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Well, I presented eight short primers on eight important economic statistics. I didn't provide a lot of context for the statistics, so that will come down the road when we delve into our next economics lesson. For now, know that I'm a committed liberal and the more I delve into economics, the most I feel that my liberalism has been reinforced. If you have anything to add, please comment!
Showing posts with label Economics. Show all posts
Showing posts with label Economics. Show all posts
Wednesday, April 29, 2009
Tuesday, April 28, 2009
Government Spending
8 Important Economic Statistics #8
Definition
There are three types of government spending:
Using the Statistic
Simply looking at government spending alone is not necessarily helpful. Generally, the most useful use of government spending data is as a percentage of GDP. (For 2009, 44.72% of GDP was government spending.) This allows us to compare our spending with those of other nations in the world, and provides us a handy benchmark to compare our own government spending historically.
Historical Changes
Until the Great Depression, government spending as a percentage of GDP in the United States was relatively low. There was a spike to account for the increased spending needed to fund the first World War, but levels came back down following the war. With the advent of the New Deal, and such government programs as social security, government spending as a percentage of GDP began to increase at a steady rate year after year. (There was a huge spike of government spending for World War II, and a smaller spike recently for the stimulus package passed earlier this year.)
Definition
There are three types of government spending:
- Consumption is the purchase of goods and services for use by the government. (The government will purchase items such as food and clothing for their various needs, including the military.) Consumption is a major component of GDP.
- Investment is the money the government spends on projects from which the country will hopefully reap future benefits. This would include research, infrastructure and education spending. Like consumption, government investment is a major component of GDP.
- Transfer Payments are payments made to the citizenry by the federal government. These are through social benefit programs. (A good example in the United States would be Social Security.) Since a transfer payment is simply a movement of money, it is not included in GDP.
Each year, the government publishes the Statistical Abstract of the United States. The data in this abstract is compiled from the US Census Bureau and The Bureau of Economic Analysis among other federal agencies. Each year, the abstract contains an overview of government spending.
Using the Statistic
Simply looking at government spending alone is not necessarily helpful. Generally, the most useful use of government spending data is as a percentage of GDP. (For 2009, 44.72% of GDP was government spending.) This allows us to compare our spending with those of other nations in the world, and provides us a handy benchmark to compare our own government spending historically.
Historical Changes
Until the Great Depression, government spending as a percentage of GDP in the United States was relatively low. There was a spike to account for the increased spending needed to fund the first World War, but levels came back down following the war. With the advent of the New Deal, and such government programs as social security, government spending as a percentage of GDP began to increase at a steady rate year after year. (There was a huge spike of government spending for World War II, and a smaller spike recently for the stimulus package passed earlier this year.)
Further Reading
Previous Entries in this Series: GDP, Unemployment Rate, Poverty Rate, Inflation Rate, Gini Index, The Dow Jones Industrial Average, The S&P 500
The S&P 500
8 Important Economic Statistics #7
Definition
The S&P 500 is a stock market index consisting of 500 different large-cap companies from the United States. All of the companies trade on the New York Stock Exchange or NASDAQ. The index is market-value weighted, which means the companies with larger market capitalizations have more influence on the index. The companies must meet the following criteria to be included in the index, among others:
Definition
The S&P 500 is a stock market index consisting of 500 different large-cap companies from the United States. All of the companies trade on the New York Stock Exchange or NASDAQ. The index is market-value weighted, which means the companies with larger market capitalizations have more influence on the index. The companies must meet the following criteria to be included in the index, among others:
- Must be a U.S company
- Must have at least a $5 billion market cap
- Must have at least half of the companies shares publicly available
- Must be financially viable
- The stock must be reasonably priced to ensure adequate liquidity
The S&P 500 is the most popular stock market index among the investor crowd. There are many mutual funds that attempt to mimic the composition of the S&P 500. The performance of most mutual funds, and other investment equities as well, are compared against the S&P 500 to determine their performance. It is the bellwether measurement of the American market.
Problems and Criticisms
The S&P 500 is considered one of the more "rock solid" investment indices. It is certainly more reliable than the Dow since it looks at 470 more companies. Still, it is not perfect. The two biggest weaknesses of the index is that it only features US companies and that it only included large companies that are traded frequently. The index does not take into account the market performance of smaller companies, or huge companies that are rarely traded such as Berkshire
The S&P 500 Today
Because of the tech bubble bust in the early part of the decade, the S&P 500 took big hits in 2000, 2001 and 2002. Growth in the market resumed in 2003. On October 9th, 2007, the index closed with its highest ever value, $1,565.15. The bad times would soon return. In 2008, the index lost 38.49% of its value. This has taken a major hit in the investment portfolios of many average Americans. Many, many people have their 401K money invested in S&P 500 mutual funds. The index is currently valued around $860.
Problems and Criticisms
The S&P 500 is considered one of the more "rock solid" investment indices. It is certainly more reliable than the Dow since it looks at 470 more companies. Still, it is not perfect. The two biggest weaknesses of the index is that it only features US companies and that it only included large companies that are traded frequently. The index does not take into account the market performance of smaller companies, or huge companies that are rarely traded such as Berkshire
Hathaway.
The S&P 500 Today
Because of the tech bubble bust in the early part of the decade, the S&P 500 took big hits in 2000, 2001 and 2002. Growth in the market resumed in 2003. On October 9th, 2007, the index closed with its highest ever value, $1,565.15. The bad times would soon return. In 2008, the index lost 38.49% of its value. This has taken a major hit in the investment portfolios of many average Americans. Many, many people have their 401K money invested in S&P 500 mutual funds. The index is currently valued around $860.
Further Reading
Previous Entries in this Series: GDP, Unemployment Rate, Poverty Rate, Inflation Rate, Gini Index, The Dow Jones Industrial Average
Monday, April 27, 2009
The Dow Jones Industrial Average
8 Important Economic Statistics #6
Definition
The Dow Jones Industrial Average (The DJIA or The Dow) is the oldest of the American stock market index. The DJIA is calculated using the value of 30 large companies, that are widely held. The 30 companies used to compute the average change on occasion, and by definition do not include utlities and transportation companies. Originally, the average was computed by taking a sum of the price of each of the included stocks and then dividing the sum by the number of stocks, a pure average. Today, the DJIA is price-weighted rather than a pure average. This helps to preserve the DJIAs usefulness as a historical measurement. For most people, the DJIA is the primary statistic used to determine the health of the market.
Problems and Criticisms
The DJIA is not necessarily the best indicator of overall stock market performance. The stock for only 30 companies are included so there are thousands of companies whose performance is not used. Additionally, because all of the included companies have large market caps, companies will smaller market caps are not figured into the average. Additionally, stocks that are higher priced have more influence over the index because the index is price-weighted. There is no consideration for the size of the companies included. Finally, despite a global economy, the DJIA remains a US centric index.
DJIA Performance
On September 3rd, 1929, the Dow reached what was, at the time, an all-time high of 381.17. By July 8, 1932, the index closed at 41.22. This was in the midst of the Great Depression. Sadly, we are living through a similar period of wealth destruction in the stock market. The DJIA experienced a period of remarkable growth in the aftermath of the 1987 market crash. On October 19th, 1987, the Dow closed at 1,738.74. By the end of the Clinton Presidency the DJIA was over 10,000. The George W. Bush Presidency would experience two major slides in the DJIA. The first came in the first two years of the administration as the tech bubble burst. Their were many lessons to learn from the tech bubble, but the Bush administration wasn't interested in those lessons. So when the DJIA began to grow again and peaked at 14,164.53 in October of 2007, they made sure their heads were buried deep in the sand. Well, with the bust of the real estate bubble and the banking crisis, the Dow would take a severe hit and would be bear 8,000 as Bush left office.
Further ReadingPrevious Entries in this Series: GDP, Unemployment Rate, Poverty Rate, Inflation Rate, Gini Index
Definition
The Dow Jones Industrial Average (The DJIA or The Dow) is the oldest of the American stock market index. The DJIA is calculated using the value of 30 large companies, that are widely held. The 30 companies used to compute the average change on occasion, and by definition do not include utlities and transportation companies. Originally, the average was computed by taking a sum of the price of each of the included stocks and then dividing the sum by the number of stocks, a pure average. Today, the DJIA is price-weighted rather than a pure average. This helps to preserve the DJIAs usefulness as a historical measurement. For most people, the DJIA is the primary statistic used to determine the health of the market.
Problems and Criticisms
The DJIA is not necessarily the best indicator of overall stock market performance. The stock for only 30 companies are included so there are thousands of companies whose performance is not used. Additionally, because all of the included companies have large market caps, companies will smaller market caps are not figured into the average. Additionally, stocks that are higher priced have more influence over the index because the index is price-weighted. There is no consideration for the size of the companies included. Finally, despite a global economy, the DJIA remains a US centric index.
DJIA Performance
On September 3rd, 1929, the Dow reached what was, at the time, an all-time high of 381.17. By July 8, 1932, the index closed at 41.22. This was in the midst of the Great Depression. Sadly, we are living through a similar period of wealth destruction in the stock market. The DJIA experienced a period of remarkable growth in the aftermath of the 1987 market crash. On October 19th, 1987, the Dow closed at 1,738.74. By the end of the Clinton Presidency the DJIA was over 10,000. The George W. Bush Presidency would experience two major slides in the DJIA. The first came in the first two years of the administration as the tech bubble burst. Their were many lessons to learn from the tech bubble, but the Bush administration wasn't interested in those lessons. So when the DJIA began to grow again and peaked at 14,164.53 in October of 2007, they made sure their heads were buried deep in the sand. Well, with the bust of the real estate bubble and the banking crisis, the Dow would take a severe hit and would be bear 8,000 as Bush left office.
Further ReadingPrevious Entries in this Series: GDP, Unemployment Rate, Poverty Rate, Inflation Rate, Gini Index
Gini Index
8 Important Economic Statistics #5
Definition
The Gini index is a measurement of a nation's income inequality. If a nation's Gini index is zero, then every citizen of the nation earns the same amount of income. A value of a hundred indicates that all income has been earned by a single individual. As a calculation, the Gini index is calculated through the use of a Lorenz Curve. (The index is the area of total equality as populated on the Lorenz Curve divided by the sum of the area of total equality and the area under the Lorenz Curve expressed as a percentage. Sound confusing? There's a great graph with a simple explanation provided by The World Bank.)
Problems and Criticisms
Like most economic statistics, the Gini index does not accomplish its goal perfectly. Some of the problems are mathematical. (For example, you cannot average the Gini indices of different groups of people to get the Gini index of the entire group.) The Gini index does not take into account the efficiency of income use. (The rich tend to the use their incomes more efficiently than the poor.) Additionally, the numbers for different nations do not account for the different levels of wealth.
The United States
The best use of the Gini index is for measuring the changes in income inequality in a given nation year after year. Looking at the Gini index throughout our history, it easy to see the effect of the two major competing political ideologies on income inequality. In 1929, at the beginning of the Great Depression, economists estimate the Gini index at 45.0. Of course, a period of highly conservative economic rule proceeded the Geat Depression. In the aftermath of the New Deal, and during World War II, the Gini index had dropped to 37.6. As recent as 1968, following the implementation of LBJ's Great Society, the index was paltry 38.6. The index would tick upwards slightly to 40.3 by the time Ronald Reagan was elected President in 1980. Since the implementation of Reaganomics throughout the 1980s, income inequality has grown steadily, peaking at 47.0 in 2006. This is the highest index recorded in the United States. It is safe to say that income inequality will continue to grow long term until the nation implements substantially more progressive economic policies.
Further ReadingPrevious Entries in this Series: GDP, Unemployment Rate, Poverty Rate, Inflation Rate
Definition
The Gini index is a measurement of a nation's income inequality. If a nation's Gini index is zero, then every citizen of the nation earns the same amount of income. A value of a hundred indicates that all income has been earned by a single individual. As a calculation, the Gini index is calculated through the use of a Lorenz Curve. (The index is the area of total equality as populated on the Lorenz Curve divided by the sum of the area of total equality and the area under the Lorenz Curve expressed as a percentage. Sound confusing? There's a great graph with a simple explanation provided by The World Bank.)
Problems and Criticisms
Like most economic statistics, the Gini index does not accomplish its goal perfectly. Some of the problems are mathematical. (For example, you cannot average the Gini indices of different groups of people to get the Gini index of the entire group.) The Gini index does not take into account the efficiency of income use. (The rich tend to the use their incomes more efficiently than the poor.) Additionally, the numbers for different nations do not account for the different levels of wealth.
The United States
The best use of the Gini index is for measuring the changes in income inequality in a given nation year after year. Looking at the Gini index throughout our history, it easy to see the effect of the two major competing political ideologies on income inequality. In 1929, at the beginning of the Great Depression, economists estimate the Gini index at 45.0. Of course, a period of highly conservative economic rule proceeded the Geat Depression. In the aftermath of the New Deal, and during World War II, the Gini index had dropped to 37.6. As recent as 1968, following the implementation of LBJ's Great Society, the index was paltry 38.6. The index would tick upwards slightly to 40.3 by the time Ronald Reagan was elected President in 1980. Since the implementation of Reaganomics throughout the 1980s, income inequality has grown steadily, peaking at 47.0 in 2006. This is the highest index recorded in the United States. It is safe to say that income inequality will continue to grow long term until the nation implements substantially more progressive economic policies.
Further ReadingPrevious Entries in this Series: GDP, Unemployment Rate, Poverty Rate, Inflation Rate
Thursday, April 23, 2009
Inflation Rate
8 Important Economic Statistics #4
Definition
The government, with the help of some really smart economists, has defined a "basket of goods" typically purchased by a run-of-the-mill urban consumer. The basket consists of, quite literally, thousands of different items. Government economists track the prices of these goods and compiles a statistic known as the Consumer Price Index (CPI). When the CPI increases, this is known as inflation. Conversely, a decrease in CPI is called deflation. The inflation rate is the change in CPI represented as a percentage.
Previous Entries in this Series: GDP, Unemployment Rate, Poverty Rate
Definition
The government, with the help of some really smart economists, has defined a "basket of goods" typically purchased by a run-of-the-mill urban consumer. The basket consists of, quite literally, thousands of different items. Government economists track the prices of these goods and compiles a statistic known as the Consumer Price Index (CPI). When the CPI increases, this is known as inflation. Conversely, a decrease in CPI is called deflation. The inflation rate is the change in CPI represented as a percentage.
The Problem with Inflation
Inflation is an increase in prices, but the best way to think of inflation is as a decrease in the purchasing power of the dollar. If inflation rises rapidly, people will rush to spend their money quickly before their purchasing power declines even further. Inflation will distort investment returns and taxes. Unchecked inflation can have a catastrophic effect on an economy. In order to maintain the purchasing power of a currency, central banks work hard to keep inflation under control by tightening or expanding the supply of money.
The United States
Unlike Germany in the 1920s and Central America towards the end of the 20th century, the US has never experienced a period of hyperinflation. (A rapid increase in the inflation rate where inflation appears to be out of control.) Our worst period for inflation was the period from 1973 to 1981 which saw four years of double digit increases in the inflation rate (including an inflation rate of a whopping 13.58 in 1980). The inflation rate in 2008 was 3.85% which is slightly higher than what economists would like to see (2%).
Further Reading
Wednesday, April 22, 2009
Poverty Rate
8 Important Economic Statistics #3
Definition
At its most basic, poverty is a lack of sufficient resources. The amount of resources needed to stay out of poverty is subject of debate, but it is generally defined by a society and the values embraced by that society. In the United States, we have set an income level that is known as the poverty line. A single person who earns less than 11, 201 a year was considered to be living in poverty in 2008. The percentage of people who live under the poverty line is the poverty rate.
Previous Entries in this Series: GDP, Unemployment Rate
Definition
At its most basic, poverty is a lack of sufficient resources. The amount of resources needed to stay out of poverty is subject of debate, but it is generally defined by a society and the values embraced by that society. In the United States, we have set an income level that is known as the poverty line. A single person who earns less than 11, 201 a year was considered to be living in poverty in 2008. The percentage of people who live under the poverty line is the poverty rate.
Problems with the Statistic
The united states poverty rate is understated for a number of reasons. The number does not take into account the different income levels needed to live in different parts of the country. (It costs more to live in California than Nebraska for instance.) The "basket of goods" used to determine the poverty line has not been updated in 50 years. (The prices are indexed for inflation, but the goods themselves have not been altered.)
The United States
In 2007, 12.5% of all Americans lived in poverty. This is 37.3 million people. With the current economic crisis in full swing, it is expected that the 2008 and 2009 numbers will decline further. (When George W. Bush took office, the poverty rate was 11.3%, which is still too high. His administration clearly did not do enough to tackle this problem.)
Like other developed countries, poverty in the United States is cyclical. At some point over every ten year period, 40% of Americans will experience poverty.
Further Reading
Tuesday, April 21, 2009
Unemployment Rate
8 Important Economic Statistics #2
Definition
An unemployed individual is someone who wants to work, is capable of working, and is actively seeking work. The unemployment rate is the percentage of unemployed workers in the total labor force. Economist Arthur Okun studied unemployment data and GDP from 1930 through 1980 and observed that rises in GDP are directly related to a lowering of the unemployment rate. In other words, in a growing economy, the unemployment rate falls. In a stagnating or recession economy, the unemployment rate will rise.
Previous Entries in this Series: GDP
Definition
An unemployed individual is someone who wants to work, is capable of working, and is actively seeking work. The unemployment rate is the percentage of unemployed workers in the total labor force. Economist Arthur Okun studied unemployment data and GDP from 1930 through 1980 and observed that rises in GDP are directly related to a lowering of the unemployment rate. In other words, in a growing economy, the unemployment rate falls. In a stagnating or recession economy, the unemployment rate will rise.
Problems with the Statistic
The unemployment rate in an imperfect statistic and does not accurately reflect the state of the workforce. The rate does not include those individuals who have given up looking for work. It does not account for those that have had to accept lower paying jobs. There is no accounting for part time employees who would prefer full time work but can't find it. The rate doesn't account for those who have accepted contract positions but would prefer a permanent position. There's no denying that a lower unemployment rate indicates a stronger economy, but the rate itself is an imperfect measurement.
The United States
We are in the midst of a major economic recession. Naturally the unemployment rate has fallen. In an April 3rd article on the MSN Money site, it was reported that the unemployment rate is 8.5% which would be the worse since the recession of the early 1980s. Worse yet, when the people who are in the circumstances mentioned in the problems section above are counted, the rate balloon even further. In other words, the real unemployment rate might be as high as 15.6%. I don't know about you, but I find that number shocking.
Further Reading
Monday, April 20, 2009
Gross Domestic Product (GDP)
8 Important Economic Statistics #1
Definition
Gross Domestic Product (GDP) is the market value of all goods and services produced by a nation in a given year. It is calculated by adding all spending (government, consumer, and investment) and exports and subtracting the value of imports. For GDP to have any real value as a statistic, it has to be adjusted for inflation. (If GDP grows 5% one year, but inflation is also 5%, no real growth has taken place.)
Usage
GDP is the statistic used by economists to determine if the economy is growing from year to year. Two consecutive quarters of negative GDP growth is called a recession.
Definition
Gross Domestic Product (GDP) is the market value of all goods and services produced by a nation in a given year. It is calculated by adding all spending (government, consumer, and investment) and exports and subtracting the value of imports. For GDP to have any real value as a statistic, it has to be adjusted for inflation. (If GDP grows 5% one year, but inflation is also 5%, no real growth has taken place.)
Usage
GDP is the statistic used by economists to determine if the economy is growing from year to year. Two consecutive quarters of negative GDP growth is called a recession.
GDP per capita (a country's GDP divided by the population of the country) is often used to determine a nation's standard of living, but there are limitations. There are items that GDP does not take into account, such as income inequality, black market transactions and bartering. All of these provide value and could either increase or reduce an individuals standard of living, but they cannot be measured.
The United States
According to the CIA The World Factbook, the United States ranked 10th in the world by the measurement of per capita GDP in 2008. Most of the countries ahead of the United States are small, rich countries such as Liechtenstein and Qatar. The United States ranks well ahead of all their so-called western neighbors such as the European Union and Canada.
According to the CIA The World Factbook, the United States ranked 10th in the world by the measurement of per capita GDP in 2008. Most of the countries ahead of the United States are small, rich countries such as Liechtenstein and Qatar. The United States ranks well ahead of all their so-called western neighbors such as the European Union and Canada.
Monday, April 13, 2009
Paul Krugman says ...
8 Words of Wisdom for Week Ending 4/17/2009 #1
Ten years ago the cover of Time magazine featured Robert Rubin, then Treasury secretary, Alan Greenspan, then chairman of the Federal Reserve, and Lawrence Summers, then deputy Treasury secretary. Time dubbed the three “the committee to save the world,” crediting them with leading the global financial system through a crisis that seemed terrifying at the time, although it was a small blip compared with what we’re going through now.The whole column should be read of course, but Krugman makes a wonderful point about our reputation ... our credibility. It's a given that most Americans recognize our loss of standing on the world stage on matters of foreign policy. George Bush and the war in Iraq robbed our nation of that. We lost the moral high ground through our use of torture. Still, we were the richest country in the world. We encouraged all the world to follow our economic lead. Now we find ourselves in the midst of the worst economic crisis since the Great Depression, and we no longer have our credibility on financial matters.
All the men on that cover were Americans, but nobody considered that odd. After all, in 1999 the United States was the unquestioned leader of the global crisis response. That leadership role was only partly based on American wealth; it also, to an important degree, reflected America’s stature as a role model. The United States, everyone thought, was the country that knew how to do finance right.
How times have changed ...
Indeed, these days America is looking like the Bernie Madoff of economies: for many years it was held in respect, even awe, but it turns out to have been a fraud all along.
It’s painful now to read a lecture that Mr. Summers gave in early 2000, as the economic crisis of the 1990s was winding down. Discussing the causes of that crisis, Mr. Summers pointed to things that the crisis countries lacked — and that, by implication, the United States had. These things included “well-capitalized and supervised banks” and reliable, transparent corporate accounting. Oh well.
Perhaps it's good that we now have a President who is so thoroughly charismatic. If we can't get the entire world to take this crisis seriously, we will never solve the problem. It's an uphill battle for President Obama and just another example of the ultimate legacy of George W. Bush ... the fall of America as the world's moral and economic leader.
Source - The New York Times
Source - The New York Times
Friday, April 10, 2009
8 Economics Lessons (Recap)
Over the past two weeks, I've shared with you eight economic lessons I learned with the help of Charles Wheelan's Naked Economics
. The book is an excellent primer on basic economics and I recommend it for anyone wanting to delve deeper into the subject.
. The book is an excellent primer on basic economics and I recommend it for anyone wanting to delve deeper into the subject.Thursday, April 9, 2009
Trade Offs
8 Economics Lessons #8
Economics are not inherently liberal or conservative. Sure, there are differences of opinion among economists on the left and those on the right, but they still have far more in common. I think the average liberal might be surprised to find how often they agree with Milton Friedman. I'm certain that your average conservative would be shocked to find they agree with Paul Krugman more often than not. The question of the economics of the left and of the right is rarely about the essential economic truths. Instead the question is about what each side is willing to give up to support their policies. The left will give up some economic growth while the right will give up the health and happiness of many of the people.
Conservatives tend to believe that the market knows best. Always. End of the story. Period. If the market is down, the market should be down. As for those effected ... the market has decided that you will be down. You know, sorry. What do you want us to do about it? Eventually, the market will rebound and sweep everyone up in the success. For a conservative, the free market is about the freedom of economic growth and the effects of bear markets are simply to be endured. They are only willing to make small trade offs.
Consider this point though: Taxation retards growth. No question. There's a theoretical point where taxes would be so high that it would be harmful to the economy. Still, isn't it worth it to retard growth a bit and have roads that are safe? Isn't it a good thing that by taxing the rich at higher rates it helps us to pay for the world's best military? Isn't it great that for a few percentage points of every paycheck that we can lift seniors out of poverty?
Regulations may slow down the economy but they help keep our kids safe and healthy. They can prevent giant banking crises. They ensure that many of the professionals you work with are qualified to do their job. They help prevent government employees from abusing the system. They help prevent businesses from scamming people. Isn't that worth a slightly lower growth rate?
In Charles Wheelan's Naked Economics, he keeps pointing out that reasonable people disagree. Although his viewpoints clearly tend towards the right, he's desperate to point out both sides of the economic questions and not disparage either side. It had made for a well-balanced book that teaches the subject well without resorting to the demagoguery that is so common to these discussions. Still, I'm a partisan, writing for a partisan blog. I feel no need to be "fair". I have opinions and I believe in them. To say that mass suffering is okay so that a few make even more money when times are good is inhuman to me, and I don't respect the opinion.
The beliefs at both ends of the ideological spectrum can be stated rather clearly. Conservatives believe in making the market work. A liberal makes the market work for people. Which sounds better to you?
(Less a lesson that an opinion piece, but it's my blog so I'll do as I wish! :) )
Previous Entries in This Series (Globalization, Deficits and Surpluses, Fiscal Policy, Supply-Side Economics, Externalities, Regulation, Deflation)
Economics are not inherently liberal or conservative. Sure, there are differences of opinion among economists on the left and those on the right, but they still have far more in common. I think the average liberal might be surprised to find how often they agree with Milton Friedman. I'm certain that your average conservative would be shocked to find they agree with Paul Krugman more often than not. The question of the economics of the left and of the right is rarely about the essential economic truths. Instead the question is about what each side is willing to give up to support their policies. The left will give up some economic growth while the right will give up the health and happiness of many of the people.
Conservatives tend to believe that the market knows best. Always. End of the story. Period. If the market is down, the market should be down. As for those effected ... the market has decided that you will be down. You know, sorry. What do you want us to do about it? Eventually, the market will rebound and sweep everyone up in the success. For a conservative, the free market is about the freedom of economic growth and the effects of bear markets are simply to be endured. They are only willing to make small trade offs.
Consider this point though: Taxation retards growth. No question. There's a theoretical point where taxes would be so high that it would be harmful to the economy. Still, isn't it worth it to retard growth a bit and have roads that are safe? Isn't it a good thing that by taxing the rich at higher rates it helps us to pay for the world's best military? Isn't it great that for a few percentage points of every paycheck that we can lift seniors out of poverty?
Regulations may slow down the economy but they help keep our kids safe and healthy. They can prevent giant banking crises. They ensure that many of the professionals you work with are qualified to do their job. They help prevent government employees from abusing the system. They help prevent businesses from scamming people. Isn't that worth a slightly lower growth rate?
In Charles Wheelan's Naked Economics
, he keeps pointing out that reasonable people disagree. Although his viewpoints clearly tend towards the right, he's desperate to point out both sides of the economic questions and not disparage either side. It had made for a well-balanced book that teaches the subject well without resorting to the demagoguery that is so common to these discussions. Still, I'm a partisan, writing for a partisan blog. I feel no need to be "fair". I have opinions and I believe in them. To say that mass suffering is okay so that a few make even more money when times are good is inhuman to me, and I don't respect the opinion.The beliefs at both ends of the ideological spectrum can be stated rather clearly. Conservatives believe in making the market work. A liberal makes the market work for people. Which sounds better to you?
(Less a lesson that an opinion piece, but it's my blog so I'll do as I wish! :) )
Previous Entries in This Series (Globalization, Deficits and Surpluses, Fiscal Policy, Supply-Side Economics, Externalities, Regulation, Deflation)
Wednesday, April 8, 2009
Deflation
8 Economics Lessons #7
Previous Entries in This Series (Globalization, Deficits and Surpluses, Fiscal Policy, Supply-Side Economics, Externalities, Regulation)
Inflation is bad; deflation, or steadily falling prices is much worse.Deflation begets a dangerous cycle. Falling prices cause consumers to postpone purchases, waiting for big ticket items to get even cheaper. Of course, asset prices fall as well which leaves consumers feeling poorer and makes them less willing to spend their money. (The book's example is imagine if the value of your home is falling, but your mortgage payment stays the same. Do you think this would affect your purchasing decisions?) This will lead to a deflationary spiral which will cause severe damage to the economy.
- Charles Wheelan in Naked Economics
The biggest problem with deflation is that monetary policy does not appear to help. Starting in the early 1990s, Japan began a long battle with deflation. The central bank in Japan would eventually cut interest rates to zero, and yet the problem persisted. (This is the dreaded liquidity trap.) Still, the rental rates (the rates on real consumer lending) didn't fall as much. Why? Well, when prices are falling, the money you pay back in the future will have more purchasing power than the amount you pay back initially. In effect, as prices fall, the cost of borrowing increases.
How do you fix the problem? Most economists believe that Japan needs a good, steady dose of inflation. In other words, money should be put into the economy as fast as possible. (If you choose to read that as government spending, I won't argue with you.) We had our own battle with deflation from 1929 to 1933 and an inactive Fed allowed the money supply to decrease. We should have been spending more from the start. Of course, starting with the New Deal, we would spend more and things would start to get better.
Previous Entries in This Series (Globalization, Deficits and Surpluses, Fiscal Policy, Supply-Side Economics, Externalities, Regulation)
Tuesday, April 7, 2009
Regulation
8 Economics Lessons #6
Governments hand down regulations and we follow them. They set regulations for the issuing of driver licenses. They set regulations limiting the amount of pollution a factory can spew out into the air. They set regulations on how much cash a bank must keep on hand in order to remain solvent. They set regulations that specify the requirements for a business license for an entrepreneur. It is undeniably true that every regulation has a cost
As Charles Wheelan points out in Naked Economics, government regulation interferes with the operation of the free market. The market will normally allocate resources where they stand to return the most in value. Regulations act as tolls on this activity. One example from the book is on the requirements to pass the bar and become a lawyer. If the requirements were lowered, lawyers would become cheaper to use which would allow more people to make use of lawyers when necessary. Regulations raise the cost of seeing a lawyer. So, are regulations, in and of themselves more helpful or harmful to an economy? There's no easy answer to this dilema.
Now, there is no question that too much regulation can stifle innovation and raise the cost of doing business. Many third world companies are over-regulated to the point that the average individual does not have the resources to so much as start their own business. (It costs 260 times the per-capita GDP of Bolivia for a Bolivian to procure the necessary approvals to start a business.)
Still, like everything in economics, regulations require trade offs. Sometimes it is in our collective best interest to stifle the effects of the market a bit. Regulations help keep the air we breathe clean. They help keep the drugs we're prescribed safe. After the Glass-Stegall Act, they kept banks from taking too many risks and all but eliminating bank runs.
It is the Glass-Stegall Act that shows us the ultimate truth of regulation. These regulations were gutted by Congress in 1999, led by Republican Phil Gramm, and we are now suffering the consequences of that decision. Regulations are often onerous, but they are, so often, necessary. Like everything in economics, the use of regulations is a balancing act. The government has to find the right level to protect the people from the worst abuses of business, while not stifling growth to the point that the people are harmed. Republican claims that regulations are inherently bad are just ridiculous.
Previous Entries in This Series (Globalization, Deficits and Surpluses, Fiscal Policy, Supply-Side Economics, Externalities)
Governments hand down regulations and we follow them. They set regulations for the issuing of driver licenses. They set regulations limiting the amount of pollution a factory can spew out into the air. They set regulations on how much cash a bank must keep on hand in order to remain solvent. They set regulations that specify the requirements for a business license for an entrepreneur. It is undeniably true that every regulation has a cost
As Charles Wheelan points out in Naked Economics
, government regulation interferes with the operation of the free market. The market will normally allocate resources where they stand to return the most in value. Regulations act as tolls on this activity. One example from the book is on the requirements to pass the bar and become a lawyer. If the requirements were lowered, lawyers would become cheaper to use which would allow more people to make use of lawyers when necessary. Regulations raise the cost of seeing a lawyer. So, are regulations, in and of themselves more helpful or harmful to an economy? There's no easy answer to this dilema.Now, there is no question that too much regulation can stifle innovation and raise the cost of doing business. Many third world companies are over-regulated to the point that the average individual does not have the resources to so much as start their own business. (It costs 260 times the per-capita GDP of Bolivia for a Bolivian to procure the necessary approvals to start a business.)
Still, like everything in economics, regulations require trade offs. Sometimes it is in our collective best interest to stifle the effects of the market a bit. Regulations help keep the air we breathe clean. They help keep the drugs we're prescribed safe. After the Glass-Stegall Act, they kept banks from taking too many risks and all but eliminating bank runs.
It is the Glass-Stegall Act that shows us the ultimate truth of regulation. These regulations were gutted by Congress in 1999, led by Republican Phil Gramm, and we are now suffering the consequences of that decision. Regulations are often onerous, but they are, so often, necessary. Like everything in economics, the use of regulations is a balancing act. The government has to find the right level to protect the people from the worst abuses of business, while not stifling growth to the point that the people are harmed. Republican claims that regulations are inherently bad are just ridiculous.
Previous Entries in This Series (Globalization, Deficits and Surpluses, Fiscal Policy, Supply-Side Economics, Externalities)
Monday, April 6, 2009
Externalities
8 Economics Lessons #5
All transactions that take place in a free market are, in effect, voluntary by the parties involved in the transaction. People choose to enter a transaction and they accept the consequences of that transaction. If I go into a car dealership and purchase an automobile, it is my choice to purchase a car and it is the choice of the dealership to sell me that car. When I go to the grocery store, I choose to buy groceries and the grocery store chooses to sell them to me. This is free market economics at its most basic.
Of course, there are often effects on people who are not directly involved in a transaction. The people who are involved in the transaction consider the costs to themselves ... they don't tend to think of any external costs involved. If you purchase a huge, gas guzzling, air polluting SUV, there is an environmental cost that neither you nor the dealership have to pay. These costs, and the failure to consider them, is a failure of the free market. These costs are called externalities.
In Naked Economics, Charles Wheelan defines an externality as "the gap between the private cost and the social cost of some behavior". These effects can be positive, but there are many negative effects from externalities. These effects can threaten our safety. They can threaten our security. They can threaten the very survival of our planet. How are externalities dealt with then?
Well, the existence of negative externalities is one of the best arguments for government involvement. People choose to buy cell phones, but people who use them when driving pose a danger to other drivers. What is the only entity that can work to ensure safety when using cell phones? People choose to smoke cigarettes, but second smoke can be deadly. What is the only entity that can work to minimize an individuals exposure to second hand smoke? Many of us choose to purchase automobiles that use gas and put pollution into the air. What is the only entity that can work to force car manufacturers to create more environmentally friendly cars?
The answer is, of course, the government. The government can tax behavior that it would like to see limited. The government can issue regulations to force better behavior. The government can outlaw that which it deems dangerous. These are the necessary functions of government, and contrary to so many Republican talking points, they are in no way inconsistent with the concept of freedom in a capitalist economy.
All transactions that take place in a free market are, in effect, voluntary by the parties involved in the transaction. People choose to enter a transaction and they accept the consequences of that transaction. If I go into a car dealership and purchase an automobile, it is my choice to purchase a car and it is the choice of the dealership to sell me that car. When I go to the grocery store, I choose to buy groceries and the grocery store chooses to sell them to me. This is free market economics at its most basic.
Of course, there are often effects on people who are not directly involved in a transaction. The people who are involved in the transaction consider the costs to themselves ... they don't tend to think of any external costs involved. If you purchase a huge, gas guzzling, air polluting SUV, there is an environmental cost that neither you nor the dealership have to pay. These costs, and the failure to consider them, is a failure of the free market. These costs are called externalities.
In Naked Economics
, Charles Wheelan defines an externality as "the gap between the private cost and the social cost of some behavior". These effects can be positive, but there are many negative effects from externalities. These effects can threaten our safety. They can threaten our security. They can threaten the very survival of our planet. How are externalities dealt with then?Well, the existence of negative externalities is one of the best arguments for government involvement. People choose to buy cell phones, but people who use them when driving pose a danger to other drivers. What is the only entity that can work to ensure safety when using cell phones? People choose to smoke cigarettes, but second smoke can be deadly. What is the only entity that can work to minimize an individuals exposure to second hand smoke? Many of us choose to purchase automobiles that use gas and put pollution into the air. What is the only entity that can work to force car manufacturers to create more environmentally friendly cars?
The answer is, of course, the government. The government can tax behavior that it would like to see limited. The government can issue regulations to force better behavior. The government can outlaw that which it deems dangerous. These are the necessary functions of government, and contrary to so many Republican talking points, they are in no way inconsistent with the concept of freedom in a capitalist economy.
Friday, April 3, 2009
Supply-Side Economics
8 Economics Lessons #4
It is true that taxation will discourage work and will damper investment. It is true that cutting taxes will encourage productivity within the economy. A supply-sider claims that you can actually increase tax revenue by decreasing taxes. The theory is that we will all work harder and earn so much more that we actually be paying more in dollars than we would have at the higher rate.
It is true that taxation will discourage work and will damper investment. It is true that cutting taxes will encourage productivity within the economy. A supply-sider claims that you can actually increase tax revenue by decreasing taxes. The theory is that we will all work harder and earn so much more that we actually be paying more in dollars than we would have at the higher rate.
In Naked Economics, Charles Wheelan acknowledges that at certain tax levels, supply-side theory will be true. (He believes that if the income tax rate is 95% and lowered to 50% it would almost certainly spur enough extra work to increase tax revenues.) So, does this mean that supply-side theory is true at all tax levels?
, Charles Wheelan acknowledges that at certain tax levels, supply-side theory will be true. (He believes that if the income tax rate is 95% and lowered to 50% it would almost certainly spur enough extra work to increase tax revenues.) So, does this mean that supply-side theory is true at all tax levels?Well, no. We know this thanks to the empirical evidence provided by the Reagan tax cuts. Government revenue did not increase and the loss in revenue resulted in the largest deficits the country had ever seen to that point. With no real evidence to back up the theory, why do conservatives remain heavily invested in it?
I can't answer that. Either way, an economist named Arthur Laffer drew what was known as Laffer's Curve on the back of Dick Cheney's napkin in 1974. This was a theoretical graphical depiction of tax revenues increasing as tax rates decreased. It was used as the basis for Reaganomics and all that passes for conservative economic theory at this point. We have paid the price both in terms of our deficit and the poisoning of the collective consciousness.
Wednesday, April 1, 2009
Fiscal Policy
8 Basic Lessons in Economics #3
So, I'm a computer consultant who finds himself between clients. At the moment, I'm still receiving paychecks from my boss, but that is not something I expect to continue for long. So, because of the uncertainty in my career right now, my wife and I have cut back on our spending. Way back. We are actively worsening the recession.
There's no denying that cutting back on spending during perilous economic times is a natural reaction. For many recessions, the loss in confidence can do more harm to the economy than whatever event caused the downturn in the first place. In Naked Economics, Wheelan puts it this way ...
There are two tools that the government can use to smooth the business cycle and bring a recession to a close: monetary policy and fiscal policy. The current interest rate from the Fed is already near zero (known as a liquidity trap) which reduces the ability of the Fed to fix the economy using monetary policy. While most economists agree that monetary policy is the best tool to use, it is simply not available for this crisis. This leaves fiscal policy.
Fiscal policy, the key of Keynesian economic theory, is the ability for government to bring a recession to a close through the use of government spending or tax cuts or perhaps a combination of the two. For fiscal policy to work, the amount of spending or tax cuts must be appropriate and the money must enter the economy as quickly as possible. Many economists believe that government spending is preferable to tax cuts because people are more likely to save than spend until confidence has been restored. (Wheelan states no preference in Naked Economics.) World War II was the largest spending project in the nation's history and it ushered in a long period of shared economic prosperity.)
The political reality of the day is that fiscal policy will consist of both government spending and tax cuts. The Stimulus Package passed earlier this year is a combination of both approaches. Let's hope the money gets into the economy as quickly as possible and makes the current recession a fading memory as soon as possible. Don't hold your breath.
So, I'm a computer consultant who finds himself between clients. At the moment, I'm still receiving paychecks from my boss, but that is not something I expect to continue for long. So, because of the uncertainty in my career right now, my wife and I have cut back on our spending. Way back. We are actively worsening the recession.
There's no denying that cutting back on spending during perilous economic times is a natural reaction. For many recessions, the loss in confidence can do more harm to the economy than whatever event caused the downturn in the first place. In Naked Economics, Wheelan puts it this way ...
Indeed, if we all believe the economy will get worse, then it will get worse ... Franklin Delano Roosevelt's admonition that we have "nothing to fear but fear itself" was both excellent leadership and good economics.So, if consumer spending is down, consumer confidence is down. If consumer confidence is down, the recession will deepen. How can we avoid this trap?
There are two tools that the government can use to smooth the business cycle and bring a recession to a close: monetary policy and fiscal policy. The current interest rate from the Fed is already near zero (known as a liquidity trap) which reduces the ability of the Fed to fix the economy using monetary policy. While most economists agree that monetary policy is the best tool to use, it is simply not available for this crisis. This leaves fiscal policy.
Fiscal policy, the key of Keynesian economic theory, is the ability for government to bring a recession to a close through the use of government spending or tax cuts or perhaps a combination of the two. For fiscal policy to work, the amount of spending or tax cuts must be appropriate and the money must enter the economy as quickly as possible. Many economists believe that government spending is preferable to tax cuts because people are more likely to save than spend until confidence has been restored. (Wheelan states no preference in Naked Economics.) World War II was the largest spending project in the nation's history and it ushered in a long period of shared economic prosperity.)
The political reality of the day is that fiscal policy will consist of both government spending and tax cuts. The Stimulus Package passed earlier this year is a combination of both approaches. Let's hope the money gets into the economy as quickly as possible and makes the current recession a fading memory as soon as possible. Don't hold your breath.
Tuesday, March 31, 2009
Deficits and Surpluses
8 Basic Lessons in Economics #2
It's time for one of the most basic lessons in all of economics. It is often advantageous for the government to run a deficit. Perhaps that seems counter-intuitive ... especially if you are a conservative ... but it is true. Deal with it.
Here's the rules: when the economy is going well, it is advantageous to run surpluses. When the economy is not doing well, it is better to run deficits and pump money into the economy. Do you know when we were last running surpluses? That would be when Bill Clinton was President in the late 90s.
Don't forget the following: it is not always a good thing to balance the budget. In fact, it can make a bad economy much, much worse. Is this wrong? No. It is not. As Charles Wheelan says in Naked Economics ...
It's time for one of the most basic lessons in all of economics. It is often advantageous for the government to run a deficit. Perhaps that seems counter-intuitive ... especially if you are a conservative ... but it is true. Deal with it.
Here's the rules: when the economy is going well, it is advantageous to run surpluses. When the economy is not doing well, it is better to run deficits and pump money into the economy. Do you know when we were last running surpluses? That would be when Bill Clinton was President in the late 90s.
Don't forget the following: it is not always a good thing to balance the budget. In fact, it can make a bad economy much, much worse. Is this wrong? No. It is not. As Charles Wheelan says in Naked Economics ...
Herbert Hoover's insistence on balancing the budget in the face of the Great Depression is considered to be one of the great fiscal follies of all time.
Monday, March 30, 2009
Globalization
8 Basic Lessons in Economics #1
I'm not a conservative which means I deal in facts. Here are a few facts about globalization:
I'm not a conservative which means I deal in facts. Here are a few facts about globalization:
- Trade Makes a Nation Richer - It is simply not possible for every nation to be self-sufficient. Every nation, even poor ones, have a comparable advantage that makes trade worthwhile. For us, it is technology. For the Saudis, it is oil. For poor countries, it is cheap labor. Yes, cheap labor helps the poor workers in our trading partners.
- Trade Creates Losers - In the long run, globalization helps an economy create many more jobs than will be lost. That is small consolation for those who lose their jobs in the intermediate aftermath of a free trade deal. We can, and we should, do everything we can to help those who have been harmed by globalization.
- Protectionism is Bad Long Term Policy - Refusing to trade with "sweatshop" nations is essentially the same as imposing crippling sanctions on some of the poorest people in the world. Sanctions make the poor poorer.
- Trade Lowers Costs of Goods - Cheap imports are good for our own poor. It allows their limited resources to be used for more. It expands their standard of living. Lowering prices works the same as increasing income.
- Trade is Good for Poor Countries - Without global trade, the poorest countries would not have access to consumers in the world's largest markets. Export jobs in the poor countries tend to pay more than other jobs in the same countries. Poor countries gain money, technology and skills through trade that they would not receive any other way.
Yes, I'm well aware of the negative aspects of globalization. These are real problems and those who fail to deal with them cause real harm to real people.
Here in the United States, we must do more to help those whose jobs are lost to globalization. We must do more to retrain workers for jobs in emerging industries. We must expand the safety net in order to mitigate the financial hardships brought about by globalization. We must improve our system of education to make sure that the high wage, high reward jobs remain American. We must support labor unions to protect the economic progress of those whose jobs remain.
As for our trading partners, we have to use pressure to press for better working conditions and fair wages. We have to use pressure to force our trading partners to improve their education systems so that kids spend their childhoods learning rather than working in factories. We have to use pressure to ensure that unions are treated with respect by the law so that workers in developing nations can bargain for better treatment.
We cannot, however, make things worse for these people by withdrawing our trade. As Paul Krugman, a rather prominent liberal economist has said, "(A)nyone who thinks that the answer to world poverty is simple outrage against global trade has no head ... The anti-globalization movement already has a remarkable track record of hurting the very people and causes it claims to champion."
Globalization is not a problem ... our failure to protect the "losers" of globalization is a problem. The lesson we should learn is this: Globalization is good long term policy. As liberals, we have to think of the long term, while working to alleviate the negative effects of the short term. To not think of the future is to not think as a liberal.
Lessons Learned from Naked Economics: Undressing the Dismal Science by Charles Wheelan. The opinions expressed are mine and not necessarily those of Mr. Wheelan.
Lessons Learned from Naked Economics: Undressing the Dismal Science by Charles Wheelan. The opinions expressed are mine and not necessarily those of Mr. Wheelan.
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