regains the trend it seemed to be on early in the year. That trend growth rate was too slow (it still implied a return to full employment somewhere off in the distant future) but it was far better than the prevailing pattern in April and May.

Unfortunately, America isn't out of the woods yet. European crisis could yet spin out of control. Commodity prices should stay moderate as overheating emerging markets rein in their growth, but oil markets remain tight and a stronger American recovery could easily mean a new jump in petrol costs.

The biggest threat to recovery, however, is associated with America's domestic political situation. If this bounce back persists, the Fed will be really and truly done with its easing, despite continued high unemployment and continued moderation in inflation. In the best of circumstances, fiscal policy is set to tighten. In all likelihood, a debt deal will mean that fiscal policy tightens quite a lot. And in the worst case, the failure to reach a debt deal will mean either catastrophic fiscal tightening or a default, which would probably send America quickly back into recession.

Washington is the biggest threat to America's economy. It shouldn't be. It should be working to make sure that recovery continues and accelerates. At this point, however, the big question seems to be: just how much damage will Congress do to a recovery that is managing, just, to keep its head above water.

Why is this? Mr Boehner’s party controls 240 of the 435 seats in the house. That means that if more than 22 of his members vote against a deal, he will need some Democrats to pass it. I don’t know of any precise count of Republicans who have sworn to vote against any increase in the debt ceiling. But Chuck Conlon, the veteran budget guru over at CQ (a sister publication of The Economist) points me to the Republican Study Committee’s “Cut-Cap-Balance” letter. Its 103 signers imply they won’t vote to raise the ceiling unless three conditions are met: halving of the deficit via spending cuts next year; implementation of a statutory spending cap of 18% of GDP; and a balanced-budget amendment to the constitution. (The letter is here; the signatories are here.)

Needless to say the odds even one of these conditions are met, much less all, are close to zero. The signatories have left themselves wiggle room. But even if Mr Boehner got the $2 trillion, spending-cuts-only deal that his deputies were angling for in their negotiations with Joe Biden, it seems likely many of these Republicans would vote against it.

For precedent consider the continuing resolution in April that narrowly averted a government shutdown. By any reasonable accounting the Republicans got more than they gave up; budget authority in 2011 was cut by $40 billion from actual spending in fiscal 2010, and by $78 billion from Mr Obama’s 2011 budget request; Republicans had wanted $100 billion. Yet revelations that much of that spending wouldn't have occurred anyway infuriated many Tea Party members, and 59 voted against the final resolution. It passed with the support of 81 Democrats.

Getting Democrats to vote for a deficit-reduction deal that slashes sacred programmes and doesn’t touch taxes will be a stretch. Conceivably enough Democrats in the Senate could be cobbled together for such a deal, but who in the House, after the culling of so many conservative members in last fall’s election, would want to defend such a vote in November, 2012? So rhetoric aside, the Republicans can't afford to close the door completely to higher taxes. This may explain the mixed messages coming from their leadership on whether eliminating tax breaks, as Mr Obama proposes, constitutes a tax increase. John Kyl implies no; Mitch McConnell implies yes.

As my colleague at Democracy In America points out, it’s in Mr Boehner’s political interest to dig in as long as possible. Yet he can use the Tea Party's intransigence as an excuse not to negotiate for only so long. First, he cannot count on Mr Obama knuckling under and persuading his party to follow suit; they may ignore him. As one Republican pundit told me, “The Democrats have their jihadists, too.” Second, the closer you get to the debt-ceiling deadline of August 2nd (although there are rumours the date will move out a bit thanks to better tax revenues), the greater the risk of an accident.

To be sure, Republicans claim the Treasury can just "prioritise" interest payments to avoid a default. Read the meticulous analysis that Jay Powell of the Bipartisan Policy Center did of the Treasury’s cash flows in August for a sense of how risky that is. Among his findings:

For example, on Aug. 3, we project that the government will have about $12 billion in receipts and $32 billion in committed payments, including a $23 billion Social Security payment. And Aug. 15 presents a triple threat: a $19 billion daily deficit, a $29 billion interest payment and a quarterly refunding auction to pay off a maturing $27 billion bond.

Even assuming that Treasury manages to remain current on its debt, the firestorm that arises when vendors, pensioners and soldiers stop getting paid will be unprecedented. As the nonpartisan analysts at ISI Group note, the failure of TARP to pass on the first try in the fall of 2008 may not do justice. The main fallout then was the plunge in the stock market. This time, it will not be just financial market turmoil but “voter outrage associated with the prospect of an immediate 44% cut in federal spending that would instantaneously overwhelm the Capitol Hill switch board”. Both parties will be blamed, but Republicans more. After all, some, such as Michele Bachmann, have opposed raising the ceiling precisely to induce cuts on such a scale.

Mr Boehner talks tough. But he has less leverage than he lets on.

• Geithner considering leaving Treasury after debt debate (Bloomberg)

• Prescriptions to revive recovery (Wall Street Journal)

• Reasons to break America's addiction to oil (ESA)

• U.S. caught China buying more debt than disclosed (Reuters)

Days after the circulation of a plan drafted by French banks to roll over much of the Greek debt that they hold, German banks said that they would do much the same. No details are available, largely because they have yet to be thrashed out, but Joseph Ackermann, the boss of Deutsche Bank, and Wolfgang Schäuble, Germany's finance minister, said that they had agreed in principle that €3.2 billion ($4.6 billion) would be rolled over.

Exactly what will be done is still a bit of a mystery to both the banks and German politicians. This is because the plan that must emerge by Sunday will, like the existing French plan, probably be a fiendish construct designed by lawyers and accountants to deliver some relief to Greece without triggering a declaration by credit-rating agencies that the country is in default. Even if the details are fuzzy, the broad parameters of it seem clear. People close to the talks say that German banks (like their French counterparts) insist that they will only agree to a deal which, in accounting terms, does not force them to write down the value of the Greek bonds they hold.

Thus the German plan is likely to follow the broad outlines of the French one, with Greece borrowing more than it needs and setting some aside by buying safe collateral that could be used to repay banks part of their money if the country defaults. The interest rate that Greece has to pay will probably also be similar to the 5.5-8% proposed under the French plan, although in cash terms Greece would be paying a higher rate for the duration of the rollover because it would also be paying interest on money set aside as collateral.

You can read more on the developing rollover plan here, in the print edition. The upshot is that the proposed rollover would likely be good for banks as it reduces their total exposure and clarifies where losses are likely to fall. For Greece, the best that can be said of the measure is that it buys time. That's about it, though; total obligations aren't reduced, and in the short-term Greece will be stuck paying very high rates in cash terms.

Meanwhile, it's been an exciting day in London:

From Bagehot's office window, the usual view of Parliament and the London Eye is accessorised by hovering police helicopters: the tell-tale sign that demonstrators are marching on central London again. Today, it is the turn of teachers and other public sector workers, out on a one-day strike to protest against changes to their retirement benefits. Do the public support the strikers? The opinion polls are confused, to be honest: there are polls that show majorities supporting the right of teachers to strike over pension rights, but polls also showing opposition to this particular strike over pension rights. For the moment, the consensus among the big parties at Westminster is that the trade unions are making a mistake, though many wonder if the government will also start to get the blame if rolling strikes start to cause serious disruption in the autumn.

Buttonwood has more on the protests and an analysis of the pension dispute here.

In America, just under 80% of enterprises employ fewer than 10 people. In Italy, by contrast, very nearly the entire economy is composed of firms of that size. But small business is the lifeblood of a dynamic economy, right? Surely America ought to be doing better on this score than laggardly Italia.

Well, a recent Special report on the Italian economy explains why it's Italy that has something to learn from America, and not the other way around:

Italy is a wild forest of little privileges, rents and closures. Each has its own lobby group; together they conspire to make reforms close to impossible. This is particularly evident in the service sector. The government is reinstating minimum charges for lawyers, a group not normally considered to need protection from unscrupulous employers. At the other end of the labour market, barriers to entry in jobs that might attract immigrants are high. In Britain pharmacies are often staffed by bright young Asians. In Italy until recently the law set minimum distances between pharmacies, handing a huge advantage to incumbents and blocking new entrants. If the owner of one of these shops died, his heirs had the right to run the business for ten years even if they were not qualified pharmacists. These laws were tweaked in 2006, but three years later the desired competition had still not materialised and only 64 pharmacists in Italy had more than one shop.

In America, the retail sector is dramatically freer than in much of Europe. Successful retailers can grow and grow and grow into national or global chains. That may make the high street a little less quaint, but it makes for higher productivity, more rapid growth, and more job creation. And less corruption. The Italian rules that protect small businesses and keep them small are a major reason why the Italian economy struggles so mightily to manage positive growth.

Why are small businesses important to an economy? Not because small itself is beautiful. Rather, it's because the best small firms become big, spreading good ideas across the entire economy and creating lots of jobs through expansion.

The presence of large businesses in America could become a problem if those businesses use their size to quash competition, through anti-competitive practices or political rent-seeking. But in general, America's large businesses are a testament to the fact that in the American economy, the successful are allowed to grow. And grow and grow and grow.