Recently, some people have argued that the minimum wage should be reduced to employ more people. Krugman has posted several responses to this proposal. Since I've linked them, you may read his analysis of this proposal.
We do know that from the view of an individual employer, he/she will likely argue that if they paid their employees less, they'd be able to hire people for more hours. Whether this leads to more income overall is questionable. Though that is a question. From Econ 201 (literally), minimum wage lies above the equilibrium wage in the labor market, by definition otherwise you don't need minimum wage. This then leads to a quantity supplied of labor greater than the quantity demanded by employers. This is usually as far as the analysis is taken. What about the view from the economy as a whole?
Recall that a 'factor of demand' that is, one of the 'things' that affect demand for goods in the economy is income. Now income and a wage are two different things, but let's just say that a cut in wages is a cut in income and vice versa (this is the assumption that minimum wage critics use). Higher minimum wage leads to more income and then leads to more goods being demanded. In turn, since the demand for labor is what's called a 'derived demand,' the higher demand for goods by workers leads to higher demand for labor by employers. In this way, a higher minimum wage can lead to more people being employed than before the minimum wage was increased.
People will counter with:
1. Higher minimum wage will lead to lower profits for the employer.
Perhaps. Not clear though given the higher sales from people having more income. Let's say it does lead to lower profit. Yes, the employer will buy less stuff. Though, I suspect the minimum wage employee will spent a greater percentage of his/her income than will the employer, though there will certainly likely be cases where this is not so.
What strikes me about this entire argument is how self-serving it is.
The July 18, 2009 issue of the Capitol Times notes the following:
""The source of wealth has changed over the past 30 years; corporations have become the engine of inequality in the U.S.," says Sam Pizzigati, associate fellow at the Institute for Policy Studies in Washington D.C. "In the past, wealth came from ownership: Today it comes increasingly from income."
The highest incomes come from executive pay at top corporations. In 2007, the ratio of CEO pay to the average paycheck was 344 to 1, lower than the record 525 to 1 ratio set in 2001, but substantial.
This year's ratio is estimated to decrease to 317 to 1. In the '60s, '70s and '80s, the average ratio fluctuated between 30 and 40 to 1.
Over 40 percent of GNP comes from Fortune 500 companies. According to the World Institute for Development Economics Research, the 500 largest conglomerates in the U.S. "control over two-thirds of the business resources, employ two-thirds of the industrial workers, account for 60 percent of the sales, and collect over 70 percent of the profits."
Corporations systematically created a wealth gap over the last 30 years. In 1955, IRS records indicated the 400 richest people in the country were worth an average $12.6 million, adjusted for inflation.
In 2006, the 400 richest increased their average to $263 million, representing an epochal shift of wealth upward in the U.S.
In 1955, the richest tier paid an average 51.2 percent of their income in taxes under a progressive federal income tax that included loopholes. By 2006, the richest paid only 17.2 percent of their income in taxes. In 1955, the proportion of federal income from corporate taxes was 33 percent; by 2003, it decreased to 7.4 percent. Today, the top taxpayers pay the same percentage of their incomes in taxes as those making $50,000 to $75,000, although they doubled their share of total U.S. income.
"Over the past 30 years, the income of the top 1 percent, adjusted for inflation, doubled: the top one-tenth of 1 percent tripled, and the top one-one-hundredth quadrupled," says Pizzigati. "Meanwhile, the average income of the bottom 90 percent has gone down slightly. This is a stunning transformation."
Meanwhile, wages for most Americans didn't improve from 1979 to 1998, and the median male wage in 2000 was below the 1979 level, despite productivity increases of 44.5 percent. Between 2002 and 2004, inflation-adjusted median household income declined $1,669 a year. To make up for lost income, credit card debt soared 315 percent between 1989 and 2006, representing 138 percent of disposable income in 2007. "
Monday, December 28, 2009
Monday, December 21, 2009
Structure-Conduct-Performace
One way I've found that's helpful in organizing information for doing policy analysis is using this Structure-Conduct-Performance (SCP) framework. One thing I like about it is I'm able to use economic principles and purge out all the material like dead weight loss, inefficiency of government 'intervention' and so forth. There's a great deal of micro principles that are useful in helping evaluate possible impacts of a policy. For example, we can still use all the price analysis, elasticity concepts, the crucial concept of opportunity cost, and the notions of inter-dependence between markets as well as using these tools to predict who might win and who might lose.
The Structure pertains to the rules, laws, prices, and so forth that are relevant to the policy you are examining. What gets included under Structure is quite flexible. Generally, think of it as whatever you understand as important to the evaluation you are conducting that is presently in existence and considered critical to describing the problem you're hoping to solve.
The Conduct pertains to the choices that various players make in response to the Structure as it currently exists. For example, by choice we could be referring to how much electricity a customer uses given the prices, technology, income, and other traits that are known to affect consumption.
The Performance pertains to what are the value of key outcomes you are concerned with. For example, the amount of electricity used at a given time of day, or month of the year and so forth.
Note that there's some flexibility between what you consider Conduct and what you consider Performance. One way to think about this distinction is the Performance are the dependent variables that you would like to impact and the Conduct are the independent variables that pertain to actions by one or more parties. In my example, it would be the consumer's use of electricity. Note also that there may be other variables, and virtually always will be other variables, that influence the dependent variable(s). If they are not associated with choices by some party, then they describe aspects of the Structure that are considered important. I use this equation structure loosely as a way to give you a sense of how to organize the SCP concepts.
Then, we can use analysis, information, theory and so forth to test various hypotheses. For example, let's say we want to reduce electric use overall. If we have information from some studies on electric use and prices, we might be able to propose how to change the current Structure in order to affect consumer Conduct sufficient to after Performance by reducing electric use by the desired amount.
As you can see, the SCP is a shell that has great flexibility. What I like about it is it's provides a systematic way to gather and organize information. It doesn't tell you what to do or what not to do. That's one of it's benefits over the partial equilibrium comparative statics model (PECS) from micro economics, although we still need to rely on the analysis tools of the PECS model that helps us predict impacts. Another aspect of the SCP framework that I like is it allows for all sorts of information to be combined. This might include assessment of the how receptive consumers might be to the proposed prices change. Or, what consumers might support it and what consumers might oppose it. It also allows for consideration of the chance of confronting a legal challenge on procedural and/or substantive grounds, for example.
I've seen decision-makers discuss and reach decisions, often in a convoluted way. This SCP framework can also be helpful to the analyst responsible for organizing information for both analysis and presentation.
The Structure pertains to the rules, laws, prices, and so forth that are relevant to the policy you are examining. What gets included under Structure is quite flexible. Generally, think of it as whatever you understand as important to the evaluation you are conducting that is presently in existence and considered critical to describing the problem you're hoping to solve.
The Conduct pertains to the choices that various players make in response to the Structure as it currently exists. For example, by choice we could be referring to how much electricity a customer uses given the prices, technology, income, and other traits that are known to affect consumption.
The Performance pertains to what are the value of key outcomes you are concerned with. For example, the amount of electricity used at a given time of day, or month of the year and so forth.
Note that there's some flexibility between what you consider Conduct and what you consider Performance. One way to think about this distinction is the Performance are the dependent variables that you would like to impact and the Conduct are the independent variables that pertain to actions by one or more parties. In my example, it would be the consumer's use of electricity. Note also that there may be other variables, and virtually always will be other variables, that influence the dependent variable(s). If they are not associated with choices by some party, then they describe aspects of the Structure that are considered important. I use this equation structure loosely as a way to give you a sense of how to organize the SCP concepts.
Then, we can use analysis, information, theory and so forth to test various hypotheses. For example, let's say we want to reduce electric use overall. If we have information from some studies on electric use and prices, we might be able to propose how to change the current Structure in order to affect consumer Conduct sufficient to after Performance by reducing electric use by the desired amount.
As you can see, the SCP is a shell that has great flexibility. What I like about it is it's provides a systematic way to gather and organize information. It doesn't tell you what to do or what not to do. That's one of it's benefits over the partial equilibrium comparative statics model (PECS) from micro economics, although we still need to rely on the analysis tools of the PECS model that helps us predict impacts. Another aspect of the SCP framework that I like is it allows for all sorts of information to be combined. This might include assessment of the how receptive consumers might be to the proposed prices change. Or, what consumers might support it and what consumers might oppose it. It also allows for consideration of the chance of confronting a legal challenge on procedural and/or substantive grounds, for example.
I've seen decision-makers discuss and reach decisions, often in a convoluted way. This SCP framework can also be helpful to the analyst responsible for organizing information for both analysis and presentation.
Economics and Policy
Economists, or many of us, LOVE to tell decision-makers what they ought to do. Though, far too many of those in the profession also want to cling to the illusion that they are also being 'objective.' Oh, yes, don't you know that economics is a 'positive' science? Positive as in 'objective' and 'value neutral.'
One might reasonably ask how a profession that deals to such a degree with money, and writes so extensively about what does and does not constitute value, can possibly think of itself as being value neutral. Thankfully, there are esteemed practitioners of the craft who know otherwise. Of course, they are seen as being a minority of crack pots. Or worse, they are labeled as journalists or sociologists. But whose complaining?
Sadly for those who continue to swallow the cool aid, such eminent economists as Joan Robinson are among the ranks of economists who understood how economics can better serve society. Stiglitz has written cogently about development after his stint as the chief economist of the World Bank and it's senior vice president. Baumol wrote years ago that economics is more like biology than physics even though physics type models were more the type employed in the profession.
What has worked for me is to borrow the structure-conduct-performance framework from Industrial Organization and apply it to policy. I'll describe how I use this approach in a subsequent post.
One might reasonably ask how a profession that deals to such a degree with money, and writes so extensively about what does and does not constitute value, can possibly think of itself as being value neutral. Thankfully, there are esteemed practitioners of the craft who know otherwise. Of course, they are seen as being a minority of crack pots. Or worse, they are labeled as journalists or sociologists. But whose complaining?
Sadly for those who continue to swallow the cool aid, such eminent economists as Joan Robinson are among the ranks of economists who understood how economics can better serve society. Stiglitz has written cogently about development after his stint as the chief economist of the World Bank and it's senior vice president. Baumol wrote years ago that economics is more like biology than physics even though physics type models were more the type employed in the profession.
What has worked for me is to borrow the structure-conduct-performance framework from Industrial Organization and apply it to policy. I'll describe how I use this approach in a subsequent post.
Thursday, December 3, 2009
"Mainstream" Economics, Heterodox Economics, and the Real World
This post picks up a thread begun in one of my first posts. How can economics be helpful to "real world" choices.
Within the profession, academic prestige comes with publishing in the 'elite' journals and getting contracts from the 'elite' sources. Unfortunately, for the most part, publishing in those 'elite' journals has little to do with solving actual problems of actual people. This system goes so far as to purge those economists from the ranks of the well regarded who have the temerity to challenge the Economic Gods of efficiency and objectivity.
Thankfully, there are those practitioners who take the path less traveled - as Thoreau put it - by most academic economists and actually work in the area of pragmatic problem solving. They are scattered around the profession. While a student at Michigan State University, I encountered Warren Samuels, A. Allan Schmid, Harry Trebing, and James Schaffer who at the time were among the main flag bearers of Institutionalist Economics.
Within the profession, academic prestige comes with publishing in the 'elite' journals and getting contracts from the 'elite' sources. Unfortunately, for the most part, publishing in those 'elite' journals has little to do with solving actual problems of actual people. This system goes so far as to purge those economists from the ranks of the well regarded who have the temerity to challenge the Economic Gods of efficiency and objectivity.
Thankfully, there are those practitioners who take the path less traveled - as Thoreau put it - by most academic economists and actually work in the area of pragmatic problem solving. They are scattered around the profession. While a student at Michigan State University, I encountered Warren Samuels, A. Allan Schmid, Harry Trebing, and James Schaffer who at the time were among the main flag bearers of Institutionalist Economics.
One thing that strikes me about 'mainstream' economists and economics overall is its desire to offer policy prescriptions and guidance while at the same time wanting to be seen as being objective. Ah, who doesn't want to have his/her cake and be able to eat it too? What I've worked to do is use tools from price theory, for example, and purge all the prescriptive stuff as much as possible. I worked setting electric rates for half the wholesale electricity used in the Pacific Northwest. Guidance like marginal cost pricing is useful AND how that's done etc. is a crucial part of the problem solving process. And, as you know, that part isn't of much interest to mainstream economics as it's practiced today. That, of course, is an understatement. The 'How' of policy work is derided as having nothing to do with economics. Rather, that's political science, sociology, psychology, history, and so forth. As Karl Marx quipped "History is economics in action." While in the 'real world' economics and politics are inseparable, in the fantasy world of the High Priests of the profession, there is absolutely NO room for such matters (and I include Gary Becker in that camp).
I like the structure-conduct-performance framework from Industrial Organization as a policy analysis framework, again purging as many of the 'shoulds' as possible from the economic principles. As I see it, there's no reasons to throw the baby out with the bath water! Opportunity cost is a wonderfully powerful concept. When I'm teaching, I simply do not teach the stuff about 'deadweight loss,' the inefficiency of government 'intervention' into the market etc. etc. I do talk about how the government is an integral part of the market economy since without rules and a way to enforce them via contract and the courts, there is no market. To drive the point home, without government there is no market!
What I've worked to do is blend some very useful tools from price theory, like elasticity and opportunity cost to name but two useful concepts, along with more pragmatic ways to solve actual, 'on the ground,' problems. I do strongly feel that there's a good deal of microeconomics that is essential and very useful to help solve and frame solutions to 'real world' problems. And, there's a whole lot of the inefficiency, deadweight loss, etc, etc, stuff that is so tied to the prescriptive aspects of partial equilibrium - comparative statics model as to be useless at best and darn right dangerous at worst.
I shifted from economics as an undergraduate student to Ag. economics as a graduate student for these reasons. I suspect you might find some fertile fields for real-world policy analysis in the heterodox approach.
Tuesday, December 1, 2009
When $4 per gallon gas was cheap
One aspect of the growing deficit and debt problem that I've noted that I was not addressed is it's impact on the value of the U.S. dollar on world currency markets. I want to address this issue here.
One very provocative commentary from the Financial Times of London concisely lays out the problem. World currency markets are another kind of market where the value of the U.S. dollar in terms of any other world currency is determined by the demand for and the supply of dollars on world markets. Much the same points were made today by Yale Finance professor Jeffrey Garten. An extended article on these dynamics written by Doug Noland from The Asia Times is available here. One of Doug Noland's more unsettling passages is his view about what's needed from the U.S. "It is my thesis that there is no alternative other than a major transformation of the underlying structure of the US economy. In simplest terms, we must produce much more, consume much less and do it with a lot less credit creation. "
The underlying gist is that our debt levels cannot be reduced through spending cuts or tax hikes since the magnitudes required are politically untenable. Given the political gridlock we're in, he's probably right. Therefore, the only way left to reduce the U.S. federal debt is to decrease the dollar's value. We do this by lowering the value of the dollar on world markets. Since the dollar's value is not fixed, but rather is determined by the market itself, we have to use tools to 'influence' the dollar's value. (NOTE: Reducing the dollar's value on world markets is different from the term 'deflation' used to describe the situation when the price level in the economy drops).
When countries want to hold fewer dollars, they put them up for sale. This increases the supply of dollars on world markets. Without a counter-veiling increase in the demand for dollars, the dollar's value falls relative to other currencies. While the linked writings above assume that foreign holders of U.S. dollars will release some of those dollars, I have a question about how they go about doing that knowing that doing so will likely result in a drop in the value of their remaining dollar holding. The U.S. government can increase dollars on world markets not by "printing" money. Rather, they buy U.S. government securities from holders like banks and large investors and that puts more U.S. dollars in circulation and thereby lowers the dollar's value of world currency markets.
How does a falling dollar help reduce the Federal debt? As the dollar weakens in value, products made in the U.S. are cheaper overseas, more production happens here, people overseas buy more U.S products, they travel to America more, and they buy American assets. In turn, GDP (the measure of overall economic activity) rises, and more tax revenue is earned. However, the cost of imports to the U.S. go up for Americans. This will also tend to increase consumption here of domestically produced goods since we will tend to substitute American made goods for imported goods, another incentive to greater domestic economic activity (GDP).
What about the price of gas? Ouch! RIght now, the price of oil is denominated in U.S. dollars on world commodity markets. This means that if the oil exporting country wants the same buying power of U.S. dollars after the dollar falls in value, they increase the price of oil. As a result, the price of oil, and therefore, the price of EVERYTHING made from it, goes up in the U.S. This is basically what happened when gas was over $4 per gallon about 16 months ago. The U.S. dollar has been the world's reserve currency. This means that the U.S. dollar has been the currency other's flock to in periods of crisis. This is what's been happening and that's helped keep us afloat during this recession. That all is beginning to change.
The political optics of all this will be interesting. WalMart's been doing well during the recession, and a drop in the dollar's value will really hit them. They'd have to either raise prices or take a bigger hit to their bottom line as the cost of goods they import from China rise with the dollar's fall. (They import the vast majority of their product from China). Also, how will such a strategy play out among other governments and bankers in other Industrialized countries? We do know that the domestic political optics are going to put increasing pressure on the Administration to take action for political reasons, I believe.
What to do? What's the timing of all this? Good question about the timing. In general, the cost of taking that overseas trip, or buying that foreign made product will only go up. Personally, I have 15 percent of my retirement invested in foreign stocks indexes and only 5 percent in U.S. stock indexes. Talk to your investment analyst who knows about international currency markets and commodity markets. Buy that Prius sooner rather than later (or other high mileage import), begin to figure out how to reduce your 'oil footprint.' Maybe look at parking some U.S. dollars in some foreign currency or at least foreign stocks (basically what I did when I invested in foreign stock indexes).
One very provocative commentary from the Financial Times of London concisely lays out the problem. World currency markets are another kind of market where the value of the U.S. dollar in terms of any other world currency is determined by the demand for and the supply of dollars on world markets. Much the same points were made today by Yale Finance professor Jeffrey Garten. An extended article on these dynamics written by Doug Noland from The Asia Times is available here. One of Doug Noland's more unsettling passages is his view about what's needed from the U.S. "It is my thesis that there is no alternative other than a major transformation of the underlying structure of the US economy. In simplest terms, we must produce much more, consume much less and do it with a lot less credit creation. "
The underlying gist is that our debt levels cannot be reduced through spending cuts or tax hikes since the magnitudes required are politically untenable. Given the political gridlock we're in, he's probably right. Therefore, the only way left to reduce the U.S. federal debt is to decrease the dollar's value. We do this by lowering the value of the dollar on world markets. Since the dollar's value is not fixed, but rather is determined by the market itself, we have to use tools to 'influence' the dollar's value. (NOTE: Reducing the dollar's value on world markets is different from the term 'deflation' used to describe the situation when the price level in the economy drops).
When countries want to hold fewer dollars, they put them up for sale. This increases the supply of dollars on world markets. Without a counter-veiling increase in the demand for dollars, the dollar's value falls relative to other currencies. While the linked writings above assume that foreign holders of U.S. dollars will release some of those dollars, I have a question about how they go about doing that knowing that doing so will likely result in a drop in the value of their remaining dollar holding. The U.S. government can increase dollars on world markets not by "printing" money. Rather, they buy U.S. government securities from holders like banks and large investors and that puts more U.S. dollars in circulation and thereby lowers the dollar's value of world currency markets.
How does a falling dollar help reduce the Federal debt? As the dollar weakens in value, products made in the U.S. are cheaper overseas, more production happens here, people overseas buy more U.S products, they travel to America more, and they buy American assets. In turn, GDP (the measure of overall economic activity) rises, and more tax revenue is earned. However, the cost of imports to the U.S. go up for Americans. This will also tend to increase consumption here of domestically produced goods since we will tend to substitute American made goods for imported goods, another incentive to greater domestic economic activity (GDP).
What about the price of gas? Ouch! RIght now, the price of oil is denominated in U.S. dollars on world commodity markets. This means that if the oil exporting country wants the same buying power of U.S. dollars after the dollar falls in value, they increase the price of oil. As a result, the price of oil, and therefore, the price of EVERYTHING made from it, goes up in the U.S. This is basically what happened when gas was over $4 per gallon about 16 months ago. The U.S. dollar has been the world's reserve currency. This means that the U.S. dollar has been the currency other's flock to in periods of crisis. This is what's been happening and that's helped keep us afloat during this recession. That all is beginning to change.
The political optics of all this will be interesting. WalMart's been doing well during the recession, and a drop in the dollar's value will really hit them. They'd have to either raise prices or take a bigger hit to their bottom line as the cost of goods they import from China rise with the dollar's fall. (They import the vast majority of their product from China). Also, how will such a strategy play out among other governments and bankers in other Industrialized countries? We do know that the domestic political optics are going to put increasing pressure on the Administration to take action for political reasons, I believe.
What to do? What's the timing of all this? Good question about the timing. In general, the cost of taking that overseas trip, or buying that foreign made product will only go up. Personally, I have 15 percent of my retirement invested in foreign stocks indexes and only 5 percent in U.S. stock indexes. Talk to your investment analyst who knows about international currency markets and commodity markets. Buy that Prius sooner rather than later (or other high mileage import), begin to figure out how to reduce your 'oil footprint.' Maybe look at parking some U.S. dollars in some foreign currency or at least foreign stocks (basically what I did when I invested in foreign stock indexes).
Saturday, November 28, 2009
Should Tim Geithner be Replaced?
More and more people are calling for Treasury Sec. Tim Geithner's resignation. Among them calling for his resignation include Jim Rodgers, Peter DeFazio,
I particularly like this passage from The New Republic article,
"Finally, on the deficit and unemployment, it's true that Geithner has been outspoken about reining in the deficit. It's also true that dwelling on the deficit can seem beside the point or worse with unemployment stuck in double digits. But it's worth considering the role of a Treasury secretary here. As one Treasury official told me a couple months ago, almost every Treasury secretary embraces somewhat more fiscally conservative views than he actually holds,** because one of the Treasury secretary's jobs is to reassure our creditors we'll pay them back. Were Geithner to suddenly argue that the deficit isn't a big deal--even though there's a strong economic case that we should ignore it for the next year or two and focus on stimulus--the bond markets would probably go nuts. By reassuring the bond markets, Geithner buys the administration a little cover."
Elliot Spitzer lashed out at Sec. Geithner on a recent episode of the Rachel Maddow show especially hitting hard the notion that the Obama Administration owns none of the financial collapse. He basically said that they do in the presence of Sec. Geithner. Spitzer has also written on this matter in The Daily Bail.
A sure sign of his impending departure is the political heat he's drawing to the Obama Administration. Dumping him might reduce that heat, but will it lead to a fundamental change in Administration policy? I suspect that either the Administration will have him resign and we'll also see a greater focus on job creation rather than debt reduction or the Administration won't fundamentally change course. I hope they use his departure as an opportunity to roll out a new approach to the economy.
I particularly like this passage from The New Republic article,
"Finally, on the deficit and unemployment, it's true that Geithner has been outspoken about reining in the deficit. It's also true that dwelling on the deficit can seem beside the point or worse with unemployment stuck in double digits. But it's worth considering the role of a Treasury secretary here. As one Treasury official told me a couple months ago, almost every Treasury secretary embraces somewhat more fiscally conservative views than he actually holds,** because one of the Treasury secretary's jobs is to reassure our creditors we'll pay them back. Were Geithner to suddenly argue that the deficit isn't a big deal--even though there's a strong economic case that we should ignore it for the next year or two and focus on stimulus--the bond markets would probably go nuts. By reassuring the bond markets, Geithner buys the administration a little cover."
Elliot Spitzer lashed out at Sec. Geithner on a recent episode of the Rachel Maddow show especially hitting hard the notion that the Obama Administration owns none of the financial collapse. He basically said that they do in the presence of Sec. Geithner. Spitzer has also written on this matter in The Daily Bail.
A sure sign of his impending departure is the political heat he's drawing to the Obama Administration. Dumping him might reduce that heat, but will it lead to a fundamental change in Administration policy? I suspect that either the Administration will have him resign and we'll also see a greater focus on job creation rather than debt reduction or the Administration won't fundamentally change course. I hope they use his departure as an opportunity to roll out a new approach to the economy.
Wednesday, November 25, 2009
Housing and Jobs
There's a new report out talking about renewed weakness in housing. My take on this is it reinforces the importance of added stimulus to help the economy along. Residential investment in housing as a percent of GDP is in the 4 - 6 percent range (see graph here) It's interesting to go back to 2008 and see how these issues were talked about then. While that article mentioned the drop in exports, later last year, net exports (exports minus imports) grew and were a bright spot in the GDP numbers. Click here. It's striking to note the decline in consumer spending and the dramatic drop in both housing and non-residential investment, with the latter falling off a cliff. Housing prices aren't going to recover until consumers are feeling more flush rather than flushed out. In turn, the jobs and income situation is going to need more improvement before consumers start spending more.
While analysts point to the drop in housing prices as the trigger for the recession and the current drag on the economy, I think the fall in housing prices is more symptomatic of the problem (they certainly are part of the problem). It's housing prices and their impact on equity, and how drops in equity combined with greater financial uncertainty, and bank's reluctance to lend that have combined to undercut consumer spending. Consumer spending is the key to economic recovery.
While analysts point to the drop in housing prices as the trigger for the recession and the current drag on the economy, I think the fall in housing prices is more symptomatic of the problem (they certainly are part of the problem). It's housing prices and their impact on equity, and how drops in equity combined with greater financial uncertainty, and bank's reluctance to lend that have combined to undercut consumer spending. Consumer spending is the key to economic recovery.
Monday, November 23, 2009
How is the U.S. Government debt like our personal debt?
Republicans and conservative Democrats have done a very good job over the years beating the 'debt is bad drum.' We've been told many falsehoods, and many have drunk the cool-aid.
One tune is how the government needs to balance it's budget just like we balance our home budget. If in any month your spending exceeds your income, you run a deficit that month. This is just like how the government runs a deficit. When we as consumers and workers run a deficit, we then need a way to make up the shortfall. We do that by some combination of borrowing or taking money out of savings. When we borrow to finance our monthly deficit, we incur debt. This is just like how it works for the government.
When we incur more and more personal debt, and have no increase in income, we do find it more and more difficult to carry that debt. We pay more of our income in interest payments and we have less flexibility in our budgets.
When the government incurs debt, that debt also is income to the economy! Yes, the interest payments on the debt is simultaneously income to the bond holders. This is one difference between government debt and personal debt. With personal debt we experience the interest payment as money leaving. With interest on government debt, the interest payments leave when they go to people and institutions (like other governments) outside the U.S. This raises the question of who holds the bonds that the government issues to finance the deficit?
It quickly gets tricky addressing questions about who owns the debt and what amount of debt we have. I am limiting myself here to debt of the U.S. Federal government. This excludes debt we as private citizens and businesses owe, and it also excludes the debt of other levels of government. An interesting overview of federal debt, deficits, and economic activity is contained in a report by the Government Accountability Office. A quick snapshot on the issue is available here. While these studies are a few years old now, they still provide a good overview of the issues. Whereas, the MSNBC article identifies Japan as the largest foreign owner of U.S. federal debt, China has now surpassed Japan as the largest foreign owner of U.S. Federal government debt.
Keep in mind when someone compares debt to GDP, they are comparing a cumulative amount (debt) to an annual amount (GDP). This would be like you adding up your mortgage and installment principal balances and comparing it to your annual income. It's unclear what such a comparison indicates. Whereas, comparing deficit or surplus to GDP compares annual amounts for both. By analogy, this is comparable to you adding up your mortgage and installment monthly payments and dividing that by your monthly income. As we know, this comparison is made when buying a home.
The largest single holder of U.S. Treasury bonds (how we finance deficits) is the U.S. Government itself! Yup, it's not China. China is the single largest foreign owner of U.S. government debt. About 25-30 percent of all U.S. government debt is owned by foreigners. That means that about 70 percent of the bonds are held in the U.S. Cut the debt, cut the income to holders of the debt.
From a political perspective, I find it striking that the total U.S. Federal debt increased from about $6 trillion in 2000 to about $9 trillion in 2009, a 50 percent increase. The causes of this rise is no mystery - two wars and two tax cut.
There are geo-political implications to foreign owners of U. S. debt. This is especially true as more and more of the foreign ownership resides in one country. Also, just as in our personal budgets, as debt grows, our ability to respond to emergencies declines, so to with increases in government debt.
This short overview has not discussed the value of the dollar and debt and it has simplified the discussion by not considering how those receiving interest from government debt sped it in the U.S. versus overseas.
One tune is how the government needs to balance it's budget just like we balance our home budget. If in any month your spending exceeds your income, you run a deficit that month. This is just like how the government runs a deficit. When we as consumers and workers run a deficit, we then need a way to make up the shortfall. We do that by some combination of borrowing or taking money out of savings. When we borrow to finance our monthly deficit, we incur debt. This is just like how it works for the government.
When we incur more and more personal debt, and have no increase in income, we do find it more and more difficult to carry that debt. We pay more of our income in interest payments and we have less flexibility in our budgets.
When the government incurs debt, that debt also is income to the economy! Yes, the interest payments on the debt is simultaneously income to the bond holders. This is one difference between government debt and personal debt. With personal debt we experience the interest payment as money leaving. With interest on government debt, the interest payments leave when they go to people and institutions (like other governments) outside the U.S. This raises the question of who holds the bonds that the government issues to finance the deficit?
It quickly gets tricky addressing questions about who owns the debt and what amount of debt we have. I am limiting myself here to debt of the U.S. Federal government. This excludes debt we as private citizens and businesses owe, and it also excludes the debt of other levels of government. An interesting overview of federal debt, deficits, and economic activity is contained in a report by the Government Accountability Office. A quick snapshot on the issue is available here. While these studies are a few years old now, they still provide a good overview of the issues. Whereas, the MSNBC article identifies Japan as the largest foreign owner of U.S. federal debt, China has now surpassed Japan as the largest foreign owner of U.S. Federal government debt.
Keep in mind when someone compares debt to GDP, they are comparing a cumulative amount (debt) to an annual amount (GDP). This would be like you adding up your mortgage and installment principal balances and comparing it to your annual income. It's unclear what such a comparison indicates. Whereas, comparing deficit or surplus to GDP compares annual amounts for both. By analogy, this is comparable to you adding up your mortgage and installment monthly payments and dividing that by your monthly income. As we know, this comparison is made when buying a home.
The largest single holder of U.S. Treasury bonds (how we finance deficits) is the U.S. Government itself! Yup, it's not China. China is the single largest foreign owner of U.S. government debt. About 25-30 percent of all U.S. government debt is owned by foreigners. That means that about 70 percent of the bonds are held in the U.S. Cut the debt, cut the income to holders of the debt.
From a political perspective, I find it striking that the total U.S. Federal debt increased from about $6 trillion in 2000 to about $9 trillion in 2009, a 50 percent increase. The causes of this rise is no mystery - two wars and two tax cut.
There are geo-political implications to foreign owners of U. S. debt. This is especially true as more and more of the foreign ownership resides in one country. Also, just as in our personal budgets, as debt grows, our ability to respond to emergencies declines, so to with increases in government debt.
This short overview has not discussed the value of the dollar and debt and it has simplified the discussion by not considering how those receiving interest from government debt sped it in the U.S. versus overseas.
Reduce Federal Debt or Grow Jobs?
The New York Times is running a story (series) on the "problem of the debt." One of their Op-ed writers, Paul Krugman, counters in an op-ed piece today that the "problem" is overblown.
Should we be more concerned about the debt than unemployment? No.Unemployment is a greater problem. There will come a time when more and more government spending (and debt) will run a greater risk of triggering inflation, but not now. We need to be spending - 'priming the pump' - its called, incur more debt, and help the economy recover.
There are rumblings of a Republican proposal to cut taxes to stimulate the economy. I can guarantee you this has more to do with appealing to the Republican Base than it does to any desire to actually stimulate the economy. Here's why.
A $100 billion tax cut and a $100 billion injection of new government spending will not affect the economy the same way. There are these things called multipliers. They do just what their name suggests - they multiply the impact from a tax cut versus an injection of new government spending. It turns out that cutting taxes has less stimulative effects than an increase in new government spending. In other words, there is more 'bang for the buck' from new government spending than there will be from an equal amount of tax cuts.
With Roubini indicating unemployment will increase to at least 11 percent (earlier post), we need stimulus now.
Should we be more concerned about the debt than unemployment? No.Unemployment is a greater problem. There will come a time when more and more government spending (and debt) will run a greater risk of triggering inflation, but not now. We need to be spending - 'priming the pump' - its called, incur more debt, and help the economy recover.
There are rumblings of a Republican proposal to cut taxes to stimulate the economy. I can guarantee you this has more to do with appealing to the Republican Base than it does to any desire to actually stimulate the economy. Here's why.
A $100 billion tax cut and a $100 billion injection of new government spending will not affect the economy the same way. There are these things called multipliers. They do just what their name suggests - they multiply the impact from a tax cut versus an injection of new government spending. It turns out that cutting taxes has less stimulative effects than an increase in new government spending. In other words, there is more 'bang for the buck' from new government spending than there will be from an equal amount of tax cuts.
With Roubini indicating unemployment will increase to at least 11 percent (earlier post), we need stimulus now.
Monday, November 16, 2009
Recession, Recovery, and Unemployment
Now that the recession is officially over, we can all get back to work!
Except that the unemployment rate is forecast to continue to rise. This is according to one economist who predicted the thing in the first place - Nouriel Roubini. In an article Sunday, 11/15/09, he predicts it will rise to around 11 percent and stay there for some time. What I find fascinating isn't the prognosis for unemployment but his setting of a specific number. When the economy was humming along back about six years ago, that recovery was dubbed "the jobless recovery." It is appearing that is again the case - another jobless recovery has begun. How would anyone imagine that unemployment would dramatically decline as we now turn the corner from recession to growth? Keep in mind, the tools used to define the beginning and end of a recession are technical and pertain to changes in overall economic output. These do not necessarily have anything to do with employment.
According to Sean Bisceglia, CEO of TalentDrive, a Chicago-based job search technology startup, almost half of the companies he surveyed in August and September either had cut their hiring budget or didn't have one. He says that more efficient technology is replacing workers in many industries. That is one reason productivity has been rising -- and why jobs have been harder to come by. Click here for the full text of the article.
Bank Lending and Economic Recovery
There's a news story out that Fed Chairman Ben Bernanke targets tight bank lending as a key reason for the current unemployment levels.
While I count myself among those who supported the bank and financial industry bailouts, the Bush Administration was caught in their ideology when they made a huge blunder in not being more aggressive in setting requirements on the use of those funds, executive pay caps, and regulation of derivatives. Early in the Obama Administration, Treasury Secretary Geithner announced a plan on setting requirements on those same banks.
While I count myself among those who supported the bank and financial industry bailouts, the Bush Administration was caught in their ideology when they made a huge blunder in not being more aggressive in setting requirements on the use of those funds, executive pay caps, and regulation of derivatives. Early in the Obama Administration, Treasury Secretary Geithner announced a plan on setting requirements on those same banks.
Thursday, November 12, 2009
Economics, Community, and Health Insurance
With the current debate about if and how to change the health insurance system in America becoming more heated over the summer, I had the opportunity to attend a Town Hall meeting hosted by Oregon's Sen. Jeff Merkeley. At times it was quite "spirited" with a not insignificant contingent representing what I'll graciously call the Libertarian wing of the electorate. At one point, one audience member quite clearly stated to Sen. Merkeley that it is the Senator's job to preserve his right to not buy health insurance.
Sen. Merkeley is Oregon's junior senator, recently elected, unseating Sen. Gordon Smith. In this part of the state, its not an exaggeration to say that former Sen. Smith was revered. This was Sen. Merkely's first Town Hall meeting in this part of the sate. Also, he followed Sen. Wyden by several weeks. As a result, people dis-satasfied with Sen. Wyden's meeting laid in wait for Sen. Merkeley.
Economics has something to say about the issue of whether or not people should be required to carry health insurance. One aspect of what economics has to say on the issue pertains to how individuals without insurance impact services available to others, even when those not carrying health insurance pay for their health care out of their own pockets. You can read my perspective on the matter - Wallowa County Chieftain.
While the argument I make in this piece is grounded in mainstream economics practiced today, the perspective I take in this letter is troubling to people who have an inordinate belief in the 'free' market.
My arguments rest on a sub-area of economics often referred to as environmental economics. This sub-area is very extensive with a massive body of conceptual and empirical literature. Part of this literature focuses on externalities. Within that literature, the externality I speak of in my essay is called a network externality. More specifically, network effects in health care and health insurance. (A note to the more specialized reader - in my short essay, I don't distinguish between network effects and network externalities).
There are many in and out of the economics profession who hold the belief that externalitie do not exist. They have very influential advocates, perhaps most notably Uncle Milty - Milton Frriedman and the Chicago School.
With The Chicago School there is even a brand of Institutional Economics that extends free market principles to the study of institutions! I subscribe to a different bread of Institutionalism that is related to the Land Economics of John R. Commons. A somewhat humorous view of part of that school may be viewed at - American Institutionalist School.
I will likely pick some of these themes up in future posts.
Sen. Merkeley is Oregon's junior senator, recently elected, unseating Sen. Gordon Smith. In this part of the state, its not an exaggeration to say that former Sen. Smith was revered. This was Sen. Merkely's first Town Hall meeting in this part of the sate. Also, he followed Sen. Wyden by several weeks. As a result, people dis-satasfied with Sen. Wyden's meeting laid in wait for Sen. Merkeley.
Economics has something to say about the issue of whether or not people should be required to carry health insurance. One aspect of what economics has to say on the issue pertains to how individuals without insurance impact services available to others, even when those not carrying health insurance pay for their health care out of their own pockets. You can read my perspective on the matter - Wallowa County Chieftain.
While the argument I make in this piece is grounded in mainstream economics practiced today, the perspective I take in this letter is troubling to people who have an inordinate belief in the 'free' market.
My arguments rest on a sub-area of economics often referred to as environmental economics. This sub-area is very extensive with a massive body of conceptual and empirical literature. Part of this literature focuses on externalities. Within that literature, the externality I speak of in my essay is called a network externality. More specifically, network effects in health care and health insurance. (A note to the more specialized reader - in my short essay, I don't distinguish between network effects and network externalities).
There are many in and out of the economics profession who hold the belief that externalitie do not exist. They have very influential advocates, perhaps most notably Uncle Milty - Milton Frriedman and the Chicago School.
With The Chicago School there is even a brand of Institutional Economics that extends free market principles to the study of institutions! I subscribe to a different bread of Institutionalism that is related to the Land Economics of John R. Commons. A somewhat humorous view of part of that school may be viewed at - American Institutionalist School.
I will likely pick some of these themes up in future posts.
Sunday, November 8, 2009
Commodities and Specialty Products
In this post, I'll just refer to product rather than product and service. This is simply for brevity. Consider that I am referring to product or service. Your business be selling Real Estate, for example, which is a service than a product.
As we know, the bottom line is determined by your revenues and your costs. I have seen businesses that do a good job at managing one but not the other, with the result being a drop in the bottom line. This post focuses on the revenue side of your business.
A commodity is a product that is just like every other business's product - in the eyes of the consumer of your product. When your product is viewed this way, how much you can charge for your product is determined by the 'market' in which you sell your product. Your revenues are then largely determined by forces outside of your control.
One important alternative is to market your product or service as a specialty product. This helps to separate your product from the mass of alternative suppliers of your product. This is a crucial step towards having greater control over your revenues. You have greater control over your revenues when you are able to charge a premium for your product. In the parlance, this premium is often referred to as a higher value added.
If there are legal limitations on your ability to set a higher price (fee) for your product, then the question is how can you charge that maximum.
If the market in your business already has a standard fee that 'everyone charges' then the question might be how do you use other tools to distinguish your product from others with the same or similar price? Here again, the goal is the same - getting greater control over your revenue stream.
As we know, the bottom line is determined by your revenues and your costs. I have seen businesses that do a good job at managing one but not the other, with the result being a drop in the bottom line. This post focuses on the revenue side of your business.
A commodity is a product that is just like every other business's product - in the eyes of the consumer of your product. When your product is viewed this way, how much you can charge for your product is determined by the 'market' in which you sell your product. Your revenues are then largely determined by forces outside of your control.
One important alternative is to market your product or service as a specialty product. This helps to separate your product from the mass of alternative suppliers of your product. This is a crucial step towards having greater control over your revenues. You have greater control over your revenues when you are able to charge a premium for your product. In the parlance, this premium is often referred to as a higher value added.
If there are legal limitations on your ability to set a higher price (fee) for your product, then the question is how can you charge that maximum.
If the market in your business already has a standard fee that 'everyone charges' then the question might be how do you use other tools to distinguish your product from others with the same or similar price? Here again, the goal is the same - getting greater control over your revenue stream.
What is economics?
Economics is the study of human choice.
Yes, that's right. It's much broader than about money or finances. It can include that area, and often does, but to view economics that narrowly is to limit it's usefulness.
Just consider for a moment what is involved in human choice. I see it including other people, maybe your family, maybe your business partners, maybe your suppliers. It can also include levels of government that play some role in how you make decisions and conduct your business. Your choices are often complex and involve competing objectives that at times clash with each other. How do you go about organizing all this information? Even when you have it organized, how do you go about approaching using it to help inform your choices?
My job is to help you frame all this in a way that facilitates your decision-making.
This is what economics is fundamentally about. There are fancier ways of saying this, and larger and broader ways of thinking about what economics is and is not. In the end though, its about one thing - using a set of tools to help you make more effective choices.
Yes, that's right. It's much broader than about money or finances. It can include that area, and often does, but to view economics that narrowly is to limit it's usefulness.
Just consider for a moment what is involved in human choice. I see it including other people, maybe your family, maybe your business partners, maybe your suppliers. It can also include levels of government that play some role in how you make decisions and conduct your business. Your choices are often complex and involve competing objectives that at times clash with each other. How do you go about organizing all this information? Even when you have it organized, how do you go about approaching using it to help inform your choices?
My job is to help you frame all this in a way that facilitates your decision-making.
This is what economics is fundamentally about. There are fancier ways of saying this, and larger and broader ways of thinking about what economics is and is not. In the end though, its about one thing - using a set of tools to help you make more effective choices.
Introduction
Welcome to my blog. This blog will focus on economic issues and decision-making. Some posts will focus on a specific issue. Other posts will focus on some broader issue or concept. I'll also be including posts on economic issues broader than I am working on as a business consultant. Also, it's worthwhile to note that I've got a wide definition of what is an economic issue.
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