A study performed by the Federal Rserve shows that immigration does not take away jobs from Americans. (Immigration and Employment numbers)
Link to the actual Fed report
Tuesday, August 31, 2010
Monday, August 30, 2010
The Recession that changes the American economy?
I was reading the blog of Greg Mankiw and he directed me to the following link. (Robert Barro) For those that do not know who Barro is, he is a very well known economist whose work can be accredited to the formation of the before mentioned Ricardian Theory. In his article, he is harsh on President Obama's method of handling unemployment. His reasoning is that Obama basically turned the unemployment system, which usually last for 26 weeks after being fired, to a program that has the possibility to last two years.
To his credit, he makes a good point. There is a disincentive for workers seeking work if they receive benefits. They may be pickier with the jobs they choose, rather than taking any job they can, prolonging unemployment. However, it is important to think about if there are really jobs out there. Let's break down GDP to see the shifts in our economy to compare it to the days of Reagan and his recession in 1983. In 1983, the trade deficit was close to 58 million dollars. Since that time, it grew to about 375 million in 2009. (Trade history.) This is not a big surprise, especially due to China and Germany emerging as international exporting powers. So fewer countries are buying our goods and services since the 1983 recession. Let us look at personal consumption. In 1983, the average household saved 9.3 cents per dollar. Last year, saving peaked at 4.3 cent per dollar. What this says is that more people are consuming, leading to a drop in investment. This happens because people save less, and the money that is foregone in savings cannot be lent out by banks. What this data is telling us is that fewer countries are buying our goods and services and we are consuming at a much higher rate than in the past.
This data is telling of the true American economy. America has transformed from the manufacturing center of the world to the buyers of all world products. This makes total sense; it is more rational to buy a good made in China for $1 than buy an American good for $2. This is possible because of the devaluation of their currency, and lack of worker's rights laws. They can afford to sell their goods for so cheap, and it has helped develop their economy. America is now a major service provider. The New York Times reported today that New York's economy is not as bad off as originally predicted. A big part of it is the reemergence of its financial sector. Bank and investment groups have been rallying and been hiring. Chances are if you are trained in finance, you will have an easier time getting a job than a person trained on an assembly line.
The major economic implication is if America can lessen its trade deficit, we can eventually see unemployment drop. If America can become a major influence in the world market, we can bring the manufacturing sector back to the states. If not, we can expect structural unemployment to rise. This would happen because finance is such a specialized field. The skill levels for finance and the struggling manufacturing sector are extremely different. There will have to be a transitioning period to allow people to swap fields (if manufacturing does not rebound in America) so they can be retrained in a new line of work.
Going back to the article written by Barro, has Obama created a disincentive for people to work. Yes, any government subsidy for unemployment makes people not look as hard for a job. What is mostly happening is people are being more selective in their job search rather than taking a job to feed their family.
To his credit, he makes a good point. There is a disincentive for workers seeking work if they receive benefits. They may be pickier with the jobs they choose, rather than taking any job they can, prolonging unemployment. However, it is important to think about if there are really jobs out there. Let's break down GDP to see the shifts in our economy to compare it to the days of Reagan and his recession in 1983. In 1983, the trade deficit was close to 58 million dollars. Since that time, it grew to about 375 million in 2009. (Trade history.) This is not a big surprise, especially due to China and Germany emerging as international exporting powers. So fewer countries are buying our goods and services since the 1983 recession. Let us look at personal consumption. In 1983, the average household saved 9.3 cents per dollar. Last year, saving peaked at 4.3 cent per dollar. What this says is that more people are consuming, leading to a drop in investment. This happens because people save less, and the money that is foregone in savings cannot be lent out by banks. What this data is telling us is that fewer countries are buying our goods and services and we are consuming at a much higher rate than in the past.
This data is telling of the true American economy. America has transformed from the manufacturing center of the world to the buyers of all world products. This makes total sense; it is more rational to buy a good made in China for $1 than buy an American good for $2. This is possible because of the devaluation of their currency, and lack of worker's rights laws. They can afford to sell their goods for so cheap, and it has helped develop their economy. America is now a major service provider. The New York Times reported today that New York's economy is not as bad off as originally predicted. A big part of it is the reemergence of its financial sector. Bank and investment groups have been rallying and been hiring. Chances are if you are trained in finance, you will have an easier time getting a job than a person trained on an assembly line.
The major economic implication is if America can lessen its trade deficit, we can eventually see unemployment drop. If America can become a major influence in the world market, we can bring the manufacturing sector back to the states. If not, we can expect structural unemployment to rise. This would happen because finance is such a specialized field. The skill levels for finance and the struggling manufacturing sector are extremely different. There will have to be a transitioning period to allow people to swap fields (if manufacturing does not rebound in America) so they can be retrained in a new line of work.
Going back to the article written by Barro, has Obama created a disincentive for people to work. Yes, any government subsidy for unemployment makes people not look as hard for a job. What is mostly happening is people are being more selective in their job search rather than taking a job to feed their family.
Saturday, August 28, 2010
Are balanced budgets the appropriate tool for fiscal responsibility?
Marco Rubio, Republican candidate for Florida's Senate seat addressed Freedom Works Friday night about his proposals for bringing America back to its roots. A key component of his proposal is that he will fight for a balanced budget amendment. In my previous post, I spoke about fiscal responsibility and lowering the national deficit. This would lead you to believe I would jump all over this idea as a novice idea to restoring America's economy. Balanced budgets are a terrific idea, and should be what we strive for every time a budget is submitted. However, if balanced budgets are mandated by law, it would dangerously affect America. The reason for this is that the government can take actions to lessen the effects of a downturn in the economy. Remember, one of the first principles of economics is the government can (in some cases) improve market conditions.
The best example to show this argument is the current economic situation we are facing. At the national level, two actions were taken by Congress to slow down the recession. Congress cut taxes and increased government spending. Each action taken by Congress adds to the current deficit because the tax breaks decrease government revenue and the increased spending from the government is on borrowed money or the selling of bonds through the FOMC. This form of deficit spending is necessary when facing tremendous downturns in the economy like America did. If gauged right, Congress or the Fed can take action to undercut the most severe parts of the recession. However, with a balanced budget amendment, the only option Congress can do is cut taxes and cut spending. You may think that this is a great idea, lowering taxes via spending cuts, but you must look deeper into it. There are automatic stabilizers built into America's economic policy that are there to help the economy during down times. For example, unemployment pay. When the government goes south, more people lose their job. This means that the number of people receiving unemployment benefits increase, which is good. The reason for its necessity is because it prevents people from reaching unrecoverable poverty, but also gives money directly to people so they can spend it. If there was no unemployment benefits, the two or three extra percent of the population that became unemployed would stop spending money because they have no money to spend. The direct aid to the people helps maintain some level of consumer spending. Under a balanced budget, the government would have to cut and cut and continue to cut spending to a point where it would not be able to prop up any program to keep the economy from falling into a further downturn.
Looking at states with balanced budget amendments, it seems from the data provided by the Bureau of Labor and Statistics are hit harder than states without the amendment. Looking at California, Rhode Island, South and North Carolina, compared to Montana, Pennsylvania and Texas, this shows to be true. CA, RI, SC and NC all have unemployment over 10%, with the highest California at 12.3%. The states without the balanced budget amendments had significantly lower unemployment rates. This does not hold true with Nevada and Michigan for obvious reasons. Nevada was destroyed by the housing bubble and the downturn of the automobile industry in Michigan (which was a major employer) added to tremendous levels of unemployment unlike in any other state.
Let’s look at California. It has an amendment to balance its budget every year. However, when the recession hit, many people lost their jobs and became dependent on temporary unemployment benefits. More money had to be sent to aiding the programs to help its people, the only problem was the money had to come from somewhere. Unfortunately for California, they had no options but to cut a tremendous amount of its economy just to pass a budget. This mandated austerity proved to greatly hurt its economy. With a national balanced budget amendment, California can easily become the American economy. The government has to have the power to deficit spend in desperate times.
The best example to show this argument is the current economic situation we are facing. At the national level, two actions were taken by Congress to slow down the recession. Congress cut taxes and increased government spending. Each action taken by Congress adds to the current deficit because the tax breaks decrease government revenue and the increased spending from the government is on borrowed money or the selling of bonds through the FOMC. This form of deficit spending is necessary when facing tremendous downturns in the economy like America did. If gauged right, Congress or the Fed can take action to undercut the most severe parts of the recession. However, with a balanced budget amendment, the only option Congress can do is cut taxes and cut spending. You may think that this is a great idea, lowering taxes via spending cuts, but you must look deeper into it. There are automatic stabilizers built into America's economic policy that are there to help the economy during down times. For example, unemployment pay. When the government goes south, more people lose their job. This means that the number of people receiving unemployment benefits increase, which is good. The reason for its necessity is because it prevents people from reaching unrecoverable poverty, but also gives money directly to people so they can spend it. If there was no unemployment benefits, the two or three extra percent of the population that became unemployed would stop spending money because they have no money to spend. The direct aid to the people helps maintain some level of consumer spending. Under a balanced budget, the government would have to cut and cut and continue to cut spending to a point where it would not be able to prop up any program to keep the economy from falling into a further downturn.
Looking at states with balanced budget amendments, it seems from the data provided by the Bureau of Labor and Statistics are hit harder than states without the amendment. Looking at California, Rhode Island, South and North Carolina, compared to Montana, Pennsylvania and Texas, this shows to be true. CA, RI, SC and NC all have unemployment over 10%, with the highest California at 12.3%. The states without the balanced budget amendments had significantly lower unemployment rates. This does not hold true with Nevada and Michigan for obvious reasons. Nevada was destroyed by the housing bubble and the downturn of the automobile industry in Michigan (which was a major employer) added to tremendous levels of unemployment unlike in any other state.
Let’s look at California. It has an amendment to balance its budget every year. However, when the recession hit, many people lost their jobs and became dependent on temporary unemployment benefits. More money had to be sent to aiding the programs to help its people, the only problem was the money had to come from somewhere. Unfortunately for California, they had no options but to cut a tremendous amount of its economy just to pass a budget. This mandated austerity proved to greatly hurt its economy. With a national balanced budget amendment, California can easily become the American economy. The government has to have the power to deficit spend in desperate times.
Friday, August 27, 2010
Tea Party, 828 Rally, Taxes and the Future
So tomorrow Glenn Beck and Sarah Palin are hosting the 828 "restoring faith and honor" rally at the Lincoln Memorial. There is a great deal of excitement among the people that support the Tea Party platform mostly because they believe they are in the process of revitalizing America. From what I am understand, the Tea Party is strictly a fiscal advocacy group concerned with government spending, size and the deficit. (Gallup Poll Data). According to a Gallup poll, the two greatest concerns on the Tea Party is that the government is too large and the deficit is too big. By no means are these concepts radical, but in my opinion, very fair points. However, it is concerning on the method that political backers of this movement propose to handle the deficit. It is being proposed that cutting taxes will actually increase government revenue. The rationality behind this is that lower taxes equal larger economic growth because more money is in the hands of people, and when they spend the money, it creates more jobs. The more jobs created directly results in an increase in government revenue because more people are paying taxes. This concept is the trademark of Art Laffer's reasoning for the Reagan tax cuts in the 1980s. Unfortunately, he under estimated the optimal level of taxation and government revenues decreased. To be fair, Reagan did not inherit an economy that was recovering from stagflation and was recently throw into a recession.
The question that I ask myself is if lower taxes will really create economic growth and benefit the economy as suggested by the Tea Party. In the short run, I say yes. The current economy is very fragile and in need of as much stimulus as possible. In my opinion, and along with trained economist, deflation can throw America into another recession, and hinder all action Congress and the President has taken to stimulate the economy. This is a very dangerous thought because if long term unemployment persists, the structural level of unemployment can increase to more than six percent. According to the Ricardian Equivalence theorem, a sharp cut in taxes now will mean the need for higher taxes in the future, resulting in slowing of the economy at a later point in time. Even resetting the tax rate from the Clinton era would greatly benefit the economy in the long run (These taxes should be enacted once the economy is more stable).
My rationality for the use of the Riccardian Equivalence is this. By cutting taxes, you are creating a multiplying effect for every dollar spent. For example, for every extra dollar spent by a consumer, this will flow throughout the economy. With more dollars in the economy, inflation will occur and interest rates will drop. However, at the same time, the nominal level of national debt will increase because of interest on the debt. The decrease of interest rates drops the value of the dollar, causing less foreign and domestic firms/governments/etc. to invest into the dollar. To fund current government programs in the future, the government can cut spending, borrow more, or raise taxes. The problem with spending cuts is it won’t solve the debt problem. The issue with more borrowing is if interest rates drop to a level where investors feel they cannot make money on their investment, then they will not lend as much money we need. This is a somewhat plausible scenario, mostly because if the value of the dollar slips below the value of other currencies, investors will lend to the currencies that have higher rates. The last option is to raise taxes. The increase in taxes will slow economic growth, resulting in interest rates and the value of the dollar to rise. The tax increase in the future will be larger than if tax increases were instituted after the economy recovers, unless there is a significant growth in the workforce. The tax increase is the most viable option for future ways to control the debt and maintain our spending in the future.
In my opinion, it will benefit America as a whole if the debt levels can be brought down now to avoid even higher taxes in the future. The obvious answer to the question if debt should get passed along to the next generation is no. However, a great deal of the platform proposed by the Tea Party movement consists of tax cuts along with spending cuts. There are several plans floating around Tea Party backed politicians, including privitization of Medicare, but there is no tangible plan for spending cuts by the party. It does not seem that the decrease in spending will equal the loss of revenue from the tax decreases. This is why I feel that we should bite the bullet now and be taxed at a higher rate, while cutting spending to bring down the debt. The debt is not of grave concern at this moment in American history, especially because other countries GDP to debt ratio is much higher than Americas. But there is no doubt that the debt will continue to grow, and a large percentage of government revenue will need to be spent on interest on the debt. In this case, I truly believe it is better to have some bad years now then horrible years in the future.
The question that I ask myself is if lower taxes will really create economic growth and benefit the economy as suggested by the Tea Party. In the short run, I say yes. The current economy is very fragile and in need of as much stimulus as possible. In my opinion, and along with trained economist, deflation can throw America into another recession, and hinder all action Congress and the President has taken to stimulate the economy. This is a very dangerous thought because if long term unemployment persists, the structural level of unemployment can increase to more than six percent. According to the Ricardian Equivalence theorem, a sharp cut in taxes now will mean the need for higher taxes in the future, resulting in slowing of the economy at a later point in time. Even resetting the tax rate from the Clinton era would greatly benefit the economy in the long run (These taxes should be enacted once the economy is more stable).
My rationality for the use of the Riccardian Equivalence is this. By cutting taxes, you are creating a multiplying effect for every dollar spent. For example, for every extra dollar spent by a consumer, this will flow throughout the economy. With more dollars in the economy, inflation will occur and interest rates will drop. However, at the same time, the nominal level of national debt will increase because of interest on the debt. The decrease of interest rates drops the value of the dollar, causing less foreign and domestic firms/governments/etc. to invest into the dollar. To fund current government programs in the future, the government can cut spending, borrow more, or raise taxes. The problem with spending cuts is it won’t solve the debt problem. The issue with more borrowing is if interest rates drop to a level where investors feel they cannot make money on their investment, then they will not lend as much money we need. This is a somewhat plausible scenario, mostly because if the value of the dollar slips below the value of other currencies, investors will lend to the currencies that have higher rates. The last option is to raise taxes. The increase in taxes will slow economic growth, resulting in interest rates and the value of the dollar to rise. The tax increase in the future will be larger than if tax increases were instituted after the economy recovers, unless there is a significant growth in the workforce. The tax increase is the most viable option for future ways to control the debt and maintain our spending in the future.
In my opinion, it will benefit America as a whole if the debt levels can be brought down now to avoid even higher taxes in the future. The obvious answer to the question if debt should get passed along to the next generation is no. However, a great deal of the platform proposed by the Tea Party movement consists of tax cuts along with spending cuts. There are several plans floating around Tea Party backed politicians, including privitization of Medicare, but there is no tangible plan for spending cuts by the party. It does not seem that the decrease in spending will equal the loss of revenue from the tax decreases. This is why I feel that we should bite the bullet now and be taxed at a higher rate, while cutting spending to bring down the debt. The debt is not of grave concern at this moment in American history, especially because other countries GDP to debt ratio is much higher than Americas. But there is no doubt that the debt will continue to grow, and a large percentage of government revenue will need to be spent on interest on the debt. In this case, I truly believe it is better to have some bad years now then horrible years in the future.
Welcome
Hey everyone. I designed this blog to discuss basically what is on my mind. There should be a fair combonation of politics, economics and a mixed array of topics. Whatever comes to mind throughout the day I will try to post, mainly to ignite thought provoking conversation and ideas. We will see. Enjoy.
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