As reported in the November 30th, 2010 CNNMoney article written by Les Christie, home prices fell by 2% during the third quarter of 2010. S&P Case-Shiller U.S. National Home Price Index uses a composite of single-family homes from nine U.S. Census divisions, which are calculated quarterly. Housing is a strong indicator to future economic performance because it drives more economic activity. When a family buys a home, it typically leads to more buying. This includes furniture, appliances, kitchen items, along with other household goods. That impacts a number of industries and leads to higher economic growth. However, this downward trend suggests that our immediate future remains cloudy as a sluggish labor market and an uncertain foreclosure market are drags on housing.
The unemployment rate remains high, so naturally individuals are cautious in buying big ticket items. The U.S. unemployment rate remains very high at 9.6% as of October. Then one look at the Economic Policy Institute report on the current labor market and the outlook is particularly dire. As they suggest, it might take 20 years for us to see unemployment rates near our normal rate of 5%, unless job growth increases substantially. When the labor market is sluggish, people are less secure and therefore less willing to make a significant financial commitment on a new house.
Foreclosure markets will need to operate more smoothly before we can see improvement. There appears to have been questionable practices from banks that may not have followed proper procedures. Another viewpoint offered here in this November 29th, 2010 Housing Wire article from Paul Jackson blames the mortgage servicing industry and governmental efforts in creating more affordable housing. Regardless, litigation risk is on the rise and this will have a negative effect on the housing market.
Tuesday, November 30, 2010
Monday, November 29, 2010
Wal-Mart Goes African: Will Trend Toward Emerging Markets Continue?
As demonstrated in this November 29th, 2010 Bloomberg article written by Margaret Brennan and Cotten Timberlake, Wal-Mart has decided to expand its presence to South Africa. This will be their first expansion in Africa, while they already have a presence in South America, Central America, and Asia. Rather than purchase a full stake in Massmart, they opted to buy majority share at 51%. As shown by South Africa's Economic Freedom index score from the Heritage Foundation, one can see that they rank below the world average at 45 which suggests that governmental regulation looks unkindly to total foreign control of a firm. Despite this barrier, this is an indication that Wal-Mart is becoming bullish toward emerging markets.
One reason for this is that emerging markets have actually outperformed advanced economies recently. A review of Real GDP growth from World Bank's Global Economic Outlook shows that developing countries will almost double the growth rate for high income countries. As stated in the article, Wal-Mart is also interested in expanding China and Brazil where both areas are expanding at explosive rates that are near double digits. Even when looking at forecasted rates in South Africa, you can see that their growth over the next two years rate comparatively to the U.S. at 3.1% and 3.4% in 2010 and 2011, respectively.
One reason for this is that emerging markets have actually outperformed advanced economies recently. A review of Real GDP growth from World Bank's Global Economic Outlook shows that developing countries will almost double the growth rate for high income countries. As stated in the article, Wal-Mart is also interested in expanding China and Brazil where both areas are expanding at explosive rates that are near double digits. Even when looking at forecasted rates in South Africa, you can see that their growth over the next two years rate comparatively to the U.S. at 3.1% and 3.4% in 2010 and 2011, respectively.
Will Airlines Receive A Boost?
In Principles of Macroeconomics and Mankiw's Production and Growth, we analyze the relationship between productivity and living standards. In determining why certain countries are wealthier than others, one common feature is the growth rate of productivity. There are four general factors that we look at in examining productivity and they include:
A reduced cost structure will provide Luthansa with a pricing advantage that can expand their market power. By getting better fuel mileage along with cheaper fuel, they have more flexibility to lower prices without sacrificing their profit margins. By offering better prices, they can also increase the number of customers and widen their market share. Of course, they will eventually be susceptible to competitors utilizing the same resource, but all travel customers would benefit by traveling at lower fares.
A potential downside could occur if this process is adopted at a significant level. If other airlines decide to use vegetable oil to fuel their planes, then this will cause an increase in demand for vegetable oil. That would mean the food industry could be affected as the price of vegetable oil rises. Therefore, restaurants and other businesses that use vegetable oil could see their cost structures increase in the future.
- Physical capital per capita
- Human capital per capita
- Natural resources per capita
- Technological knowledge
A reduced cost structure will provide Luthansa with a pricing advantage that can expand their market power. By getting better fuel mileage along with cheaper fuel, they have more flexibility to lower prices without sacrificing their profit margins. By offering better prices, they can also increase the number of customers and widen their market share. Of course, they will eventually be susceptible to competitors utilizing the same resource, but all travel customers would benefit by traveling at lower fares.
A potential downside could occur if this process is adopted at a significant level. If other airlines decide to use vegetable oil to fuel their planes, then this will cause an increase in demand for vegetable oil. That would mean the food industry could be affected as the price of vegetable oil rises. Therefore, restaurants and other businesses that use vegetable oil could see their cost structures increase in the future.
Sunday, November 28, 2010
Expensive Bailout for Irish
Based on the articles from the November 28th, 2010 editions of Reuters and the Financial Times, Ireland is set to receive a 85 billion euro ($110 billion) rescue package from the European Union. As for the specific terms, around 10 billion euros of the funds will be used to recapitalize their financial system and bring them up to core Tier 1 capital requirements. Tier 1 capital is what the industry uses to measure liquidity and their ability to absorb bad loans. An additional 25 billion euros will be available to cover any future deterioration. As for the remaining amount, they will be used by the Irish government in meeting their budgetary requirements. Overall, this is a costly bailout for the Irish and will require significant sacrifice from its citizens.
We must consider that the Irish government has already made a commitment to resolving their economic crisis where their solutions are geared toward more efficiency and less equity. They have committed a combination of spending cuts (67%) and tax increases (33%) totaling 15 billion euros over a four year period. Due to concerns about losing direct foreign investment, they decided to maintain their corporate tax rate from 12.5%, which is substantially lower than the U.S. corporate tax rate of 35%. However to accomplish this, they had to resort to cuts in welfare and lowering the pay of public sector workers. In addition, the minimum wage will be slashed by 12% and tax code changes that are more onerous to the working poor. By lowering the bar where income tax rate kicks in, more lower income individuals will see their tax liability rise. These proposals are considered more efficient because it will minimize the loss of foreign capital that can boost economic growth, but will lower equity because the burden will of the shortfall will be felt more by the poor than the wealthy.
Then there are concerns about the high interest rate for obtaining the rescue funds. As reported in the November 28th, 2010 Irish Times, the average interest rate will be 5.8% which exceeds the average interest rate for 5.2%. This is a bitter pill for Ireland to swallow because they have exhibited a stronger political will than Greece, their southern brethren. Under these terms, they will no longer get access to short-term funds from the European Central Bank, which are much cheaper.
In order to save Ireland's financial industry, further commitments from the Irish and the International Monetary Fund will also be needed with concerns that this contagion can spread. The Irish government has agreed to commit 17.5 billion euros, while the International Monetary Fund, where the U.S. is the largest stakeholder, will extend 22.5 billion euros.
There is concern of moral hazard where poor business practices are rewarded, but for now the global community does not want to risk the ramifications of any European country going bankrupt. Greece started the trend with their 110 billion euro bailout in May 2010. At the time, there was concerned that it would not stop there and it looks like it could go beyond Ireland. Both Portugal and Spain are encountering similar problems, so it will be interesting to see if Europe can contain this burgeoning crisis. Some argue that countries should be allowed to fail, but that ignores the significant financial interests present in the U.S., the rest of Europe, and throughout the world. If any of the European countries did go bankrupt, then banks with European interests across the world would take massive losses. This is problematic because global financing would be disrupted and that could lead to a severe credit crunch. Its impact could be felt globally with the end result being further economic decline and higher unemployment.
We must consider that the Irish government has already made a commitment to resolving their economic crisis where their solutions are geared toward more efficiency and less equity. They have committed a combination of spending cuts (67%) and tax increases (33%) totaling 15 billion euros over a four year period. Due to concerns about losing direct foreign investment, they decided to maintain their corporate tax rate from 12.5%, which is substantially lower than the U.S. corporate tax rate of 35%. However to accomplish this, they had to resort to cuts in welfare and lowering the pay of public sector workers. In addition, the minimum wage will be slashed by 12% and tax code changes that are more onerous to the working poor. By lowering the bar where income tax rate kicks in, more lower income individuals will see their tax liability rise. These proposals are considered more efficient because it will minimize the loss of foreign capital that can boost economic growth, but will lower equity because the burden will of the shortfall will be felt more by the poor than the wealthy.
Then there are concerns about the high interest rate for obtaining the rescue funds. As reported in the November 28th, 2010 Irish Times, the average interest rate will be 5.8% which exceeds the average interest rate for 5.2%. This is a bitter pill for Ireland to swallow because they have exhibited a stronger political will than Greece, their southern brethren. Under these terms, they will no longer get access to short-term funds from the European Central Bank, which are much cheaper.
In order to save Ireland's financial industry, further commitments from the Irish and the International Monetary Fund will also be needed with concerns that this contagion can spread. The Irish government has agreed to commit 17.5 billion euros, while the International Monetary Fund, where the U.S. is the largest stakeholder, will extend 22.5 billion euros.
There is concern of moral hazard where poor business practices are rewarded, but for now the global community does not want to risk the ramifications of any European country going bankrupt. Greece started the trend with their 110 billion euro bailout in May 2010. At the time, there was concerned that it would not stop there and it looks like it could go beyond Ireland. Both Portugal and Spain are encountering similar problems, so it will be interesting to see if Europe can contain this burgeoning crisis. Some argue that countries should be allowed to fail, but that ignores the significant financial interests present in the U.S., the rest of Europe, and throughout the world. If any of the European countries did go bankrupt, then banks with European interests across the world would take massive losses. This is problematic because global financing would be disrupted and that could lead to a severe credit crunch. Its impact could be felt globally with the end result being further economic decline and higher unemployment.
Wednesday, November 24, 2010
Corporate Profits Soar Higher
It might be odd with the U.S. recovery not recognized by many, but U.S. businesses continue to surge forward as described in November 23rd, 2010 NY Times article written by Catherine Rampell. At the end of the third quarter of 2010, U.S. corporate profits rose to $1.659 trillion which is the highest recorded figure in over 60 years. Even though it is not adjusted by inflation, that is certainly a healthy figure. One might ask how that can occur given economic conditions in the U.S. The explanation lies in higher productivity rates and globalization.
First, corporate performance is directly related to productivity. If firms can produce a good at a faster rate of time, then that can lower their overall costs and lead them to gaining more market share because they can be more competitive on price. Even with a downsized workforce, investments in technology have paid off for firms. That means that can maintain production levels with less workers. That is one of the reasons why the U.S. is transitioning from manufacturing to service-oriented jobs, so U.S. workers must improve their human capital and technology skills to become more marketable and attain higher paying service jobs.
One other aspect that led to the quick recovery of U.S. firms during the last recession is the U.S. economic system. When looking at the U.S. economic profile from the Heritage Foundation's Index of Economic Freedom, you will see that they score very high in labor freedom at 94.6 out of 100. This means that there are very few costs in firing an employee. Therefore when the economy deteriorated, businesses were able to layoff workers quickly to improve their bottom line. This is in contrast to European countries, who impose high costs on firms who want to fire workers. For instance, Germany's labor freedom index score rates at a low 39.9. While this is obviously good for European workers, European firms were slower in recovering as reflected in this March 18th, 2010 Economist article comparing U.S. and Europe productivity rates. When looking at 2009, you can see that U.S. firms still had positive productivity rates at 2.5% rise in GDP per hour, while Europe had a -1.1% decrease in GDP per hour. It should be noted that European countries have since rebounded, though.
Another factor is that the U.S. has capitalized on globalization. Even though the U.S. economy tanked, many U.S. multinational corporations were able to offset their domestic losses by taking advantage of higher growth in developing countries, such as China, Brazil, and India. In addition to being able to market their products and services in these new markets, they were also able to outsource production overseas. This improved their cost structure and enabled them to boost their profits.
While many Americans are discouraged by oursourcing and the loss of jobs, there are hidden benefits that many do not see. In the Fruits of Free Trade produced in the 2002 Annual Report of the Federal Reserve Bank of Dallas, we can see how we capitalize from freer markets. It is outdated because it shows the U.S. as the world's greatest exporter, but we have since been taken over by Germany and China. However, the U.S. consumer is better off due to the cheaper imports entering the marketplace. While it is true that free trade destroys jobs, there is an economic concept called creative destruction where inefficient firms are replaced by more efficient producers. In fact before the recession, more jobs were being created than destroyed. The problem is that these new jobs require different skillsets, so the distribution of these jobs are not always equitable.
First, corporate performance is directly related to productivity. If firms can produce a good at a faster rate of time, then that can lower their overall costs and lead them to gaining more market share because they can be more competitive on price. Even with a downsized workforce, investments in technology have paid off for firms. That means that can maintain production levels with less workers. That is one of the reasons why the U.S. is transitioning from manufacturing to service-oriented jobs, so U.S. workers must improve their human capital and technology skills to become more marketable and attain higher paying service jobs.
One other aspect that led to the quick recovery of U.S. firms during the last recession is the U.S. economic system. When looking at the U.S. economic profile from the Heritage Foundation's Index of Economic Freedom, you will see that they score very high in labor freedom at 94.6 out of 100. This means that there are very few costs in firing an employee. Therefore when the economy deteriorated, businesses were able to layoff workers quickly to improve their bottom line. This is in contrast to European countries, who impose high costs on firms who want to fire workers. For instance, Germany's labor freedom index score rates at a low 39.9. While this is obviously good for European workers, European firms were slower in recovering as reflected in this March 18th, 2010 Economist article comparing U.S. and Europe productivity rates. When looking at 2009, you can see that U.S. firms still had positive productivity rates at 2.5% rise in GDP per hour, while Europe had a -1.1% decrease in GDP per hour. It should be noted that European countries have since rebounded, though.
Another factor is that the U.S. has capitalized on globalization. Even though the U.S. economy tanked, many U.S. multinational corporations were able to offset their domestic losses by taking advantage of higher growth in developing countries, such as China, Brazil, and India. In addition to being able to market their products and services in these new markets, they were also able to outsource production overseas. This improved their cost structure and enabled them to boost their profits.
While many Americans are discouraged by oursourcing and the loss of jobs, there are hidden benefits that many do not see. In the Fruits of Free Trade produced in the 2002 Annual Report of the Federal Reserve Bank of Dallas, we can see how we capitalize from freer markets. It is outdated because it shows the U.S. as the world's greatest exporter, but we have since been taken over by Germany and China. However, the U.S. consumer is better off due to the cheaper imports entering the marketplace. While it is true that free trade destroys jobs, there is an economic concept called creative destruction where inefficient firms are replaced by more efficient producers. In fact before the recession, more jobs were being created than destroyed. The problem is that these new jobs require different skillsets, so the distribution of these jobs are not always equitable.
Tuesday, November 23, 2010
Evaluating Krugman's Axis of Depression
In Paul Krugman's Axis of Depression article in the November 19th, 2010 edition of the NY Times, he creates an allegory on George Bush's famous reference of the Axis of Evil, which represented Iran, North Korea, and Iraq in the early part of 2000. While Bush was concerned about terroristic activities from Iran, North Korea and a Saddam-led Iraq, Krugman is worried that China, Germany, and the Republican Party are favoring policies that will send us to economic calamity. Recently, we learned that the U.S. Federal Reserve Open Market Committee (Fed) led by Bernanke decided to implement a second round of quantitative easing aimed at stimulating economic activity by driving down interest rates. In this editorial, Krugman not only agrees with the Fed's moves, but is adamant that government should play a much larger role in sustaining and growing this recovery.
This debate is actually an age-old argument on the proper role of a central bank in running an economy. In the Principles of Macroeconomics and Mankiw's Five Debates over Macroeconomic Policy, there are two schools of thought. On one hand, you have monetarists, such as John Taylor, who believes the primary goal of the Fed is to maintain price stability. Then you have other economists such as Krugman, who favor the Fed playing a more active role in steering the economy where they increase money supply to increase employment. While this act might improve the labor market, it should be noted that it can lead to higher inflation.
When the Fed plays an activist role in managing the economy, they must recognize that the two goals of low inflation and unemployment often conflict with each other. In Principles of Economics and Mankiw's Ten Principles of Economics, there is Principle #10 stating that society faces a short-run trade-off between inflation and employment. This means that the Fed can increase money supply, which floods additional reserves to financial institutions, and eventually leads to more lending and investment activities. Jobs typically follow higher investment spending, so unemployment should fall. However the downside to this strategy is that more money in consumer pockets can lead to excessive spending. While that sounds good, the problem occurs when businesses are not able to meet the rise in consumer demand for goods and must respond by raising prices to ensure their goods remain stocked. This can result in higher inflation and that spooks investors and consumers alike.
Krugman's central argument is that the current economic environment calls for a more aggressive response to improving the labor market and not be as concerned about inflation because it is already so low. Economists often remark how monetary policy is an art where we carefully have to guide through the ebbs and flows caused by market forces. The general rule is that you increase money supply when inflationary risks are lower than unemployment risk. Conversely, you decrease money supply when inflationary risks are higher than unemployment risk. As I remark in my November 18th, 2010 blog entry, current inflation rates are near historical lows and there's even concern that deflation could be an issue. Therefore, this is strong evidence to support Krugman's reasoning for quantitative easing and boosting money supply.
On the other hand, it should be acknowledged that inflation often takes on disguised forms and can strike with immediacy and great force. While Krugman states that inflation remains low, he neglects to mention that the market also prices bonds based on inflation expectations. Based on past history, bond investors are wary about extended efforts in keeping interest rates low and money supply high. As pointed out in this November 15th, 2010 WSJ Real Time Economics blog, we can look back to the 1960s where the Fed was too aggressive in keeping interest rates low by buying short-term bonds over an extended period. You can see the what happened to inflation based on their actions as shown in this graph of core inflation rates from 1965 to 1984 from the Federal Reserve Bank of Cleveland. The measure of core inflation was initially low in 1965, but quickly exploded in the mid-1966 and continued its rise for over a decade. (Note: There was a brief respite in the early 1970s, but that was due to flawed price controls implemented by President Richard Nixon, which only led to hyperinflation a couple of years later.) Only the vigilant actions of former Fed Chairman Paul Volcker was able to stave off inflation around 1983. Therefore, the Fed must tread carefully with monetary policy because an incorrect move can damage an economy for a long period of time.
Another ancillary benefit to the quantitative easing is its potential impact on U.S. exports and jobs that can be created from it. One of the effects of increasing money supply is that it will devalue the U.S. currency. This is beneficial because a cheaper dollar can make our U.S. goods less expensive to foreign goods, which is one of the reasons why Krugman casts a dismissive eye to complaints from China and Germany. In fact, both of these countries passed the U.S. in overall exports. In particular, China was able to do this by tying its currency rate to the U.S. dollar at artificially low exchange rates, while Germany capitalized on a unified currency (Euro) that enabled them to attract investment away from its European breathren. Both would see their position weaken with a cheaper U.S. dollar, so Krugman discounts their criticism as being self-serving.
Krugman's angst with Republicans is their preoccupation with limiting government's role during an economic downturn. Their concerted efforts in watering down last year's stimulus legislation, along with reluctance in passing an infrastructure bill, can also stall economic activity. As we have seen with the impotence of monetary policy so far, one could assert that the U.S. is in a liquidity trap where the private sector is either unwilling or unable to create jobs. In those instances, government can intervene by boosting spending on highways, investment in alternative energy, and serve as a stopgap for state finances that continue to deteriorate. While not being specific, the Republican Party believes that government excess can be cut. While their proposals could lead to lower deficits, one cannot forget that lower government spending will lead to economic declines in the short run. Local businesses would be affected if welfare spending and extended unemployment benefits are cut. Areas that depend on military bases could be greatly affected if those bases close due to cuts in national defense.
In fact, one look at history can see the danger in addressing the budget deficit immediately. When looking at historical data on U.S. budget deficits from the U.S. Census, one can see the potential harm. Specifically, you can look at 1937 and 1938 where the budget deficit was significantly curtailed from $4.3 billion in 1936 to $2.2 billion in 1937 and a paltry $89 million in 1938. During this time period, Democrat President Franklin D. Roosevelt was concerned about budget deficits and immediately reacted by drastically cutting government expenditures from $8.2 billion in 1936 to $6.8 billion in 1938 and the results were staggering as shown in this table of Real GDP growth rates from the Bureau of Economic Analysis. Economic growth rates went from an explosive 13% in 1936 to a demoralizing -3.4% in 1938. This is indicative of why Krugman is concerned about the Republican priority of slashing government spending.
In summary, the U.S. recovery is still fragile and I believe the actions from both the Fed and Congress will influence the direction of future economic growth. It is my belief that Bernanke anticipates gridlock from a divided Congress, so that is why the Fed decided to organize a second round of quantitative easing because they want to avoid a deflationary environment that could occur if our recovery stalls. Despite this risk of deflation, I do not think quantitative easing is the right method now. As inferred by even Krugman, the effect of quantitive easing will probably be minimal anyway. However, the risks of retalitory currency manipulation, along with heightening inflation risks in the future, outweigh the benefits of this monetary policy response.
A more appropriate course of action would be Congress quickly passing legislation aimed at additional public investment and reforming the tax code. Industrial policy aimed at investments of transportation systems and alternative energy projects are essential to maintaining our competitive edge globally. While I understand that these investments are costly and could crowd out private investment in the future, I think this could be balanced by imposing deficit-cutting methods that will start to take effect three or four years down the road. As for the tax code, I do believe that it needs to be modified to boost revenues and better align incentives. This can be done by slowly limiting deductions for both individuals and businesses over time. By broadening the tax base, we can increase revenues through these efforts and then make it politically more viable by cutting marginal income tax rates for everyone, along with lowering the corporate, capital gains, and dividend tax rates.
Lastly, we also need to address the strain of entitlement spending and national defense. As the baby boomers retire, Social Security, Medicare, and Medicaid spending will skyrocket, so politicians will soon not be able to ignore it. Then combine that with a volatile world where nuclear proliferation and terrorism threaten our security, there will be increased pressure to raise defense spending. All of these forces are leading the U.S. to an unsustainable fiscal state soon. Therefore, politicians will need to be frank with the public and outline priorities that will require sacrifice by all of us.
This debate is actually an age-old argument on the proper role of a central bank in running an economy. In the Principles of Macroeconomics and Mankiw's Five Debates over Macroeconomic Policy, there are two schools of thought. On one hand, you have monetarists, such as John Taylor, who believes the primary goal of the Fed is to maintain price stability. Then you have other economists such as Krugman, who favor the Fed playing a more active role in steering the economy where they increase money supply to increase employment. While this act might improve the labor market, it should be noted that it can lead to higher inflation.
When the Fed plays an activist role in managing the economy, they must recognize that the two goals of low inflation and unemployment often conflict with each other. In Principles of Economics and Mankiw's Ten Principles of Economics, there is Principle #10 stating that society faces a short-run trade-off between inflation and employment. This means that the Fed can increase money supply, which floods additional reserves to financial institutions, and eventually leads to more lending and investment activities. Jobs typically follow higher investment spending, so unemployment should fall. However the downside to this strategy is that more money in consumer pockets can lead to excessive spending. While that sounds good, the problem occurs when businesses are not able to meet the rise in consumer demand for goods and must respond by raising prices to ensure their goods remain stocked. This can result in higher inflation and that spooks investors and consumers alike.
Krugman's central argument is that the current economic environment calls for a more aggressive response to improving the labor market and not be as concerned about inflation because it is already so low. Economists often remark how monetary policy is an art where we carefully have to guide through the ebbs and flows caused by market forces. The general rule is that you increase money supply when inflationary risks are lower than unemployment risk. Conversely, you decrease money supply when inflationary risks are higher than unemployment risk. As I remark in my November 18th, 2010 blog entry, current inflation rates are near historical lows and there's even concern that deflation could be an issue. Therefore, this is strong evidence to support Krugman's reasoning for quantitative easing and boosting money supply.
On the other hand, it should be acknowledged that inflation often takes on disguised forms and can strike with immediacy and great force. While Krugman states that inflation remains low, he neglects to mention that the market also prices bonds based on inflation expectations. Based on past history, bond investors are wary about extended efforts in keeping interest rates low and money supply high. As pointed out in this November 15th, 2010 WSJ Real Time Economics blog, we can look back to the 1960s where the Fed was too aggressive in keeping interest rates low by buying short-term bonds over an extended period. You can see the what happened to inflation based on their actions as shown in this graph of core inflation rates from 1965 to 1984 from the Federal Reserve Bank of Cleveland. The measure of core inflation was initially low in 1965, but quickly exploded in the mid-1966 and continued its rise for over a decade. (Note: There was a brief respite in the early 1970s, but that was due to flawed price controls implemented by President Richard Nixon, which only led to hyperinflation a couple of years later.) Only the vigilant actions of former Fed Chairman Paul Volcker was able to stave off inflation around 1983. Therefore, the Fed must tread carefully with monetary policy because an incorrect move can damage an economy for a long period of time.
Another ancillary benefit to the quantitative easing is its potential impact on U.S. exports and jobs that can be created from it. One of the effects of increasing money supply is that it will devalue the U.S. currency. This is beneficial because a cheaper dollar can make our U.S. goods less expensive to foreign goods, which is one of the reasons why Krugman casts a dismissive eye to complaints from China and Germany. In fact, both of these countries passed the U.S. in overall exports. In particular, China was able to do this by tying its currency rate to the U.S. dollar at artificially low exchange rates, while Germany capitalized on a unified currency (Euro) that enabled them to attract investment away from its European breathren. Both would see their position weaken with a cheaper U.S. dollar, so Krugman discounts their criticism as being self-serving.
Krugman's angst with Republicans is their preoccupation with limiting government's role during an economic downturn. Their concerted efforts in watering down last year's stimulus legislation, along with reluctance in passing an infrastructure bill, can also stall economic activity. As we have seen with the impotence of monetary policy so far, one could assert that the U.S. is in a liquidity trap where the private sector is either unwilling or unable to create jobs. In those instances, government can intervene by boosting spending on highways, investment in alternative energy, and serve as a stopgap for state finances that continue to deteriorate. While not being specific, the Republican Party believes that government excess can be cut. While their proposals could lead to lower deficits, one cannot forget that lower government spending will lead to economic declines in the short run. Local businesses would be affected if welfare spending and extended unemployment benefits are cut. Areas that depend on military bases could be greatly affected if those bases close due to cuts in national defense.
In fact, one look at history can see the danger in addressing the budget deficit immediately. When looking at historical data on U.S. budget deficits from the U.S. Census, one can see the potential harm. Specifically, you can look at 1937 and 1938 where the budget deficit was significantly curtailed from $4.3 billion in 1936 to $2.2 billion in 1937 and a paltry $89 million in 1938. During this time period, Democrat President Franklin D. Roosevelt was concerned about budget deficits and immediately reacted by drastically cutting government expenditures from $8.2 billion in 1936 to $6.8 billion in 1938 and the results were staggering as shown in this table of Real GDP growth rates from the Bureau of Economic Analysis. Economic growth rates went from an explosive 13% in 1936 to a demoralizing -3.4% in 1938. This is indicative of why Krugman is concerned about the Republican priority of slashing government spending.
In summary, the U.S. recovery is still fragile and I believe the actions from both the Fed and Congress will influence the direction of future economic growth. It is my belief that Bernanke anticipates gridlock from a divided Congress, so that is why the Fed decided to organize a second round of quantitative easing because they want to avoid a deflationary environment that could occur if our recovery stalls. Despite this risk of deflation, I do not think quantitative easing is the right method now. As inferred by even Krugman, the effect of quantitive easing will probably be minimal anyway. However, the risks of retalitory currency manipulation, along with heightening inflation risks in the future, outweigh the benefits of this monetary policy response.
A more appropriate course of action would be Congress quickly passing legislation aimed at additional public investment and reforming the tax code. Industrial policy aimed at investments of transportation systems and alternative energy projects are essential to maintaining our competitive edge globally. While I understand that these investments are costly and could crowd out private investment in the future, I think this could be balanced by imposing deficit-cutting methods that will start to take effect three or four years down the road. As for the tax code, I do believe that it needs to be modified to boost revenues and better align incentives. This can be done by slowly limiting deductions for both individuals and businesses over time. By broadening the tax base, we can increase revenues through these efforts and then make it politically more viable by cutting marginal income tax rates for everyone, along with lowering the corporate, capital gains, and dividend tax rates.
Lastly, we also need to address the strain of entitlement spending and national defense. As the baby boomers retire, Social Security, Medicare, and Medicaid spending will skyrocket, so politicians will soon not be able to ignore it. Then combine that with a volatile world where nuclear proliferation and terrorism threaten our security, there will be increased pressure to raise defense spending. All of these forces are leading the U.S. to an unsustainable fiscal state soon. Therefore, politicians will need to be frank with the public and outline priorities that will require sacrifice by all of us.
Thursday, November 18, 2010
Not Much Change in Georgia Job Market
As reported in the November 18th, 2010 Atlanta Business Chronicle, the unemployment rate was unchanged at 9.9% in October. It should be pointed out that September's unemployment rate was revised downward by 0.1%. On a positive note, there was job growth of 22,300 over the last month. Even though most of the growth was in retail and considered temporary, that is usually going to be the case during the holiday season.
More robust job growth will be needed to achieve more significant cuts in unemployment. Even though we should continue to see more temporary unemployment in the next couple of months, a better than expected holiday season of retail sales can alter the future outlook for businesses. Therefore, it will be interesting to see how those numbers eventually play out. Though, our expectations should be tempered because most analysts are only expected a modest improvement from last year.
Challenging state fiscal conditions are another barrier to boosting economic activity and generating jobs. Sluggish tax revenues will make it harder to faciliate investment spending and attract businesses to our state. In order to counter this trend, Atlanta Business Chronicle article written by Dave Williams highlights the difficulty that Georgia's Department of Transportation is having in funding highway projects. In fact, they have made a decision to tap into reserves in order to spend $350 million right away. Unless they are able to generate additonal funding, that will be another obstacle to overcome in getting Georgia's economy on track.
More robust job growth will be needed to achieve more significant cuts in unemployment. Even though we should continue to see more temporary unemployment in the next couple of months, a better than expected holiday season of retail sales can alter the future outlook for businesses. Therefore, it will be interesting to see how those numbers eventually play out. Though, our expectations should be tempered because most analysts are only expected a modest improvement from last year.
Challenging state fiscal conditions are another barrier to boosting economic activity and generating jobs. Sluggish tax revenues will make it harder to faciliate investment spending and attract businesses to our state. In order to counter this trend, Atlanta Business Chronicle article written by Dave Williams highlights the difficulty that Georgia's Department of Transportation is having in funding highway projects. In fact, they have made a decision to tap into reserves in order to spend $350 million right away. Unless they are able to generate additonal funding, that will be another obstacle to overcome in getting Georgia's economy on track.
Inflation At Its Lowest Level in Many Years, So Why Is That Bad?
As reported in this November 17th, 2011 CNN Money article by Annalyn Censky, we see that core inflation increased, but it was at the lowest rate since 1957. Over the last 12 months, the Consumer Price Index rose by 1.2%, but after taking out food and energy, the core CPI only rose by 0.6%. Of course, consumers like prices remaining low, however this does not bode well for our wages or job prospects.
In order to create jobs, businesses need to be able to raise prices in order to improve profit margins. With the recent recession taking a toll on consumers, businesses have not been able to raise prices even though they have been hurt by rising input prices. Overall, sales of new and used vehicles, apparel and even tobacco were down. Even though commodity prices were rising, sluggish buying activity prevented firms from passing those rising costs to consumers. Until businesses are able to raise prices and boost profit margins, we might not see further improvement in the job market.
It must also be noted that consumers did not always feel the impact of historically low inflation. This is because medical costs and gasoline prices rose and these items are measured in core inflation. In addition, there was also a small increase in food prices, too.
In order to create jobs, businesses need to be able to raise prices in order to improve profit margins. With the recent recession taking a toll on consumers, businesses have not been able to raise prices even though they have been hurt by rising input prices. Overall, sales of new and used vehicles, apparel and even tobacco were down. Even though commodity prices were rising, sluggish buying activity prevented firms from passing those rising costs to consumers. Until businesses are able to raise prices and boost profit margins, we might not see further improvement in the job market.
It must also be noted that consumers did not always feel the impact of historically low inflation. This is because medical costs and gasoline prices rose and these items are measured in core inflation. In addition, there was also a small increase in food prices, too.
Wednesday, November 17, 2010
Evaluating Sowell's Editorial on Obama's Debt Commission
In the November 16th, 2010 Real Clear Politics editorial from Thomas Sowell, he makes the case that Obama's motives are not pure in terms of addressing our outsized budget deficit. Sowell is a respected economist, who holds strong conservative views of government and the economy. He is distrustful of an expanding role of government and an avid advocate of free markets. In this editorial, he believes that Obama formed a bipartisan commission as a ruse to increase tax revenues to cover up for irresponsible spending.
Sowell was highly critical of Obama's emphasis on expanding the role of government in addressing the economic crisis. As noted in August 18th, 2010 CBO Executive Summary of Budget and Economic Outlook, we can see that large federal deficits have occurred over the last two years under Obama's watch. In 2009, our annual budget deficit was over $1.4 trillion and only slightly decreased to over $1.3 trillion this fiscal year. Both figures are the largest in 65 years when looking at them relative to the size of the U.S. economy.
In Obama's defense, one could argue that private sector investment slowed to a crawl due to a financial crisis that almost crippled our financial system. Despite the efforts from the Fed to replenish reserves of failing financial institutions, one could argue that our economy was in a liquidity trap. That occurs when an expansion of money supply does not result in much economic activity. In those instances, Keynesian economists would argue that government needs to play a stronger role to make up for the shortfall of private sector activity. As noted in Howard Penney's Fortune article where he interviews Obama's former budget director, Peter Orszag, we can see that private sector borrowing declined significantly during the period of 2007 and 2009. Whereas private sector borrowing represented 30% of GDP in 2007, it dropped dramatically to -15% of GDP in 2009.
Most of his editorial was aimed at Congress's stimulus legislation which he thought was too expensive. While around a third of the stimulus package consisted of tax cuts for the middle class and small businesses, there were increases in education, infrastructure, and alternative sources of energy. In addition, funds were distributed to the states to help them with mounting deficits that arose from slowing economic activity. In particular, Sowell took aim at various spending items that he felt benefited Obama's constituency such as teachers, unions, and advocates of green economy jobs.
By setting up a bipartisan commission in looking at the deficit as detailed in my November 11th, 2010 blog entry, Sowell believes that Obama is trying to find cover for raising taxes. While the recommendations called for across-the-board cuts in individual income tax rates, the elimination of mortgage interest deductions and child tax credits would actually increase the tax burden on most Americans. Also, there will be limited raise in the gasoline tax between 2013 and 2015. He also does not like the cuts in defense spending, given the current turmoil present throughout the globe. According to Sowell, these proposals would not have been needed if Obama and Congress were not so loose with the taxpayer purse strings.
While Sowell references the benefits of tax cuts, I thought this was somewhat misleading. Even though he correctly interprets past history where revenues increased when tax rates were cut, this can be a deceptive when reading this Heritage paper written by Arthur Laffer on June 1st, 2004. When Sowell mentions the tax cuts in 1920s and the Kennedy tax cuts in the 1960s, the marginal tax rates were much higher than they are now. Laffer is best known for developing the Laffer Curve, which suggests that very high tax rates will cause revenues to decline. However, it should also be noted that very low tax rates will also cause revenues to decline, thus there is an optimal tax rate that can be imposed to maximize revenues. This optimal tax rate was never identified by Laffer because it depends on various circumstances relating to specific characteristics of the present tax system, the level of underground activity, and amount of tax loopholes.
In summary, I thought Sowell's economic facts were accurate and policy analysis was reasonable, but I thought some of his inferences were deceptive and incomplete. I think he makes a valid point that Obama formed the bipartisan commission on the federal deficit to prepare Americans that additional revenue sources need to be found. However, I think the budget outlook was dire even before Obama came to office and requires a solution that involves a shared sacrifice of eventual tax increases and government spending cuts. Otherwise, you have a scenario where some combination of national security, education, and social programming would be unduly compromised. Lastly, I would have liked him to more fully explain the Laffer Curve and the impact that tax rates have on overall revenues. It was unclear how cutting current marginal tax rates, which are much lower than those in the 20s and 60s, would generate similar increases in tax revenue. Of course, I realize this clarification would weaken his overall argument.
Sowell was highly critical of Obama's emphasis on expanding the role of government in addressing the economic crisis. As noted in August 18th, 2010 CBO Executive Summary of Budget and Economic Outlook, we can see that large federal deficits have occurred over the last two years under Obama's watch. In 2009, our annual budget deficit was over $1.4 trillion and only slightly decreased to over $1.3 trillion this fiscal year. Both figures are the largest in 65 years when looking at them relative to the size of the U.S. economy.
In Obama's defense, one could argue that private sector investment slowed to a crawl due to a financial crisis that almost crippled our financial system. Despite the efforts from the Fed to replenish reserves of failing financial institutions, one could argue that our economy was in a liquidity trap. That occurs when an expansion of money supply does not result in much economic activity. In those instances, Keynesian economists would argue that government needs to play a stronger role to make up for the shortfall of private sector activity. As noted in Howard Penney's Fortune article where he interviews Obama's former budget director, Peter Orszag, we can see that private sector borrowing declined significantly during the period of 2007 and 2009. Whereas private sector borrowing represented 30% of GDP in 2007, it dropped dramatically to -15% of GDP in 2009.
Most of his editorial was aimed at Congress's stimulus legislation which he thought was too expensive. While around a third of the stimulus package consisted of tax cuts for the middle class and small businesses, there were increases in education, infrastructure, and alternative sources of energy. In addition, funds were distributed to the states to help them with mounting deficits that arose from slowing economic activity. In particular, Sowell took aim at various spending items that he felt benefited Obama's constituency such as teachers, unions, and advocates of green economy jobs.
By setting up a bipartisan commission in looking at the deficit as detailed in my November 11th, 2010 blog entry, Sowell believes that Obama is trying to find cover for raising taxes. While the recommendations called for across-the-board cuts in individual income tax rates, the elimination of mortgage interest deductions and child tax credits would actually increase the tax burden on most Americans. Also, there will be limited raise in the gasoline tax between 2013 and 2015. He also does not like the cuts in defense spending, given the current turmoil present throughout the globe. According to Sowell, these proposals would not have been needed if Obama and Congress were not so loose with the taxpayer purse strings.
While Sowell references the benefits of tax cuts, I thought this was somewhat misleading. Even though he correctly interprets past history where revenues increased when tax rates were cut, this can be a deceptive when reading this Heritage paper written by Arthur Laffer on June 1st, 2004. When Sowell mentions the tax cuts in 1920s and the Kennedy tax cuts in the 1960s, the marginal tax rates were much higher than they are now. Laffer is best known for developing the Laffer Curve, which suggests that very high tax rates will cause revenues to decline. However, it should also be noted that very low tax rates will also cause revenues to decline, thus there is an optimal tax rate that can be imposed to maximize revenues. This optimal tax rate was never identified by Laffer because it depends on various circumstances relating to specific characteristics of the present tax system, the level of underground activity, and amount of tax loopholes.
In summary, I thought Sowell's economic facts were accurate and policy analysis was reasonable, but I thought some of his inferences were deceptive and incomplete. I think he makes a valid point that Obama formed the bipartisan commission on the federal deficit to prepare Americans that additional revenue sources need to be found. However, I think the budget outlook was dire even before Obama came to office and requires a solution that involves a shared sacrifice of eventual tax increases and government spending cuts. Otherwise, you have a scenario where some combination of national security, education, and social programming would be unduly compromised. Lastly, I would have liked him to more fully explain the Laffer Curve and the impact that tax rates have on overall revenues. It was unclear how cutting current marginal tax rates, which are much lower than those in the 20s and 60s, would generate similar increases in tax revenue. Of course, I realize this clarification would weaken his overall argument.
International: How Serious Is Ireland's Banking Issue?
There is reason to be concerned about Ireland and it's all due to the health of their banking system. One cannot overemphasize the importance of a sound financial system and the overall health of an economy. The banking system is like an engine in a car. If it breaks down, the car will go nowhere. Even though these developments are occurring across the ocean, they can certainly be a rippling effect to the U.S. due to their direct and indirect financial interests. As for the latest development in the potential Irish banking crisis, November 17th, 2010 Economist article highlights those concerns.
As background, it should be noted that most of Europe uses the Euro as their main currency, which is both advantageous and disadvantageous. The Euro is a single currency that comprises of many European nations. Usually, countries individually run their money supply, but this is not the case in Europe. While the benefits of a single currency faciliates more monetary stability and freer trade, its main downside is that it provide less flexibility to poorer countries. Usually, countries can adjust their monetary policy by devaluing their currency to deal with rising deficits and counterbalancing large trade deficits. However, struggling European countries like Ireland, Portugal, and Greece are not able to do that because their money supply is tied to the Euro. As of right now, European Central Bank is opting to not lower the value of the Euro which is compounding the problem.
The main concern is how Ireland's banking system will impact the Euro. All indications point to Europe stepping in to save the Irish banking system from collapsing. If the Irish banking system collapses, then the financial interests of other European countries will be negatively impacted. Then there's the concern if this will have a ripple effect on other low performing countries, such as Portugal and Greece. Foreign investors will be spooked by this development and would probably resort to taking their funds out of Europe and investing them elsewhere.
Many Irish and European officials are correct to say that there are differences between the problems experienced by Ireland compared to situations in Portugal and Greece. First, Ireland has shown more political will in addressing their budget deficit than either of the Southern European countries. As for their competitiveness, you can see that the Irish's economic fundamentals are superior to both Portugal and Greece. While Ireland's current economic growth is lower than both, it should be noted that their living standards as measured by per capita growth and unemployment rates are much better. This can be attributed to their superior economic freedom scores that measure a country's productivity, fiscal management systems, and business-friendly environment.
Overall, it will be politically difficult for Europe to bailout Ireland. There is already uneasiness and frustration from mainly Northern European counterparts that are resentful of having to use taxpayer dollars to rescue countries that have not adequately managed their fiscal and banking risks. When talking about a potential bailout of $68 billion to $117 billion, that will mean that more austerity practices will have to take place throughout Europe or risk facing higher deficits. Either scenario can dampen economic prospects in the future.
As Americans, we should closely monitor developments in Europe. Obama has stated that he is committed to increasing U.S. exports, which create jobs. However, that goal will be compromised if European economic prospects continue to diminish. Lower wealth from Europe will mean less money to spend on U.S. goods. One should not be surprised if the U.S. plays a large role through the International Monetary System in helping stabilize Europe because our economic fortunes are tied to their success.
As background, it should be noted that most of Europe uses the Euro as their main currency, which is both advantageous and disadvantageous. The Euro is a single currency that comprises of many European nations. Usually, countries individually run their money supply, but this is not the case in Europe. While the benefits of a single currency faciliates more monetary stability and freer trade, its main downside is that it provide less flexibility to poorer countries. Usually, countries can adjust their monetary policy by devaluing their currency to deal with rising deficits and counterbalancing large trade deficits. However, struggling European countries like Ireland, Portugal, and Greece are not able to do that because their money supply is tied to the Euro. As of right now, European Central Bank is opting to not lower the value of the Euro which is compounding the problem.
The main concern is how Ireland's banking system will impact the Euro. All indications point to Europe stepping in to save the Irish banking system from collapsing. If the Irish banking system collapses, then the financial interests of other European countries will be negatively impacted. Then there's the concern if this will have a ripple effect on other low performing countries, such as Portugal and Greece. Foreign investors will be spooked by this development and would probably resort to taking their funds out of Europe and investing them elsewhere.
Many Irish and European officials are correct to say that there are differences between the problems experienced by Ireland compared to situations in Portugal and Greece. First, Ireland has shown more political will in addressing their budget deficit than either of the Southern European countries. As for their competitiveness, you can see that the Irish's economic fundamentals are superior to both Portugal and Greece. While Ireland's current economic growth is lower than both, it should be noted that their living standards as measured by per capita growth and unemployment rates are much better. This can be attributed to their superior economic freedom scores that measure a country's productivity, fiscal management systems, and business-friendly environment.
Overall, it will be politically difficult for Europe to bailout Ireland. There is already uneasiness and frustration from mainly Northern European counterparts that are resentful of having to use taxpayer dollars to rescue countries that have not adequately managed their fiscal and banking risks. When talking about a potential bailout of $68 billion to $117 billion, that will mean that more austerity practices will have to take place throughout Europe or risk facing higher deficits. Either scenario can dampen economic prospects in the future.
As Americans, we should closely monitor developments in Europe. Obama has stated that he is committed to increasing U.S. exports, which create jobs. However, that goal will be compromised if European economic prospects continue to diminish. Lower wealth from Europe will mean less money to spend on U.S. goods. One should not be surprised if the U.S. plays a large role through the International Monetary System in helping stabilize Europe because our economic fortunes are tied to their success.
Tuesday, November 16, 2010
Will Diversifying Congressional Black Caucus Lead to New Perspectives in Fighting Poverty
In Mike Lillis's November 9th, 2010 article in The Hill, he mentioned that the executive committee of the Congressional Black Caucus voted unanimously to extend membership to two newly-elected African-Americans to the House of Representatives. Allen West of Florida and Tim Scott of South Carolina won as Republicans. While it is not unprecendented, it has been rare for a non-Democrat to serve on this caucus. It appears that Allen West will accept membership, but Tim Scott will not. By bringing more diversity in terms of party ideology, some are hoping that this will bring a fresh perspective on fighting poverty.
There are various ways to attack poverty, but one of the keys is raising productivity. There is a perception that Republicans are thought to be uncaring toward the poor. This is because their tax policies favor efficiency over equality and their priorities on government spending typically tilt to national defense over social programs. However West disagrees with that label and says, "...it’s so important that we break down this monolithic voice that continues to talk about victimization and dependency in the black community."
Let's look back to the mid-1990s, Congressional Republicans were insistent on reforming welfare by imposing limits on payout, which President Clinton agreed to despite the ominous warnings from liberals. By spending less on welfare, the U.S. was able to lower their budget deficit and cause interest rates to fall. Lower interest rates resulted in more investment and job creation. As a result of an improved job market, former welfare recipients found it easier than many thought to land jobs. Others surmised that when the safety net ends, most people will be motivated to look for work and improve their situation. In economics, we call this people responding to incentives and can be more effective in achieving social mobility.
On the other hand, education and social services are also elements necessary to improving productivity. During the early-1980s, a movement similar to the one we are experiencing today where the American people were concerned about the expanding role of government. The aftermath was dramatic cuts in public education and social programs contributing to decay and unrest in many urban communities. One can say that the exodus of jobs and unstable family structures call for increased mentoring and social services that are typically underserved through private charities. Many point to less federal funding to communities as one of the reasons for the rise in drug trafficking and murders.
Another potential problem is access to quality health care and again there are differing philosophies. While black Republicans will assert that greater government will limit choice and compromise quality for all Americans, members of the Congressional Black Caucus are alarmed at the rising premiums of health care and how that will impact the most vulnerable citizens. Particularly, when private health insurance companies previously were able to deny coverage based on pre-existing conditions. On the other hand, critics to health care reform would like the market system work more freely. They feel that more competition will lead to more choices and lower prices.
In Principles of Macroeconomics and Mankiw's Basic Tools of Finance, we discuss adverse selection, which says that high-risk individuals are more likely to purchase insurance over low-risk individuals. That is precisely the problem with forcing insurance companies to take on individuals with pre-existing conditions. They are more likely to make expensive payouts on health care and will need to gain access to younger, more low-risk individuals to cover the increased costs. Otherwise, they will have to resort to higher premiums for that higher risk segment. This is one of the reasons why the controversial health care mandate, which forces Americans to purchase health insurance or face a monetary penalty, is essential to making this initiative work.
In attacking complex issues of poverty, I do believe that Americans should be receptive to new ideas and perspectives. It is hoped that when Allen West officially joins the Congressional Black Caucus that his views are heard and given serious consideration. Undoubtedly, allowing market forces to interact in education, social services, and health care will increase the cost on more vulnerable segments of society. However, Americans must realize that resources used in providing education, social services, and health care are scarce and have to be paid for directly by the less fortunate or funds must be redistributed from middle class and upper class Americans, who are becoming weary of carrying this burden. As a Christian, I feel it is my duty to help the impoverished, but I also want to seek solutions that will help lift more people out of generational poverty. If that means being open to policies that will lead to empowerment rather than enabling them toward the same self-destructive behaviorial traits that limit advancement, then I believe we should be open to those ideas.
There are various ways to attack poverty, but one of the keys is raising productivity. There is a perception that Republicans are thought to be uncaring toward the poor. This is because their tax policies favor efficiency over equality and their priorities on government spending typically tilt to national defense over social programs. However West disagrees with that label and says, "...it’s so important that we break down this monolithic voice that continues to talk about victimization and dependency in the black community."
Let's look back to the mid-1990s, Congressional Republicans were insistent on reforming welfare by imposing limits on payout, which President Clinton agreed to despite the ominous warnings from liberals. By spending less on welfare, the U.S. was able to lower their budget deficit and cause interest rates to fall. Lower interest rates resulted in more investment and job creation. As a result of an improved job market, former welfare recipients found it easier than many thought to land jobs. Others surmised that when the safety net ends, most people will be motivated to look for work and improve their situation. In economics, we call this people responding to incentives and can be more effective in achieving social mobility.
On the other hand, education and social services are also elements necessary to improving productivity. During the early-1980s, a movement similar to the one we are experiencing today where the American people were concerned about the expanding role of government. The aftermath was dramatic cuts in public education and social programs contributing to decay and unrest in many urban communities. One can say that the exodus of jobs and unstable family structures call for increased mentoring and social services that are typically underserved through private charities. Many point to less federal funding to communities as one of the reasons for the rise in drug trafficking and murders.
Another potential problem is access to quality health care and again there are differing philosophies. While black Republicans will assert that greater government will limit choice and compromise quality for all Americans, members of the Congressional Black Caucus are alarmed at the rising premiums of health care and how that will impact the most vulnerable citizens. Particularly, when private health insurance companies previously were able to deny coverage based on pre-existing conditions. On the other hand, critics to health care reform would like the market system work more freely. They feel that more competition will lead to more choices and lower prices.
In Principles of Macroeconomics and Mankiw's Basic Tools of Finance, we discuss adverse selection, which says that high-risk individuals are more likely to purchase insurance over low-risk individuals. That is precisely the problem with forcing insurance companies to take on individuals with pre-existing conditions. They are more likely to make expensive payouts on health care and will need to gain access to younger, more low-risk individuals to cover the increased costs. Otherwise, they will have to resort to higher premiums for that higher risk segment. This is one of the reasons why the controversial health care mandate, which forces Americans to purchase health insurance or face a monetary penalty, is essential to making this initiative work.
In attacking complex issues of poverty, I do believe that Americans should be receptive to new ideas and perspectives. It is hoped that when Allen West officially joins the Congressional Black Caucus that his views are heard and given serious consideration. Undoubtedly, allowing market forces to interact in education, social services, and health care will increase the cost on more vulnerable segments of society. However, Americans must realize that resources used in providing education, social services, and health care are scarce and have to be paid for directly by the less fortunate or funds must be redistributed from middle class and upper class Americans, who are becoming weary of carrying this burden. As a Christian, I feel it is my duty to help the impoverished, but I also want to seek solutions that will help lift more people out of generational poverty. If that means being open to policies that will lead to empowerment rather than enabling them toward the same self-destructive behaviorial traits that limit advancement, then I believe we should be open to those ideas.
Monday, November 15, 2010
When Should Fed Reverse Their Monetary Policy Course?
The Federal Reserve has been committed to using monetary policy to improve employment conditions. This November 15th, 2010 WSJ Real Time Economics blog entry by Martin Vaughn discusses how the Fed should not ignore inflation in their efforts to boost a sluggish job market. While acknowledging that the unemployment rate remains high, Federal Reserve Bank of Richmond President Jeffrey Lacker told a group of Advanced Placement teachers of economics warned that the Fed should not wait too long to keep interest rates low. Dr. Lacker uses the analogy of the 1960s where stagnant economic growth led the Fed to keep interest rates low for too long of a period. The result was staggering inflation that took over a decade to contain.
In our Principles of Macroeconomics course, we talk about the balancing act that the Federal Reserve plays when managing money supply. On one hand, their goal is to enhance full employment, but that can sometimes compromise price stability, which is another stated goal of the Fed. One of the main tools used to boost employment is to increase money supply. Previously, they did this by buying U.S. bonds in order to drive the fed funds rate down to essentially zero. With that method dried up, Bernanke called for two installments of quantitative easing, which I describe in my previous blog entry. However, there is concern mounting that these actions will lead to more inflation.
It is my opinion that Dr. Lacker's main purpose of this speech is to convey the Fed's message that they are concerned with inflation to alleviate concerns from their trading partners and investors. They certainly do not want to raise inflation expectations which could lead investors to take their funds from the stock market and U.S. Treasuries and shift them to gold and other commodities. Also, China could decide to stop buying U.S. debt if there is no serious action toward controlling inflation and large budget deficits. If both scenarios occur, then we will see higher interest rates and dimmed prospects on future economic growth. The best case scenario is that the recovery gains momentum with improved holiday sales and an improved job market can withstand an increase in the fed funds rate.
In our Principles of Macroeconomics course, we talk about the balancing act that the Federal Reserve plays when managing money supply. On one hand, their goal is to enhance full employment, but that can sometimes compromise price stability, which is another stated goal of the Fed. One of the main tools used to boost employment is to increase money supply. Previously, they did this by buying U.S. bonds in order to drive the fed funds rate down to essentially zero. With that method dried up, Bernanke called for two installments of quantitative easing, which I describe in my previous blog entry. However, there is concern mounting that these actions will lead to more inflation.
It is my opinion that Dr. Lacker's main purpose of this speech is to convey the Fed's message that they are concerned with inflation to alleviate concerns from their trading partners and investors. They certainly do not want to raise inflation expectations which could lead investors to take their funds from the stock market and U.S. Treasuries and shift them to gold and other commodities. Also, China could decide to stop buying U.S. debt if there is no serious action toward controlling inflation and large budget deficits. If both scenarios occur, then we will see higher interest rates and dimmed prospects on future economic growth. The best case scenario is that the recovery gains momentum with improved holiday sales and an improved job market can withstand an increase in the fed funds rate.
Encouraging Sign for Retail Sales
This November 15th, 2010 Bloomberg article by Timothy Homan discusses the recent retail sales activity for the month of October. The 1.2% increase was much better than expected and was the highest increase in seven months. This is another indication that the holiday season will be better than last year.
It is hopeful that the higher than expected sales can lead to better job numbers in the near future. Increased business activity will lead firms to draw down on their inventories. This could eventually lead to businesses having to restock their inventory and this could lead to a ripple effect as jobs can be created through supply chains and retail establishments.
Typically, the holiday season will lead to more employment with retail stores trying to capitalize on the positive spirit and giving nature of consumers as they celebrate Christmas. It should be noted that many of these jobs are temporary, but retailers will gauge future prospects based on their holiday sales. If holiday sales are better than expected, then this will be an indicator to overall industry that economic conditions are improving. Therefore, they will be more likely to boost investment spending and generate more job creation.
It is hopeful that the higher than expected sales can lead to better job numbers in the near future. Increased business activity will lead firms to draw down on their inventories. This could eventually lead to businesses having to restock their inventory and this could lead to a ripple effect as jobs can be created through supply chains and retail establishments.
Typically, the holiday season will lead to more employment with retail stores trying to capitalize on the positive spirit and giving nature of consumers as they celebrate Christmas. It should be noted that many of these jobs are temporary, but retailers will gauge future prospects based on their holiday sales. If holiday sales are better than expected, then this will be an indicator to overall industry that economic conditions are improving. Therefore, they will be more likely to boost investment spending and generate more job creation.
Thursday, November 11, 2010
Finding a Long-Term Fix for the Alternative Minimum Tax
While it has been an annual occurence to fix the Alternative Minimum Tax (AMT) as suggested in this November 9th, 2010 CNN Money article written by Jeanne Sahadi, Congress needs to work on finding a permanent solution. AMT is a tax law that was specifically targeted to affluent individuals in order to ensure that they paid an extra tax in addition to their regular taxes. Its intent was to make sure that rich individuals would pay their fair share in taxes, especially when they are able to qualify for various tax deductions that limit their tax liability. This issue is becoming a problem because income thresholds were never adjusted for inflation.
There is bipartisan support for adjusting AMT, but eliminating or adjusting it will create more pressure on the deficit. Even though Democrats and Republicans want to make changes to it, they cannot reach an agreement on finding alternative revenue sources or government spending cuts to finance the change. With an economic recovery still tenuous, both parties will be reluctant to raise taxes in any form. It will also be difficult to find significant cuts in government spending since that would probably involve restraining entitlement spending or impacting national security.
If their interest is in maximizing economic growth, then they will want to look at instituting taxes based on consumption. One popular initiative that has not received much traction in Congress is instituting a national sales tax. This tax would create incentives to save, rather than spend. Therefore, there is the potential to boost loanable funds for financial institutions and that could lead to more investment and job creation. The main problem with this proposal is that low income and middle income households would bear larger share of the tax burden, particularly if food is not exempted. When looking at proportion of income, it is much easier for affluent households to cut down on household spending than other families.
Another option is to focus more on equality and less on efficiency. When looking at income tax rates to other countries, raising marginal income tax rates on high-income individuals could be done. This would be applying the ability-to-pay principle where people who can most afford the tax should pay more. The downside to this strategy is the concern that this might lead your most productive individuals to not invest as much. That could hamper future economic growth.
With a divided Congress, it will be difficult to find a compromise in replacing this unpopular tax. This is an issue that has gone unresolved for a number of years, so it will not be surprising if another stopgap solution will emerge. If that is the case, then we will have to wait another year before finding a permanent fix.
There is bipartisan support for adjusting AMT, but eliminating or adjusting it will create more pressure on the deficit. Even though Democrats and Republicans want to make changes to it, they cannot reach an agreement on finding alternative revenue sources or government spending cuts to finance the change. With an economic recovery still tenuous, both parties will be reluctant to raise taxes in any form. It will also be difficult to find significant cuts in government spending since that would probably involve restraining entitlement spending or impacting national security.
If their interest is in maximizing economic growth, then they will want to look at instituting taxes based on consumption. One popular initiative that has not received much traction in Congress is instituting a national sales tax. This tax would create incentives to save, rather than spend. Therefore, there is the potential to boost loanable funds for financial institutions and that could lead to more investment and job creation. The main problem with this proposal is that low income and middle income households would bear larger share of the tax burden, particularly if food is not exempted. When looking at proportion of income, it is much easier for affluent households to cut down on household spending than other families.
Another option is to focus more on equality and less on efficiency. When looking at income tax rates to other countries, raising marginal income tax rates on high-income individuals could be done. This would be applying the ability-to-pay principle where people who can most afford the tax should pay more. The downside to this strategy is the concern that this might lead your most productive individuals to not invest as much. That could hamper future economic growth.
With a divided Congress, it will be difficult to find a compromise in replacing this unpopular tax. This is an issue that has gone unresolved for a number of years, so it will not be surprising if another stopgap solution will emerge. If that is the case, then we will have to wait another year before finding a permanent fix.
Is the U.S. Purposely Devaluing the Dollar?
Former Fed Chairman Alan Greenspan apparentely thinks so as expressed in this November 11th, 2010 CNN Money article written by Aaron Smith. On the other hand, Timothy Geithner disagrees, though there are many foreign leaders, such as Germany's Finance Minister Wolfgang Schäuble, who side with Greenspan. Specifically, the accusations of the U.S. devaluing the dollar come from Bernanke's annnouncement of quantitative easing. Essentially, they are printing more dollars in efforts to increase economic activity. Its effect should cause the dollar to weaken make U.S. goods relatively cheaper to foreign goods.
In a complementary piece also on CNN Money, Greenspan elaborates on his charges. He believes that the U.S. is reacting to China's slow pace in adjusting their currency in relation to the dollar. While China has appreciated their yuan to a degree, many critics believe that it is still undervalued which gives them an advantage when selling their exports. The flood of cheap Chinese goods to the U.S. market makes it hard for U.S. firms to compete, thus they end up either laying off workers in the U.S. or outsource jobs overseas where they will enjoy better cost advantages. In order to counteract this, he believes the U.S. is engaging in currency manipulation in order to regain the advantage in world trade. If the U.S. starts to boost exports through a cheaper dollar, then this can lead to more job creation here in the U.S. That sounds good, but there's a downside to this strategy.
Other countries, particularly Europe, are complaining that the U.S. is being hypocritical and not following good policy. Even though Geithner is urging other countries at the G-20 conference to not engage in currency manipulation, the Fed's latest actions appear to be counterintuitive to this concept. While Europe has not resorted to devaluing the Euro through monetary easing, other countries like Japan and Brazil are following the U.S. in lowering their currencies to remain competitive. The potential problem with constantly devaluing currencies is that it can lead to higher inflation and this scenario is consistent with monetary neutrality concept that we talk about in Principles of Macroeconomics and Mankiw's Money Growth and Inflation. In particular, China's economy is at risk of overheating and resulting inflation could have a devastating impact on not only China, but the rest of the world.
Another troubling issue is that this could lead to a trade war as countries can counteract currency manipulations through protectionist practices. Even if countries decide not to lower their currencies, they can always resort to restricting foreign goods through tariffs and import quotas. The net effect of a trade war would be a rise in prices, job losses, and a declining economy. Certainly, the U.S. is aware of that and do not want to create the perception of purposely devaluing currency.
In a complementary piece also on CNN Money, Greenspan elaborates on his charges. He believes that the U.S. is reacting to China's slow pace in adjusting their currency in relation to the dollar. While China has appreciated their yuan to a degree, many critics believe that it is still undervalued which gives them an advantage when selling their exports. The flood of cheap Chinese goods to the U.S. market makes it hard for U.S. firms to compete, thus they end up either laying off workers in the U.S. or outsource jobs overseas where they will enjoy better cost advantages. In order to counteract this, he believes the U.S. is engaging in currency manipulation in order to regain the advantage in world trade. If the U.S. starts to boost exports through a cheaper dollar, then this can lead to more job creation here in the U.S. That sounds good, but there's a downside to this strategy.
Other countries, particularly Europe, are complaining that the U.S. is being hypocritical and not following good policy. Even though Geithner is urging other countries at the G-20 conference to not engage in currency manipulation, the Fed's latest actions appear to be counterintuitive to this concept. While Europe has not resorted to devaluing the Euro through monetary easing, other countries like Japan and Brazil are following the U.S. in lowering their currencies to remain competitive. The potential problem with constantly devaluing currencies is that it can lead to higher inflation and this scenario is consistent with monetary neutrality concept that we talk about in Principles of Macroeconomics and Mankiw's Money Growth and Inflation. In particular, China's economy is at risk of overheating and resulting inflation could have a devastating impact on not only China, but the rest of the world.
Another troubling issue is that this could lead to a trade war as countries can counteract currency manipulations through protectionist practices. Even if countries decide not to lower their currencies, they can always resort to restricting foreign goods through tariffs and import quotas. The net effect of a trade war would be a rise in prices, job losses, and a declining economy. Certainly, the U.S. is aware of that and do not want to create the perception of purposely devaluing currency.
Wednesday, November 10, 2010
Are Debt Commission Recommendations Politically Viable?
President Obama tasked a commission to look at solutions to our bulging deficit. This November 10th, 2010 NY Times article highlights their recommendations. While many of the proposals are sure to anger various factions in Congress, I do think it is a good start. This bipartisan commission mainly resorted to spending and tax rate cuts, but I actually think tax liability for most Americans will rise when one considers eliminating the popular mortgage interest deduction. The deficit commission had an impossible task, but their answers focused on improving efficiency at the expense of equality.
One of the most important elements involved expanding the tax base by eliminating popular deductions, but balancing that with tax rate cuts investment and consumption. While they propose eliminating popular corporate deductions, this would be balanced by lowering the corporate tax rate from 35% to 26%. While the elimination of the mortgage interest deduction would be politically unpopular, that would be alleviated by an across the board tax cut. The marginal tax rates could fall from 10% to 8% for the lowest income quintile and drop from 35% to 23% for this highest income quintile. This change in the tax code can yield increased revenues of up to $80 billion by 2015. This would actually simplify the tax code, but would still cause taxpayers angst when they realize how valuable those deductions are.
Cuts in Social Security and national defense are sure to upset both Democrats and Republicans alike. In addition to raising taxes on benefits received by wealthy seniors, there are gradual plans to increase the retirement age from 67 to 69 with an exemption for non able-bodied workers that are 62 years or older. As for national defense, this is addressed in greater detail in the November 10th, 2010 CNN Money article written by Jeanne Sahadi. First, noncombat pay would be frozen and bases overseas would be closed. Both measures would yield savings of about $17.7 billion. In addition to affecting morale of our troops, one can think that our European allies would be concerned with base closings and the spector of an invigorated Russia looming in their midst.
Federal government would see a downsizing and that might be politically viable. They hope to gain savings of $18.4 billion by cutting 250,000 contractors, along with freezing pay for federal workers for three years which would amount to $15.1 million. That could lead to operational disruptions, but might start a shift from the public sector to the private sector and that could boost overall productivity. Private sector employment could see a boost in talent and their production would probably result in more production of goods and services.
In summary, it is highly doubtful that all of these proposals will pass the political viability test. However, it will serve as a wakeup call to Americans about how serious this crisis is. Strong leadership in the White House and Congress will be necessary in letting parties from all political spectrums that tough choices have to be made. They need to understand that tax increases and government spending cuts will not work without drastically affecting the quality of life for many segments of America. As we look toward the new year, it is hoped that some of these provisions are seriously considered.
One of the most important elements involved expanding the tax base by eliminating popular deductions, but balancing that with tax rate cuts investment and consumption. While they propose eliminating popular corporate deductions, this would be balanced by lowering the corporate tax rate from 35% to 26%. While the elimination of the mortgage interest deduction would be politically unpopular, that would be alleviated by an across the board tax cut. The marginal tax rates could fall from 10% to 8% for the lowest income quintile and drop from 35% to 23% for this highest income quintile. This change in the tax code can yield increased revenues of up to $80 billion by 2015. This would actually simplify the tax code, but would still cause taxpayers angst when they realize how valuable those deductions are.
Cuts in Social Security and national defense are sure to upset both Democrats and Republicans alike. In addition to raising taxes on benefits received by wealthy seniors, there are gradual plans to increase the retirement age from 67 to 69 with an exemption for non able-bodied workers that are 62 years or older. As for national defense, this is addressed in greater detail in the November 10th, 2010 CNN Money article written by Jeanne Sahadi. First, noncombat pay would be frozen and bases overseas would be closed. Both measures would yield savings of about $17.7 billion. In addition to affecting morale of our troops, one can think that our European allies would be concerned with base closings and the spector of an invigorated Russia looming in their midst.
Federal government would see a downsizing and that might be politically viable. They hope to gain savings of $18.4 billion by cutting 250,000 contractors, along with freezing pay for federal workers for three years which would amount to $15.1 million. That could lead to operational disruptions, but might start a shift from the public sector to the private sector and that could boost overall productivity. Private sector employment could see a boost in talent and their production would probably result in more production of goods and services.
In summary, it is highly doubtful that all of these proposals will pass the political viability test. However, it will serve as a wakeup call to Americans about how serious this crisis is. Strong leadership in the White House and Congress will be necessary in letting parties from all political spectrums that tough choices have to be made. They need to understand that tax increases and government spending cuts will not work without drastically affecting the quality of life for many segments of America. As we look toward the new year, it is hoped that some of these provisions are seriously considered.
Should We Privatize Fannie Mae and Freddie Mac?
That would certainly not be the sentiment of Dr. Edward Glaeser, who is an economics professor at Harvard University. He expresses his rationale in the NY Times Economix Blog on November 9th, 2010. Certainly, Fannie Mae and Freddie Mac contributed to the housing crisis through their ineffective controls and incentivizing irresponsible home purchases by driving down interest rates. However, it would not be prudent to transfer both entities to private hands because that could end up costing taxpayers even more.
Fannie Mae and Freddie Mac are government-sponsored enterprises (GSE) aimed at making home purchases more affordable. They were originally set up to operate in the secondary mortgage market. That means that they do no loan originations, but rather buy a group of mortgages from another party, typically a mortgage servicer or bank. It was thought by pooling mortgages together into a securitized product that investors could benefit from diversification and servicing fees. While there will always be a certain number of homeowners that would default and have to foreclosed on, the GSEs would recover enough fees and repayments to cover any bad mortgages. However beginning in 2003, a significant number of homeowners were defaulting and payouts to the mortgages started to decline and this caused the value of the mortgage securities to fall. This occurred due to a high number of subprime loans collapsing. Subprime loans refer to credit quality and are given to individuals with subpar credit. While they are more risky, it was thought that their defaults could be covered by Gradually, the portfolio of mortgage securities held by Fannie Mae and Freddie Mac became toxic and investors fled both, which affected their viability.
Congress was faced with two choices, which was either to allow both entities to collapse or have the Treasury come in with taxpayer-funded dollars to bail out both Fannie Mae and Freddie Mac. The problem with the first option is what to do with the trillion dollars of unpaid mortgages that cannot find a buyer. That could cause significant turmoil within the housing market and leave many vulnerable. The other option is also not too enticing, but it's actually the course of action taken by Congress. They did this to prevent another more severe crisis, but many are concerned that this is creating a moral hazard, where the U.S. government's implicit guarantee of these mortgages is leading to reckless risk-taking by banks and mortgage servicers. As stated by Dr. Glaeser, this eventually led to the U.S. Treasury assuming 80% stake in the two entities.
Dr. Glaeser's main point was to show that privatizing the mortgage securities market carries implicit costs that are different from other forms of privatizing governmental services. For one, there's the real possibility that there will not be enough investors interested in a group of securitized mortgages that remain toxic. In that scenario, they would demand a bailout and the U.S. government would have to intervene or risk another catastrophe that could leave homeowners vulnerable. Dr. Glaeser contrasted that with trash pickup services that governments subcontract to private industry. When that occurs, there's no risk of the implicit government guarantee because they should always be another firm to assume those services if that firm defaults.
Another alternative not mentioned above comes from Dr. Arnold Kling, an adjunct scholar with the Cato Institute. While his paper was dated on September 8th, 2008, the Fannie Mae and Freddie Mac: An Exit Strategy for the Taxpayer provides another solution that involves the Congress immediately freezing their mortgage purchasing activities. By doing that, he hoped that banks and financial institutions would start buying new mortgages and eventually downsize the influence of both GSEs. In order to encourage the financial institutions to take on these loans, Dr. Kling called for loosening or eliminating capital requirements, so that they would have to capacity to take on additional loans. On the positive side, this would limit the exposure to taxpayers in the case of both GSEs failing. However, the negative side is that lower capital requirements could lead to a less stable financial system, especially during another economic downturn. Another downside is that borrowing costs for many individual home buyers would rise, so an affordable source for home financing would no longer occur.
While it is probably necessary to maintain the current arrangement, it is critical that Congress take steps to stabilize an untenable arrangement. This can be done by instilling more strict underwriting standards to ensure that their portfolio of mortgage securities would be improved. Eventually, it would be ideal if we could wean ourselves away from Fannie Mae and Freddie Mac, but this should be done on a more gradual basis.
Fannie Mae and Freddie Mac are government-sponsored enterprises (GSE) aimed at making home purchases more affordable. They were originally set up to operate in the secondary mortgage market. That means that they do no loan originations, but rather buy a group of mortgages from another party, typically a mortgage servicer or bank. It was thought by pooling mortgages together into a securitized product that investors could benefit from diversification and servicing fees. While there will always be a certain number of homeowners that would default and have to foreclosed on, the GSEs would recover enough fees and repayments to cover any bad mortgages. However beginning in 2003, a significant number of homeowners were defaulting and payouts to the mortgages started to decline and this caused the value of the mortgage securities to fall. This occurred due to a high number of subprime loans collapsing. Subprime loans refer to credit quality and are given to individuals with subpar credit. While they are more risky, it was thought that their defaults could be covered by Gradually, the portfolio of mortgage securities held by Fannie Mae and Freddie Mac became toxic and investors fled both, which affected their viability.
Congress was faced with two choices, which was either to allow both entities to collapse or have the Treasury come in with taxpayer-funded dollars to bail out both Fannie Mae and Freddie Mac. The problem with the first option is what to do with the trillion dollars of unpaid mortgages that cannot find a buyer. That could cause significant turmoil within the housing market and leave many vulnerable. The other option is also not too enticing, but it's actually the course of action taken by Congress. They did this to prevent another more severe crisis, but many are concerned that this is creating a moral hazard, where the U.S. government's implicit guarantee of these mortgages is leading to reckless risk-taking by banks and mortgage servicers. As stated by Dr. Glaeser, this eventually led to the U.S. Treasury assuming 80% stake in the two entities.
Dr. Glaeser's main point was to show that privatizing the mortgage securities market carries implicit costs that are different from other forms of privatizing governmental services. For one, there's the real possibility that there will not be enough investors interested in a group of securitized mortgages that remain toxic. In that scenario, they would demand a bailout and the U.S. government would have to intervene or risk another catastrophe that could leave homeowners vulnerable. Dr. Glaeser contrasted that with trash pickup services that governments subcontract to private industry. When that occurs, there's no risk of the implicit government guarantee because they should always be another firm to assume those services if that firm defaults.
Another alternative not mentioned above comes from Dr. Arnold Kling, an adjunct scholar with the Cato Institute. While his paper was dated on September 8th, 2008, the Fannie Mae and Freddie Mac: An Exit Strategy for the Taxpayer provides another solution that involves the Congress immediately freezing their mortgage purchasing activities. By doing that, he hoped that banks and financial institutions would start buying new mortgages and eventually downsize the influence of both GSEs. In order to encourage the financial institutions to take on these loans, Dr. Kling called for loosening or eliminating capital requirements, so that they would have to capacity to take on additional loans. On the positive side, this would limit the exposure to taxpayers in the case of both GSEs failing. However, the negative side is that lower capital requirements could lead to a less stable financial system, especially during another economic downturn. Another downside is that borrowing costs for many individual home buyers would rise, so an affordable source for home financing would no longer occur.
While it is probably necessary to maintain the current arrangement, it is critical that Congress take steps to stabilize an untenable arrangement. This can be done by instilling more strict underwriting standards to ensure that their portfolio of mortgage securities would be improved. Eventually, it would be ideal if we could wean ourselves away from Fannie Mae and Freddie Mac, but this should be done on a more gradual basis.
Tuesday, November 9, 2010
Essay on Financial Literacy: Heady Hints to Heed for the Holidays
Even in Southwest Georgia, we can see the changing trend in our weather. The Georgia heat is subsiding; the landscape is slowly transforming from brown to bare; and the short-sleeved shirts are being traded in for sweaters. It must be time to bring out the red and green and celebrate the birth of Christ. As Christians, we understand how the spirit of Christmas encourages us to give. It is my belief that we receive more blessings when we give, but it is important that our giving comes from our personal sources of income, rather than through debt.
We want to express our love and gratitude to our friends and families and that is through our gifts. When thinking about our spouses, children, relatives, and close friends, it is natural to shower them with clothes, jewelry, toys, and money. Nothing is more joyous than gathering around family and opening up large quantities of presents. We draw satisfaction from seeing the bubbling excitement from a child; catching the gaze from a loved one who received just what they wanted; and the sincere hug from a friend that treasured the special thought.
While it is important that our expressions of love through gifts continue, we need to ensure that they come from our savings and not debt. We must recognize that when we are using our credit card that we are actually using someone else's money and not ours. Credit cards are not money, but simply a loan from a financial institution that will expect their principal and interest over time. That is a recipe for killing future wealth. Rather than pursuing that road, we should be drawing down from our savings account that we have accumulated through pursuing practical budgetary practices.
You will need to establish a plan of action first before heading to the mall. I recommend using this Holiday Spending Survival Guide from Practical Money Skills, which is a free resource to help you determine your spending limits and other holiday spending tips. They suggest that you side aside no more than 1.5% of your annual income toward gifts. If you go beyond that, then it is recommended that you pursue a long-range plan of savings that should extend through the whole year. Regardless, you need to see specified limits and not go beyond them.
If this has been a tough year and income is tight, then you will want to be creative. This might mean investing your time and talent creating a gift, rather than going to the store. You might be surprised by how well it will be received by others. If you need ideas on where to start, then I recommend using either Instructibles or Craftzine. Another idea is to either buy gifts as a group or form a circle of family members where each member is responsible for buying a gift for just one member of the circle. Lastly, I recommend searching online to find special deals. Common sites can be found on Yahoo Shopping, Overstock, and PriceGrabber.
Finally, recognize that the holiday season is supposed to be time for relaxation and fun. By applying good saving methods and taking advantage of the right resources, you will be able to spread the love without the headache of crunching debt to start the new year. Smiles will be more plentiful and relationships will be strengthened. Let's all look forward to a Happy Holidays and a stress-free New Year!
We want to express our love and gratitude to our friends and families and that is through our gifts. When thinking about our spouses, children, relatives, and close friends, it is natural to shower them with clothes, jewelry, toys, and money. Nothing is more joyous than gathering around family and opening up large quantities of presents. We draw satisfaction from seeing the bubbling excitement from a child; catching the gaze from a loved one who received just what they wanted; and the sincere hug from a friend that treasured the special thought.
While it is important that our expressions of love through gifts continue, we need to ensure that they come from our savings and not debt. We must recognize that when we are using our credit card that we are actually using someone else's money and not ours. Credit cards are not money, but simply a loan from a financial institution that will expect their principal and interest over time. That is a recipe for killing future wealth. Rather than pursuing that road, we should be drawing down from our savings account that we have accumulated through pursuing practical budgetary practices.
You will need to establish a plan of action first before heading to the mall. I recommend using this Holiday Spending Survival Guide from Practical Money Skills, which is a free resource to help you determine your spending limits and other holiday spending tips. They suggest that you side aside no more than 1.5% of your annual income toward gifts. If you go beyond that, then it is recommended that you pursue a long-range plan of savings that should extend through the whole year. Regardless, you need to see specified limits and not go beyond them.
If this has been a tough year and income is tight, then you will want to be creative. This might mean investing your time and talent creating a gift, rather than going to the store. You might be surprised by how well it will be received by others. If you need ideas on where to start, then I recommend using either Instructibles or Craftzine. Another idea is to either buy gifts as a group or form a circle of family members where each member is responsible for buying a gift for just one member of the circle. Lastly, I recommend searching online to find special deals. Common sites can be found on Yahoo Shopping, Overstock, and PriceGrabber.
Finally, recognize that the holiday season is supposed to be time for relaxation and fun. By applying good saving methods and taking advantage of the right resources, you will be able to spread the love without the headache of crunching debt to start the new year. Smiles will be more plentiful and relationships will be strengthened. Let's all look forward to a Happy Holidays and a stress-free New Year!
Monday, November 8, 2010
Will Consumers Embrace Electric Cars?
The November 8th, 2010 edition of the USA Today discusses the potential success of electric cars in the marketplace. Chris Woodyard highlights One aspect of the U.S. bailout of both GM and Chrysler involved a commitment to introducing electric cars into the marketplace. In particular, Democratic leadership and Obama urged U.S. automakers to start developing new environmentally-friendly cars in return for taxpayer funds. In order to spur more sales, the U.S. government is offering significant incentives for both consumers and producers.
In order to alleviate the concerns over sticker shock, the U.S. government are using market-based schemes to increase sales. Right now, electric cars are expensive ranging from $32,750 to around $50,000. That can be burdensome for many middle class families, so qualifying individuals can be eligible to receive tax credits that can reduce the price by around $7,500. There have been some success with Nissan hitting their sales target with their Leaf brand.
One potential concern involves getting the vehicles charged on a regular basis. With very few public charging stations, people are concerned about running out of power while traveling on the road. The U.S. government is offering grant money to suppliers, but so far only two firms have taken advantage of it and these stations are limited to large metro areas in a few select states. It is possible to charge these cars at home, but they can take up to 20 hours to be fully charged on a regular 110 or 120-volt home wall socket. Alternatively, one can choose a 220- or 240-volt charger, but those items are pricey at $1,200 or more. Even if one can afford that, there's a problem if one lives without a garage.
Electric cars are still in their nascent stage, so that might cause consumers to be wary. With very few public charging stations, there's the concern of being stranded. Certainly, it is not a vehicle that is conducive to long range driving. Then there's the issue of performance issues over time and their adaptability to different climates. These are issues that can only be resolved over time.
Returning to economics, there is one politically unpopular method that can be used that would be sure to boost electric car sales. Economists realize that individuals respond to incentives and that the price system can be used to deal with scarce resources. When looking at the current consumption levels of crude oil by Americans and combine that with growing demand in China, our environmental costs are rising. If our concern is with global warming and reducing our use of carbon dioxide, then applying a corrective tax would be an efficient strategy. This corrective tax would take the form of a federal gasoline tax that would raise the price of gasoline. Higher gas prices would make electric cars more attractive and lead to more of them being on the road. Of course, the downside is that this policy would be more burdensome to the more vulnerable segments of U.S. society, including the working poor, middle class, and people living in rural areas.
In summary, I do believe that electric cars might be the wave of the future, but it looks like our response will be reactive, rather than proactive. Market-based strategies, such as providing subsides to both consumers and businesses alike, will quicken the transformation, but that alone will not cut it. It will take another ‘crisis’ such as an economic recovery that suddenly raises the demand for gasoline. Skyrocketing gas prices that are sustained over a long period of time will be the reason why electric cars will catch on.
What do you think?
In order to alleviate the concerns over sticker shock, the U.S. government are using market-based schemes to increase sales. Right now, electric cars are expensive ranging from $32,750 to around $50,000. That can be burdensome for many middle class families, so qualifying individuals can be eligible to receive tax credits that can reduce the price by around $7,500. There have been some success with Nissan hitting their sales target with their Leaf brand.
One potential concern involves getting the vehicles charged on a regular basis. With very few public charging stations, people are concerned about running out of power while traveling on the road. The U.S. government is offering grant money to suppliers, but so far only two firms have taken advantage of it and these stations are limited to large metro areas in a few select states. It is possible to charge these cars at home, but they can take up to 20 hours to be fully charged on a regular 110 or 120-volt home wall socket. Alternatively, one can choose a 220- or 240-volt charger, but those items are pricey at $1,200 or more. Even if one can afford that, there's a problem if one lives without a garage.
Electric cars are still in their nascent stage, so that might cause consumers to be wary. With very few public charging stations, there's the concern of being stranded. Certainly, it is not a vehicle that is conducive to long range driving. Then there's the issue of performance issues over time and their adaptability to different climates. These are issues that can only be resolved over time.
Returning to economics, there is one politically unpopular method that can be used that would be sure to boost electric car sales. Economists realize that individuals respond to incentives and that the price system can be used to deal with scarce resources. When looking at the current consumption levels of crude oil by Americans and combine that with growing demand in China, our environmental costs are rising. If our concern is with global warming and reducing our use of carbon dioxide, then applying a corrective tax would be an efficient strategy. This corrective tax would take the form of a federal gasoline tax that would raise the price of gasoline. Higher gas prices would make electric cars more attractive and lead to more of them being on the road. Of course, the downside is that this policy would be more burdensome to the more vulnerable segments of U.S. society, including the working poor, middle class, and people living in rural areas.
In summary, I do believe that electric cars might be the wave of the future, but it looks like our response will be reactive, rather than proactive. Market-based strategies, such as providing subsides to both consumers and businesses alike, will quicken the transformation, but that alone will not cut it. It will take another ‘crisis’ such as an economic recovery that suddenly raises the demand for gasoline. Skyrocketing gas prices that are sustained over a long period of time will be the reason why electric cars will catch on.
What do you think?
Friday, November 5, 2010
Do Liquor Stores Enhance or Worsen Economic Development?
There is a hotly debated issue in Albany, GA where there are concerns about whether or not to provide a liquor license to Alexander Rowe, who wants to open a liquor store that is close to Albany State University (ASU) and Union Baptist Church. Even though it appears that the liquor store meets regulatory requirements on distance between a school and church, it is still negligible and one can say that it violates the spirit of the law, if not the letter of the law. J.D. Sumner writes an editorial in November 5th, 2010 edition of the Albany Herald that asserts that reasoning and free markets should prevail and Mr. Rowe should be able to open the liquor store. On the other hand, ASU supporters are worried about its effect on students, who might be more tempted to bring alcohol to campus. When looking at economic development, it is important to recognize the true cost of allowing a liquor store to operate in such close proximity to a school and church.
Most advocates of permitting Mr. Rowe's proposed business point to its financial benefits. As of right now, the area in question is currently vacant, so a liquor store would bring in much needed sales tax revenues that can be used to support city services. While there would be a limited number of jobs, there would be increased traffic and this could lead to more business activity in East Albany, which is economically depressed.
However, there is the issue of negative externalities occurring in an area where a liquor store is located. A negative externality is a cost incurred on outside parties not directly involved in the transaction. Often, free market advocates ignore or minimize the effects of externalities, but their existence can create inefficient outcomes. Examples of negative externalities would be an increase in crime in the area and student performance being compromised if their alcohol use increases due to the existence of the liquor store. Mr. Sumner tries to counter this point by referencing a local study that found no significant correlation between crime and the location of businesses that serve alcohol. While he was careful to note that the study included all establishments that serve alcohol, I would think the study should be narrowed to include only liquor stores.
There should be a distinction between establishments that serve alcohol as their primary source of revenue and those where alcohol sales are secondary. One can assume that the primary source of revenue for a liquor store is alcohol, while L'Jua is a restaurant whose primary role is serving food to customers. This is important because I would argue that a patron goes to L'Jua with the explicit purpose of enjoying its fine food. On the other hand, a liquor store customer is almost always interested in buying alcohol and carrying that liquor outside to either their home, school, or other place. There is also the potential for attracting unsavory elements as vagrants and other undesirables to this area. While Mr. Sumner's point is strengthened by highlighting the existence of a nearby nightclub, Big Daddy's Lounge, you still have the same scenario as L'Jua where alcohol can only be consumed inside its door and not beyond.
When considering economic development, one needs to examine its overall impact. Oftentimes, our desperation leads us to encourage any type of economic activity, as long as it creates jobs and revenues. However, one must understand that certain actions can hamper future economic development. Just because East Albany is relatively depressed today, that does not have to be the case 5, 10, or 20 years later. Remember we will be seeing a new Walmart constructed nearby and the Marine Corps Logistics Base is also expanding. This has the potential to attract more population to Dougherty County and prospective homeowners are likely to turn a dismissive eye to areas that have too many liquor stores. After examining the merits and downsides to Rowe's proposed liquor store, I see its denial as eventually a net benefit to both East Albany and the ASU community.
Most advocates of permitting Mr. Rowe's proposed business point to its financial benefits. As of right now, the area in question is currently vacant, so a liquor store would bring in much needed sales tax revenues that can be used to support city services. While there would be a limited number of jobs, there would be increased traffic and this could lead to more business activity in East Albany, which is economically depressed.
However, there is the issue of negative externalities occurring in an area where a liquor store is located. A negative externality is a cost incurred on outside parties not directly involved in the transaction. Often, free market advocates ignore or minimize the effects of externalities, but their existence can create inefficient outcomes. Examples of negative externalities would be an increase in crime in the area and student performance being compromised if their alcohol use increases due to the existence of the liquor store. Mr. Sumner tries to counter this point by referencing a local study that found no significant correlation between crime and the location of businesses that serve alcohol. While he was careful to note that the study included all establishments that serve alcohol, I would think the study should be narrowed to include only liquor stores.
There should be a distinction between establishments that serve alcohol as their primary source of revenue and those where alcohol sales are secondary. One can assume that the primary source of revenue for a liquor store is alcohol, while L'Jua is a restaurant whose primary role is serving food to customers. This is important because I would argue that a patron goes to L'Jua with the explicit purpose of enjoying its fine food. On the other hand, a liquor store customer is almost always interested in buying alcohol and carrying that liquor outside to either their home, school, or other place. There is also the potential for attracting unsavory elements as vagrants and other undesirables to this area. While Mr. Sumner's point is strengthened by highlighting the existence of a nearby nightclub, Big Daddy's Lounge, you still have the same scenario as L'Jua where alcohol can only be consumed inside its door and not beyond.
When considering economic development, one needs to examine its overall impact. Oftentimes, our desperation leads us to encourage any type of economic activity, as long as it creates jobs and revenues. However, one must understand that certain actions can hamper future economic development. Just because East Albany is relatively depressed today, that does not have to be the case 5, 10, or 20 years later. Remember we will be seeing a new Walmart constructed nearby and the Marine Corps Logistics Base is also expanding. This has the potential to attract more population to Dougherty County and prospective homeowners are likely to turn a dismissive eye to areas that have too many liquor stores. After examining the merits and downsides to Rowe's proposed liquor store, I see its denial as eventually a net benefit to both East Albany and the ASU community.
Better Than Expected Job Market
As reported in this November 5th, 2010 CNNMoney article, the labor market is showing signs of improvement. Even though the unemployment rate is unchanged at 9.6%, there was an increase of 151,000 jobs in October. That was more than double than what economists predicted, so that's a good sign. However, we are going to need consistently higher job growth numbers in order to see the unemployment rate drop. Most economists feel that we need to be around the mid-250,000s to see a significant decrease in the unemployment rate because the labor force typically grows each month.
While there was considerable improvement in the private sector, the public sector is continuing to show weakness. On the positive side, private businesses started rehiring and created over 159,000 jobs. As for government jobs, they continued their decline this month with 8,000 jobs lost during this period. That is not surprising since many states continue to be strapped for cash as previous declines in economic activity caused their revenues to decline. In order to balance their budgets, many are resorting to downsizing their departments and cutting services.
Another key unemployment measure, which actually might be more accurate, also declined slightly from 17.1% to 17%. The Bureau of Labor Statistics also calculates an underemployment rate, which captures workers that are marginally attached to the labor force. This attempts to count discouraged workers, who want a job but are no longer seeking a job, along with involuntary part-time workers, who prefer to work full-time. These individuals are considered unemployed in this measure.
While there was considerable improvement in the private sector, the public sector is continuing to show weakness. On the positive side, private businesses started rehiring and created over 159,000 jobs. As for government jobs, they continued their decline this month with 8,000 jobs lost during this period. That is not surprising since many states continue to be strapped for cash as previous declines in economic activity caused their revenues to decline. In order to balance their budgets, many are resorting to downsizing their departments and cutting services.
Another key unemployment measure, which actually might be more accurate, also declined slightly from 17.1% to 17%. The Bureau of Labor Statistics also calculates an underemployment rate, which captures workers that are marginally attached to the labor force. This attempts to count discouraged workers, who want a job but are no longer seeking a job, along with involuntary part-time workers, who prefer to work full-time. These individuals are considered unemployed in this measure.
Thursday, November 4, 2010
Are Republican Attempts to Thwart Health Care Reform Misguided?
This November 3rd, 2010 New York Times editorial written by former budget director for Obama, Peter Orszag, thinks so. His premise is based on public comments from key Republican leaders, who vow to change or diminish the effects of certain provisions of health care reform. There is certainly a divide between liberals, who are concerned with extending coverage to more Americans, and conservatives, who are more interested in maintaining quality and lowering cost.
While Orszag asserts that Republicans are ironically focusing on initiatives aimed at lowering health care costs, it should be pointed out that there are other cost-saving measures that they favor implementing. Orszag does infer on one of those measures when he talks about malpractice reform. Republicans believe that premium costs are rising because doctors must purchase expensive malpractice insurance and engage in defensive medical practices that drive up costs. They also want to allow people to purchase insurance across state lines with the thinking that more choices for consumers will drive overall prices down.
However, Orszag does bring up potentially valid points on health care reform measures that should not be blocked. For instance, hospitals will see their reimbursement rates fall if patients have to be readmitted, so this will create an incentive to make the correct diagnosis and prescriptive service on the initial visit. In theory, that would lower overall medical costs. He also mentions Medicare payment cuts to providers, though it should be noted that it is not a certainty that Congress will continue to agree to those cuts. This is because providers can simply not accept Medicare patients, so they can use that threat in order to prevent those cuts from occurring.
One other part of the bill that I am sure that will try to be reversed is the health care mandate. The health care mandate means all adults must purchase health care or risk paying a penalty. We actually have until 2014 before any penalties will be assessed, but there are some who believe that this is unconstitutional. However, this will be an effective way to lower health care costs because private insurance companies will see their pool insurance recipients rise as a result. By receiving more premiums, insurance companies will be able to lower premiums because they no longer face the problem of adverse selection. Adverse selection refers to high-risk individuals (older individuals) will purchase health insurance whereas low-risk individuals (young people) do not. This is a problem for insurers because the payout for health care costs are greater.
Administrating health care through markets is a challenging issue due to the concept of scarcity. We learn in economics that the more scarce a resource is then the cost of that resource will rise. In America, our population is aging where we will soon have more retirees than we will have workers. Retirees are more likely to use health care services than younger workers, so that is one of the main reasons why many expect health care costs to rise. Currently, government has tried using a series of price controls to keep prices down, but that leads to complex distortions to the market place that can ultimately lead to shortages.
While Orszag asserts that Republicans are ironically focusing on initiatives aimed at lowering health care costs, it should be pointed out that there are other cost-saving measures that they favor implementing. Orszag does infer on one of those measures when he talks about malpractice reform. Republicans believe that premium costs are rising because doctors must purchase expensive malpractice insurance and engage in defensive medical practices that drive up costs. They also want to allow people to purchase insurance across state lines with the thinking that more choices for consumers will drive overall prices down.
However, Orszag does bring up potentially valid points on health care reform measures that should not be blocked. For instance, hospitals will see their reimbursement rates fall if patients have to be readmitted, so this will create an incentive to make the correct diagnosis and prescriptive service on the initial visit. In theory, that would lower overall medical costs. He also mentions Medicare payment cuts to providers, though it should be noted that it is not a certainty that Congress will continue to agree to those cuts. This is because providers can simply not accept Medicare patients, so they can use that threat in order to prevent those cuts from occurring.
One other part of the bill that I am sure that will try to be reversed is the health care mandate. The health care mandate means all adults must purchase health care or risk paying a penalty. We actually have until 2014 before any penalties will be assessed, but there are some who believe that this is unconstitutional. However, this will be an effective way to lower health care costs because private insurance companies will see their pool insurance recipients rise as a result. By receiving more premiums, insurance companies will be able to lower premiums because they no longer face the problem of adverse selection. Adverse selection refers to high-risk individuals (older individuals) will purchase health insurance whereas low-risk individuals (young people) do not. This is a problem for insurers because the payout for health care costs are greater.
Administrating health care through markets is a challenging issue due to the concept of scarcity. We learn in economics that the more scarce a resource is then the cost of that resource will rise. In America, our population is aging where we will soon have more retirees than we will have workers. Retirees are more likely to use health care services than younger workers, so that is one of the main reasons why many expect health care costs to rise. Currently, government has tried using a series of price controls to keep prices down, but that leads to complex distortions to the market place that can ultimately lead to shortages.
Could Modest Gain in Worker Productivity Lead to More Hiring?
As reported in the November 4th, 2010 edition of the New York Times, worker productivity showed a modest gain of 1.9% in the third quarter of 2010. Productivity is a key measure of the overall economy. Ideally, we would like to see productivity in the 3% or more range. Some economists are speculating that these relatively low rates will lead firms to boost hiring. As we head into the holiday season where most are expecting better shopping activity than last year, there is hope that the fourth quarter will yield more jobs.
It is important to note that high productivity rates are highly correlated with better living standards. Firms want to produce a high volume of goods and services at the lowest possible cost. This occurs when workers are able to increase their production levels during a specified time period. Certainly, machinery and investment equipment can increase those yields, but workers must have the intellect and skill levels to operate more complex machinery. With increased pressures globally in manufacturing, it is critical that U.S. workers increase their knowledge of technology, so that jobs stay here and not go overseas.
It should also be noted that these productivity rates are measured across a broad spectrum of industries. Over time, it has been shown that workers with stronger educational levels and literacy rates will be more productive. That is why advanced countries, such as the U.S., Canada, and Germany, will have higher productivity rates than developing countries in Southeast Asia, Latin America, and Africa.
It is important to note that high productivity rates are highly correlated with better living standards. Firms want to produce a high volume of goods and services at the lowest possible cost. This occurs when workers are able to increase their production levels during a specified time period. Certainly, machinery and investment equipment can increase those yields, but workers must have the intellect and skill levels to operate more complex machinery. With increased pressures globally in manufacturing, it is critical that U.S. workers increase their knowledge of technology, so that jobs stay here and not go overseas.
It should also be noted that these productivity rates are measured across a broad spectrum of industries. Over time, it has been shown that workers with stronger educational levels and literacy rates will be more productive. That is why advanced countries, such as the U.S., Canada, and Germany, will have higher productivity rates than developing countries in Southeast Asia, Latin America, and Africa.
Fed's Strategy to Boost Economy
With congressional gridlock firmly in place, Bernanke is opting to use innovative monetary policies to boost economic growth. This November 4th, 2010 Bloomberg article analyzes its potential success. In my Principles of Macroeconomics class, we talk about traditional ways to create jobs through monetary policy. The main strategy involves buying bonds through Open Market Operations which pushes down the yield of the Fed Funds Rate. The Fed Funds Rate is a key interest rate where all other interest rates are tied to. However, the Fed already utilized this strategy and the Fed Funds Rate is essentially zero.
Bernanke is now embarking on a new innovative monetary policy tool that was used to lift us out of our financial crisis a couple of years ago. It is called quantitative easing, which essentially involves selling U.S. Treasury T-bills, which mature in less than a year, and use the proceeds from those sales to buy longer term U.S. Treasury bonds. By buying U.S. Treasury bonds, this process will lower their yields. Lower yields mean lower interest rates for businesses and consumers alike.
While I discuss this policy in more detail in "Jumpstarting Our Economy", we now know that the Fed has decided to buy $600 billion in U.S. Treasuries through June. This figure was a little more than the consensus take of $500 billion of economists.
A survey of economists on the future trend in the unemployment rate was discouraging. They anticipate that the unemployment rate will remain above 9% or above until the first quarter of 2012. As of right now, the U.S. unemployment rate is at 9.6%.
Bernanke is now embarking on a new innovative monetary policy tool that was used to lift us out of our financial crisis a couple of years ago. It is called quantitative easing, which essentially involves selling U.S. Treasury T-bills, which mature in less than a year, and use the proceeds from those sales to buy longer term U.S. Treasury bonds. By buying U.S. Treasury bonds, this process will lower their yields. Lower yields mean lower interest rates for businesses and consumers alike.
While I discuss this policy in more detail in "Jumpstarting Our Economy", we now know that the Fed has decided to buy $600 billion in U.S. Treasuries through June. This figure was a little more than the consensus take of $500 billion of economists.
A survey of economists on the future trend in the unemployment rate was discouraging. They anticipate that the unemployment rate will remain above 9% or above until the first quarter of 2012. As of right now, the U.S. unemployment rate is at 9.6%.
Monday, November 1, 2010
Manufacturing Activity Picks Up in October
Even though the U.S. economy is more reliant on services, manufacturing is still an indicator of the overall strength of an economy. As reported in the November 1st edition of Bloomberg, the Institute for Supply Management's factory index reported a five-month high to 56.9. This is an increase from last month's 54.4 and is mainly attributed to rising demand in markets overseas. It should also be noted that most economists expected manufacturing to decline this month, so this is certainly a positive. While it is another indicator that we will not be experiencing a double-dip recession, further jumps in manufacturing is needed to sustain and grow the current recovery.
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