A Deficit to Remember.....

Its quite the ironic situation to find ourselves discussing debt and the problems it can cause only 8 days after the release of the 2011 Fiscal Year Federal Budget. We learned today that an individual, company, or country that can be considered high risk has to pay more in interest to keep the money juices flowing. This is an intuitive, straight forward, and can easily be applied: as our national debt rises the interest rates we pay as a nation will rise. A conclusion easily reached. Also easily grasped is the idea that every new yearly deficit we incur will cost more and more, than it's proposed face value.

Now I would like you to contemplate this string of numbers

12388010613153

This is not a random assortment, nor is it something fabricated and purposed to scare. This is how much we owe as a nation. As an aggregate society we owe over 12 trillion dollars to lenders of various types. I got this number off one of the many debt clocks. I highly recommend everyone to take one look at that page, I was literally frightened. I watched with my own eyes as the national debt grew over $50,000 in less than a second. $12,388,010,613,153... quite impressive, and the first thought is how in the hell can all that money possibly be spent period, let-alone by one entity. But this number was not the only one i found intriguing on this site. Over 16 Trillion dollars in debt is held by individuals in the US, over 14 Trillion is held in mortgage debts by U.S. Citizens, and a mere 2 Trillion dollars in U.S. Consumer debt. There is one vital difference in these numbers though, and it took me a minute to notice it. They're DECLINING, if one result of the Great Recession (as some have now labeled it) is a new U.S. individual mindset, that reemphasizes the importance of being in the black then i will be truly happy. This financial crisis and consequent economic reeling is not so much a correction of markets, but of market psychology( My opinion of course) and these declining numbers show at least some evidence of this change on Main Street.

But Wall Street and the Government seem not to have gotten the message or at least not yet. There will be arguments into the next decade surrounding this I'm sure but the mind set that once drove Main Street into the continuing housing crisis has already found financial markets making the same mistakes. Ill-proportioned risk is still rampant in U.S. Financial markets and will lead them straight into another crisis. Which could have resounding effects on the economy once again. The fear of a "double dip" recession has a large factual basis here. Eventually i see regulation finally taking hold of this renegade reclusive society, but in the mean time problems shall remain.

In the Government however longterm financial solvency may have some effects that are not so often thought about as described by the Brookings Institute contributor in this article:

"Paralysis in the face of such dire warnings tells the public that their government is not working, undermines trust in our political institutions, and leads to more cynicism about the entire process, with ramifications that go far beyond the fiscal problem itself."

"the problem is so dire now that instead of doubling down on our efforts to do something we have moved the goal posts and redefined our deficit reduction goals."

" the goal has shifted from balancing the budget to keeping deficits below 3 percent of GDP in the president’s budget. That would mean accepting a deficit of over $400 billion (in today’s dollars) as a goal. However, even this much more modest goal now appears impossible to reach. "

I can tell you right now that my trust in our political institutions is close to nothing, i see reckless abandonment (again my personal opinion, and there are many many others who see otherwise) and until something can be done to reign in spending just slightly more than already projected I'm going to continue my skepticism. I will leave my readers here with a couple final quotes from another Brookings Institute article that scared me even more.... here are the projections for the next decade. Enjoy!

"

• The deficit never goes below $700 billion and then rises to $1 trillion by 2020.
• We will add $8.5 trillion to the national debt during this period, a pace that does not slow from the first five years (2011-2015) to the second (2016-2020)
• Debt held by the public rises from 63.6 percent of GDP to 77.2 percent, a figure that never stabilizes.
• Net interest payments on the debt rise from $188 billion in 2010 to a stunning $912 billion in 2020—almost at much as total projected spending on national security that year.
• Social Security increases from $703 billion in 2010 to $1,204 billion in 2020; Medicare more than doubles, from $451 billion to $957 billion; Medicaid nearly doubles, from $275 billion to $488 billion.
• These projections assume that total spending for discretionary domestic programs will decline from $553 billion next year to $529 billion a decade later—a trajectory without precedent in modern U.S. history."

I Don't know bout you but Im seeing Red....

A Growing Appreciation for Cents Off

The usage of coupons took a major increase in 2009, the highest it's been since 1992.

Matthew Tilley, Inmar’s director for marketing, said companies last year pumped out an unprecedented number of coupons, hoping to prevent financially struggling consumers from drifting to private-label brands.

“In a down economy,” Mr. Tilley said, “coupons might make the difference between turning your loyal consumer over to a private-label brand, and keeping them in the fold. In essence, you’ve lowered your price for them in a short period when they needed the help.

It is obvious that people are becoming more thrifty during this tough economy. I think especially for young people the thought of cutting coupons out of a sales paper was not thought of before the recession began. Now it has become quite the trend. Having grew up in a household where being cheap was the norm it is quite comforting to know that people in my generation see the good side in buying cheap, taking advantage of disscounts, clearance racks and generic brands!

www.nytimes.com/2010/02/08/business/08drill.html?ref=economy

Job Openings Plunged By One-Quarter Last Year

Job openings became much tougher to find last year, as the number of available openings fell by nearly one quarter. As a result, the unemployed population increased by more than one-third, leaving more laid-off workers competing for fewer jobs. All together, there were 6.1 unemployed workers in December, on average, for every available position, according to Labor Department data released Tuesday. That is a significant increase from 3.4 jobless workers per opening in December of 2008, and much worse than the 1.7 unemployed people per opening in December of 2007, when the recession began. According to the article about job openings plunging at finance.yahoo.com:

"There were 2.5 million jobs available at the end of December, according to the Labor Department's Job Openings and Labor Turnover survey. That includes all jobs publicly listed by companies and government agencies.

That may seem like a lot given the severity of the recession, but that's down from 3.2 million in December 2008. And it's way below the 4.8 million openings that existed in June 2007, the peak reached before the recession.
The picture eased slightly in December from the previous month, as available jobs increased by about 60,000 from November. December's ratio of 6.1 unemployed workers per job was better than November's 6.3, the highest on records dating from 2001."

So my question to you is, with the increase of 60,000 available jobs in December, do you think job openings will continue to increase? Or do you believe that the worst has yet to come?

Don't Expect the GDP to Increase Anytime Soon.

I found this article on yahoo and the title surprised me, "Expect just 2% GDP Growth Over Next Decade, Gary Shilling Says." Shilling went on the talk of the housing sector and unemployment outlook.

Full article available at:

http://finance.yahoo.com/tech-ticker/expect-just-2-gdp-growth-over-next-decade-gary-shilling-says-421149.html;_ylt=AmIYW0gpj7RhFdDtUnzufhW7YWsA;_ylu=X3oDMTE2ZGU2a2c3BHBvcwMxMQRzZWMDdG9wU3RvcmllcwRzbGsDZXhwZWN0anVzdDJn?tickers=dia,spy,xlf,man,xhb,len,hd&sec=topStories&pos=9&asset=&ccode=

The housing sector. Some regions, including NYC, have enjoyed a mild recovery reflecting Wall Street bonuses. But the national housing inventory overhang remains high. Shilling forecasts another 10% drop in prices and one-to-two more years before housing truly bottoms. Expect lenders to take over more properties as modifications fail, he adds.

Unemployment outlook. Think chronic. Shilling's forecast of 2% growth is below the 3.3% level needed to keep unemployment stable. On the ground level, it's taking laid off American workers longer to find new jobs and the number of jobs lost since December 2007, now estimated at 8.4 million, is about the twice the percentage drop in any previous post-World War II recession.

Obviously another 10% drop in prices is going to hurt the housing market for sellers. The sellers will have to take ridiculous losses on what they originally paid for the house or they will have to stay in the house until the market rebounds. Also with lenders seizing more properties, I feel as though numerous homes will fall into disrepair like the ones we saw in House of Cards.

Regarding the unemployment outlook, I feel as though it will start to gradually decrease in the months ahead. In response to Shilling saying that laid off workers are taking a longer time to find new jobs is obvious. With so many people looking for work, employers can pick the best of the best required for the job.

However, I disagree with the statement presented in the title. I feel as though the GDP will increase more than 2% within the next decade. With jobs coming back, consumption will increase as well as investments due to more spending money in the market. I don't expect government purchases to increase much considering the large debt the government currently has. I feel the same way with net exports because other countries can produce the same goods the U.S does but at a much cheaper cost and we can't compete with that.

How do you feel about Shillings' grim outlook on GDP for the upcoming decade? What are your thoughts regarding Shillings outlook on the housing market and unemployment?

Forget the Mortgage, I'm Paying My Credit Card Bill

I just came across this interesting article and thought that it had some relation to the video we are watching in class. Below is most of the article, but the full text if provided in the link. 

http://finance.yahoo.com/news/Forget-the-Mortgage-Im-Paying-usnews-816222158.html?x=0&.v=2 

Amid high unemployment and sliding home prices, a growing number of struggling consumers are doing what was once considered unthinkable: paying their credit card bills instead of their mortgages. A recent study developed by TransUnion found the percentage of Americans who were current on their credit cards but behind on their mortgage increased to 6.6 percent in the third quarter of 2009, up from 4.3 percent in the first quarter of 2008. Meanwhile, the share of consumers making mortgage payments on time but behind on their credit cards moved in the opposite direction, sliding from 4.1 percent to 3.6 percent over the same time period.

Before the housing crisis, bankers typically operated under the assumption that homeowners would do whatever possible to remain current on their mortgage--even if that meant falling behind on other bills. "It used to be that the mortgage was sacrosanct," says Keith Gumbinger of HSH.com. "You paid it before anything else." But a combination of factors linked to the current economic mess--falling home prices, high unemployment, and tight consumer credit--have lead many consumers to prioritize credit card payments above mortgage bills. "This sort of thing is what keeps bankers awake at night," Gumbinger says.

The development is rooted in the housing bust. When home prices turned south--falling roughly 30 percent from their peak in the second quarter of 2006--a great deal of borrowers watched the value of their homes drop below what they owed on their mortgages. Today, roughly one in four homeowners finds himself in this position, which is also known as being "underwater." Without equity in their homes, such borrowers are more likely to default. "They don't see any value in putting money into an asset that has lost that much value and will probably never regain that value to offset the mortgages," says Celia Chen, of Moody's Economy.com.

But while walking away from a mortgage--even, at times, when borrowers can afford it--has become a less radical prospect, remaining current on a credit card has grown increasingly important for many Americans. First, credit cards can be used to pay for basic necessities, like food, gas, or clothes. And with the unemployment rate remaining near double digits, purchasing such items with credit has become more and more essential. At the same time, the tighter credit environment has made credit cards more difficult to obtain, Becker says, so consumers have become increasingly concerned with hanging on to the cards that they have. "It is hard to operate in our society without a credit card today," Gumbinger says.

Still, another key factor is the disparate consequences associated with defaulting on a mortgage versus those for falling behind on a credit card. National anti-foreclosure efforts have worked to significantly extend the time period between a borrower's initial mortgage default notice and the foreclosure itself, says Edward Pinto, a former chief credit officer at Fannie Mae. "The last thing you have to worry about at this juncture is paying your mortgage because by the time they foreclose it could be six months, 12 months, or a year and a half down the road," Pinto said. A credit card, however, can disappear much quicker, Becker says. "If you go a couple months without paying your credit card bill, they are going to close your account," he says. "You won't be able to access your credit.

A credit card's ability to finance basic necessities--and the swift consequences of default--make the trends highlighted in the TransUnion study less startling, especially in a time of high unemployment and widespread negative equity. "For a borrower who has got a significant [cash] shortfall, it is a completely rational decision [to pay off a credit card bill while defaulting on a mortgage]," Gumbinger says.

Do you agree with what Gumbinger says in his final quote? Is that a rational decision? Are credit cards a factor that contribute to people defaulting on their homes? What is more important to pay from your point of view?

Technology Marches On - The Declining Publishing Industry

Right, I keep forgetting about this thing. Here's what should be my seventh post. And here is an article on the declining magazine industry.

Technological progress is a game-changer. Much innovation consists not just gadgets, but the streamlining of an otherwise inefficient system. This is great for the consumer, and rather unfortunate for whoever just found themselves with a superfluous job. As industrial machinery progressed, fewer and fewer untrained laborers could produce more and more. Today the Internet provides a new paradigm, one that increasingly renders traditional print sources obsolete. What's more, the prominent news sources are often more likely to receive online readership than the local ones. As such, we have seen traditional print media suffering as newspaper and magazine readers turn to their computers.

As much as I'd like to see the trash that is the average popular magazine disappear, it's more likely that many will succeed in changing their format. It will be some time before print magazines entirely disappear, if ever, but technological progress is set to make them increasingly irrelevant. Most notably, electronic paper. The next few generations of products such as the Amazon Kindle are likely to revolutionize the publishing industry.

What do you think of the economic incentives and disincentives of this process? What other technologies do you think will transform traditional business practices in the foreseeable future?

Unconvential Giving

An article in today's New York Times discusses an unconvential way that a group of people are making charitable contributions. (http://www.nytimes.com/2010/02/09/nyregion/09bigcity.html?hp)

Ms. Martin ...a Brooklyn-based writer who, five years ago, was shocked to find herself in possession of a six-figure book advance. She wanted to give a chunk of it away, but was not sure how. So she decided she would make it someone else’s problem — nine other people’s problems. She chose nine thoughtful friends, gave them each $100, and told them they would be expected to account for what they had done with it at a gathering a month later. 

Heart-warming high jinks have ensued ever since. Saturday night marked the fourth annual dance-crazed celebration of what Ms. Martin calls the Secret Society for Creative Philanthropy. Since that first year, Ms. Martin has been joined by several other small-time philanthropists, who bestow multiples of $100 on admired acquaintances. This year 16 inductees committed creative acts of kindness, some of them kooky, most of them thoughtful. 

Someone is publishing the writing of New York students in a nonprofit literacy program. Someone else bought a video camera for a public high school in Canarsie, Brooklyn. One recipient, who runs a Web site to encourage female writers, decided to give the money to the most frequent commenter on the site, who turned out to be a former correction officer with dreams of a life in the arts. Several people doubled down by donating $100 of their own money, part of the ripple effect that so often gives small, charmed gestures reach beyond their scope. (The ripples go as far as San Francisco and Athens, Ga., where others have started their own chapters of the Secret Society.)

As the article readily admits, this may not be a particularly effective means of charity, but it appealed to me nonetheless. It seems like this would make making charitable contributions a more interactive and thoughtful process.

Real Unemployment 18% - Will Stocks Falter?

The Bureau of Labor Statistics (BLS) has reported that real unemployment is 18%. This percentage includes other forms of unemployment that are not typically included in the regular unemployment statistics. The descriptions of the various types of unemployed workers are as follows:

U-3 is the 'official' unemployment rate and illustrates total unemployed persons as a percentage of the civilian labor force.
U-4 is another category that includes unemployed workers plus discouraged workers. A discouraged worker is someone who's available to work but has stopped actively seeking for work.
U-5 unemployment includes the number of unemployed workers, plus discouraged workers, plus marginally attached workers. A marginally attached worker is someone who is able and willing to work but is not actively seeking work.
U-6 is as close to the real unemployment figure as government reporting gets. This number includes unemployed workers, plus discouraged workers, plus marginally attached workers, plus workers that are forced to work part-time because they are not able to find a full-time job. Put another way, it's the most realistic picture of today's job market as any.

finance.yahoo.com/news/Real-Unemployment-18-Will-etfguide-45329818.html?x=0&.v=1

Europe Facing A Long Debt Grind?

As the United States is going through a rough time, the same can be said for Europe. Greece's efforts to restore confidence in its finances have only called attention to its problems, and now investors believe the debt problem could spread to other countries, starting with similarly troubled Portugal, but with markets wondering who is next. Some experts believe a bailout may be needed to prevent a continental disaster - but European Union leaders are resisting the idea, because they believe going to the International Monetary Fund would be a humiliating step they're unlikely to take. More and more people are predicting a less dramatic, but potentially more detrimental, outcome, which would include a years-long grind of fiscal pain that neither plunges Greece into default nor restores its finances up to par. As it continues to deny the possibility of a bailout, the EU has been desperately voicing its confidence in Greece's ability to contain spending and pay down debt in the hopes that investors will give the country a break and stop betting on its fiscal downfall. As stated by the article at news.yahoo.com:

"A number of investors now appear inclined to think the politicians will go to any length to avoid the humiliation of a member state going bust or being bailed out, by the EU or by the IMF.

The result may leave Greece and other debt-plagued countries in the 16-member euro zone in limbo — without the boost of a bailout or the catastrophe of a default, but stuck for years in an uphill struggle to gets its finances straight that will mean lower salaries for many workers, especially those in public jobs, plus higher interest rates and less chance that governments can spend to stimulate their economies.

David Jones, chief market strategist at IG Markets in London, believes that after last week's sharp sell-off in equities, when markets were evaluating the risk of default and the possibility of contagion across the eurozone, investors are now turning to the view that the debt crisis will become a long-term burden — both for Greece and the wider eurozone."

So my question to you is, should the European Union go to the International Monetary Fund to receive bailout money? If not, what alternative action do you believe they should take?

A new tax in America?

As I'm sure everyone is aware the United States government's budget deficit has been growing and is now at $1.6 Trillion. The office of Management and budget claims that the deficit will decrease to $1 Trillion by 2020, and that's on the optimistic side. This amount of debt is unsustainable, huge amounts of money will go towards paying interest. according to CNN.com,
One dollar in seven will wind up paying interest on the debt, which will scare away overseas capital. "Foreign investors could dump our debt, causing a fiscal crisis and a disastrous rise in interest rates," says Brian Riedl, an economist at the conservative Heritage Foundation.
The main problem is that money was spent faster than it was made. This is what caused a lot of individuals to go it to bankruptcy. They spent more money on credit cards or mortgages than they made in income. The government has done the same thing, over the past two administrations it has increased spending while lowering taxes. Recently it has had to spent even more money to bail out those same people who made the same mistake of over spending. So who will bail out the government?
According to the CNN article if the government continues to spend this much money it will need to raise taxes, "erasing the deficit would require a 44% increase in income tax revenues to cover that $1 trillion deficit." That amount of a tax raise would be impossible to make work. Instead the article says that a Value-Added Tax (VAT) will have to be imposed. A VAT is a tax that is collected during the stages of a products manufacture. Part of the cost would then be passed along to the consumer in the final price of the product. This is a more efficient way for the government to raise money because companies just write them checks directly. It would require an estimated 7% price increase on all products we consume to cut the deficit.
This idea is not a popular one in America, because low income families pay a higher percentage of their income towards it, and because it copies the socialist governments of Europe. In fact this idea is very popular and widely used in Europe. It has allowed for government spending to grow so much.
While this idea is unpopular and would result in a huge fight in the government, the author of the article thinks it is going to be the only viable option. The only other two options are a huge growth in the economy, or a drastic cut in government spending.
What are your thoughts on the deficit and on a Value-Added Tax? How would this kind of tax effect the market? What about dead-weight loss?

Decreasing the National Debt

This article in The New York Times (http://www.nytimes.com/2010/02/07/weekinreview/07calmes.html?ref=weekinreview) suggests just how dificult it is going to be to decrease the national debt.

To illustrate the scale of the problem, consider the impact on the deficit of some of the most consistently popular ideas from would-be budget cutters on the left and the right, and a few even more improbable proposals as well.

Think foreign aid is a waste? If you erase every dime, you’d cut the deficit ... by 3 percent. Abolish welfare payments? You will have cut even less of the deficit. Stop spending on Afghanistan and Iraq? You’d still be more than $1 trillion in the red.

The biggest and fastest-growing share of the budget still goes for mandatory entitlement programs — Medicare, Medicaid and Social Security — that no elected official wants to cut, and for interest payments on the debt, which they cannot cut without inviting a default.

What if you kept just the entitlement programs and got rid of everything else? You’d have a modest surplus — about $109 billion. But there would be no one left to mail the benefit checks.

Colleges Cutting Back

I came across an interesting Time article that listed various colleges and strategies they are implementing to cut costs: http://www.time.com/time/printout/0,8816,1921613,00.html .

This really made me think of how easy it can be to cut costs.

For example: PITZER COLLEGE will keep $80,000 by power-washing sidewalks and windows once, instead of twice, annually.

For as little of a loss as that is, $80,000 is a huge amount of money that could be put towards scholarship money.

Solutions such as this seem much better than saving money by cutting courses or academic programs.

One particular "solution", however, didn't seem worth it: BRYN MAWR COLLEGE saved $900 when its women's swim team held a virtual meet against nearby Dickinson; each team's swimmers raced in their home pool, and then they compared times to declare winners.

I would much rather see cuts like the one at Carleton College, where the administration cut four times that amount by skipping the shrimp and wine at faculty parties.

Were there any particular cuts that you found interesting? How about any you found unnecessary, or any you thought went too far?

BUSINESSES don’t let 13-year-olds pay for purchases with a promise. At least they didn’t before last week.

Sites like FooPets let minors buy virtual merchandise like pet food if they agree to pay later.

A new payment option for anyone without a credit card or a debit card, no matter how young, has just become available. It’s initially offered by FooPets and Puzzle Pirates, online game companies that are business partners of Kwedit.com, a start-up based in Mountain View, Calif.

Minors as well as adults can buy items in the games with a “Kwedit Promise,” which can be paid off later in a number of ways — with a credit or debit card, for example, or with cash sent in a mailer that Kwedit supplies.

(http://www.nytimes.com/2010/02/07/business/07digi.html?ref=business)

This article initially took me aback - the idea seemed like an easy way to get into debt. However, the article goes on to make an interesting point - that such a system (Kwedit starts out with a very low "Kwedit limit" that increases as the balance is successfully repaid) is a way to become familiar with credit early.

Marketing In A Weak Economy

The recession has made it especially difficult for retailers to sell their products and made consumers less eager to open up their wallets. In recent research by advertising agency Leo Burnett Worldwide it shows that 80% to 90% of people are willing to trade off or trade down when it comes to shopping. Companies such as Campbell Soup, Newell Rubbermaid, Johnson & Johnson are using marketing techniques that appeal to their target audience such as family and staying at home, as well as keeping up with their audience, private labels and consumer high anxiety.

www.forbes.com/2010/02/04/marketing-brand-strategy-entrepreneurs-sales-marketing-wharton.html?boxes=Homepagechannels

Labor Market Shows Signs of New Birth

The worst job market in at least a quarter century is finally improving. The unemployment rate unexpectedly dipped to 9.7% in January, from 10% in December. In January manufacturing jobs added 11,000 jobs, 52,000 temporary workers, and average wages increased modestly, amplifying the view that commercial activity is reawakening after two years if hibernation.

“The economy is continuing to improve,” said John E. Silvia, chief economist at Wells Fargo in Charlotte, N.C. “You don’t have a boom, but you have an economic recovery. It’s a positive sign.”

The Labor Department has discovered that the unemployment rate was far worse than what it was previously assumed. However, the Obama administration admits that they made a mistake by implementing the $787 billion stimulus package. The administration has assumed that without the stimulus the unemployment rate would have topped out at 8.9% by the end of the year, considerably below the 10.1% rate reached in October.

The economy is making a positive progression, slowly but surely.

www.nytimes.com/2010/02/06/business/economy/06jobs.html?ref=global

U.S. Olympic Commitee on a slippery slope

With the Olympic Winter Games coming up soon, I found an article relating to their financing rather interesting. The United States Olympic Committee is a nonprofit group that finances and supports the U.S.A.'s Olympic teams. The U.S.A. is one of the few countries that does not give government financing to its Olympic program. Most of the U.S. committee's money comes from the International Olympic committee. The United States' committee receives almost as much funding from the International committee as all the other world countries combined. This has angered many of the other countries and the budget is scheduled for a renegotiation in 2013. I can understand why other countries would be angry about the apparent favoritism of the United States. However, on closer inspection of where the International Committee makes its money, it is understandable. Most of the money that the International Olympic Committee raises comes from the sale of T.V. broadcasting rights. U.S. television companies contribute over half of that money. Other support is from corruptions, many are U.S. based. So it seems more fair that the International committee then supports the U.S. committee the most.
For more information I suggest you check out this cool graphic.
Even with the support it receives from the International Committee the U.S. Olympic committee has been having difficulty with finding enough money to support its programs and athletes. Many of its corporate sponsors, like Home Depot and General Motors, have dropped funding. Leaving others to pick up the slack. 'News Anchor' Stephan Colbert has had a widely viewed campaign to raise money in donations for the U.S. Winter Olympic teams. Although his methods are unconventional, his goals are commendable and his antics are hilarious.
Do you agree with other countries that the U.S. receives too much funding from the International Committee? Or do you think that it's fair because U.S. companies provide most of the funding for the International Committee? Should the U.S.A. government directly fund the Olympics program?

Debt, Greece, and the bumpy road toward a unified European economy

Caleb posted another article on this subject several days ago, but I thought I'd bring it up too as I took Professor Elman's European Institutions course last quarter and feel like adding some context.

Going back to that first day of class where we learned the Principals of Economics, a massive portion of the process of European integration is proof-positive that actors respond to incentives, especially economic ones. The EU and its predecessor institutions were built off two desires: mutual security and economic growth. The European Coal and Steel Community (ECSC) was founded shortly after the Second World War with these goals in mind. By bringing France and Germany together in an economic union, they had all the more impetus to lay aside their long-standing differences and stand together. Economic interaction without significant political interaction is quite possible, but political interaction without economic interaction is without a solid foundation.

The political integration process has always been driven predominately by economic self-interest. The European states have realized that it is often in the best interest of their economic futures to work together. This isn't universally true, of course: Great Britain, for example, continues to vehemently resist the adoption of the Euro or the opening of borders to their island. Short-sighted self interest is a significant roadblock on the path to integration, but so are the economic problems currently experienced by Greece, as well as the former Soviet Bloc countries. The founding members are feeling no small trepidation at being somewhat obligated to help these struggling economies with their relatively stronger ones. Like Britain with its mighty Pound sterling, they are reluctant to strain their own economies to aid the weaker member states.

Yet, despite the short-term incentives to ignore them, the long-term incentives (both economic and political) seem to have kept them to their word. Despite the difference in relative power and one-sidedness of their economic exchange, the strong European states seem set to weather the storm alongside their weaker brethren.

I'm not terribly sure where I'm going with this, discussion-wise, but the interplay between the political and economic arenas is interesting. What is needed to make actors look beyond the immediate costs and benefits of something to the long term? Why can the once volatile European states make sacrifices for long-term gains, while the competitive American financial corporations were all willfully blind to the dangers of their practices to the long-term detriment of all?

GM's Detroit Incentives

General Motors announced on Friday that it keep it's 5000 workers at the GM Renaissance center in down town Detroit. The company had been considering moving it's workers out to the surrounding area for some time but ultimately decided against it. Far from being a decision to benefit the city, the decision was all business. The move would have cost tens of millions of dollars. Apart from that the city and state governments offered huge incentive packages to the company to stay where it was. Last year the state approved $50 million dollars in incentives for GM to keep just 2000 workers. Detroit Mayor Dave Bing worked hard to negotiate with GM officials and was very pleased with the new decision.
The "decision by GM is great news for the city of Detroit," Mayor Dave Bing said in a statement. "Retaining jobs is a top priority of my administration, and I appreciate their commitment to the city."

Bing, along with Detroit's Down Town Development Authority have somewhat agreed to provide $21 million dollars over seven years to keep GM jobs in Detroit. While the article did not say what type of incentives I have to imagine that they are mostly tax breaks. This story illustrates one of the fundamental principles of economics, people respond to incentives. GM could hardly have turned down all the incentives in received and will receive to stay. However we also learned that incentives skew the market. Where will the government get all that money to give as incentives? I would hope that someone in the city government calculated the amount of money that GM would bring into the city, and to it's residents, and then calculated how much it could afford to give to GM in incentives to still come out ahead. That seems like a good job for an economist. Do you think that these incentives are beneficial or should the invisible hand be allowed to do it's work?

Yesterday it was announced that the unemployment rate in January had fallen to 9.7%. Yet, according to a New York Times article, life doesn't automatically get better once a person finds a job. (http://www.nytimes.com/2010/02/06/us/06return.html?hp)

Interviews with more than a dozen people who were out of work at least a half-year during the recession and have now landed jobs found many adjusting to new realities. Some of the changes are self-imposed; others forced upon them. They include grappling with newfound insecurities and scaled-back budgets; reshaped priorities and broken relationships. In some ways, it is equivalent to the lingering symptoms of post-traumatic stress.

This is an interesting article because it shows that the effects of unelmplyment can remain even after one is employed again.

Inflating Social Security

If any of you happened to read the text book you will remember, and if you didn't I'll tell you, that chapter 17 was about the inflation rate or Consumer Price Index (CPI). Mankiw described the inflation rate as a good way to compare past amounts of money to today's money. For instance, did you know that "Gone With the Wind" was actually the top grossing movie in American History, way above "Titanic", when you adjust for inflation. While all of that was interesting, it left me wondering if there was a more important, current use for the CPI.
On that topic I found an opinion piece that was in response to someone slamming the Obama administration for not increasing social security this year by using the "excuse" of inflation. As the author explained, however, the President has no direct control over the increase in social security. He then goes on to tell a brief history of Social Security, starting with it's start in the 1930's. In the 1970's with rising prices becoming a real concern, the government amended social security to account for the effects of inflation. They used the Cost of Living Adjustment (COLA) index to measure inflation. The COLA is like the CPI in that they measure a fixed basket of goods and compare the change in prices over time. When the COLA increases, social security increases by that same amount. When COLA decreases, however, social security payments remain the same because of a law in the social security bill that forbid lowering payments due to decrease in inflation.
This system is run by a nonpartisan committee and has a lot of transparency, so there has never been any reports of abuse of the system. The issue is in how the COLA, or CPI for that matter, is calculated. Some people feel that the calculation system needs to be reformed. They state that health care is not as heavily weighted as it should be. Reforming the calculation system would be very difficult and a no win situation for politicians, according to Joe Hamilton:
If they enact a new inflation calculation that, intentionally or not, raises the level of inflation when placed beside the old calculation, it will appear that they are mismanaging the economy as a whole. If they enact a new calculation that lowers the inflation rate compared to the old calculation, those Americans expecting COLA increases won’t get them and will be even more infuriated
I think that that the current system based on inflation is a fair determinant of social security. Do you agree that it should be based on the CPI? What possible problems could come from just using CPI or COLA data? Also the issue that the letter was a response to was that social security will not increase this year because there was a 2.3% decline in COLA, yet many people feel that there should be an increase this year. What are you opinions on that?

The Worth of Direct Intervention, or: How the New Deal Overcame Countless Risks and Still Benefits Us Today

In the past few decades, opponents of government intervention have tried to force a reinterpretation of perhaps the best example of the utility of government intervention in an economy. Through a bit of argumentum ad infinitum, conservatives have put a blatantly false view of the New Deal. According to these laissez-faire purists, the New Deal served, in fact, to sharpen and lengthen the effects of the Great Depression, having no redeeming value. Of course, there was a good deal of criticism on the Left from those believing the program to not go far enough, but these tend not to misrepresent the content of the New Deal.

I stumbled across this article defending it, written by some random blogger. He unfortunately did not cite his sources, but if you've already made up your mind on the subject, you're probably not going to care too much. It's a horribly long, but interesting read. If you have the time and are looking to expand your knowledge on an era that is terribly relevant today, I encourage you to take a look. Otherwise, here is the main gist of the article:

"No dollar of government spending is wasted, if it does a job that nobody else was going to do and it builds something that lasts."

And to try to link it back to what we're doing in class, I'll bring up the whole inflation thing. Then, like now (if Wiki is to be trusted), the Depression included a dangerous amount of deflation. The measures taken by FDR were largely inflationary, infusing massive amounts of new money into the economy and taking the U.S. off the gold standard. Roosevelt also put money into banks to forestall closures, but the most enduring programs were those that employed millions of Americans in the construction of buildings and infrastructure that are still widely used today. If one goes by the Phillips curve, increasing employment does indeed have the effect of inflation. But we saw with the stagflation of the 1970s that this curve is far from always true.

So, any thoughts on inflation/deflation? Or perhaps the inaccurate Keynesian model versus the inaccurate Neoclassical model? Or maybe just the New Deal itself and reasons for/against a similar program today?

How Inflation Can Destroy Shareholder Value

MicKensey Quarterly has detected that the country's low interest rate and high government spending has played a huge role in stabilizing economies during the global recession. However, they now have companies, investors and policymakers on the lookout for inflation to come roaring back.

http://www.forbes.com/2010/02/04/inflation-danger-risk-leadership-governance-mckinsey.html?boxes=Homepagechannels

At first glance the effects of inflation on a company's ability to create value might seem negligible. After all, as long as managers can pass increased costs on to the customer, they can keep inflation from eroding shareholder value. Most managers believe that to achieve this goal, they need only ensure that earnings grow at the rate of inflation.

Yet a closer analysis reveals that to fend off inflation's value-destroying effects, earnings must grow much faster than inflation.For example in the mid 1970s to 1980s, U.S. companies managed to increase their earnings per share at a rate roughly equal to inflation around 10%. But according to their analysis, they would actually have to increase their earnings growth by around 20%.

We learned that the two most important macro variables are unemployment and inflation rate. This article talks about how inflation affects shareholder values and not customers. As I read this article I was confused because we learned that unemployment was the inverse of inflation, which means that people who are heavily impacted by high unemployment rates are not worried about inflation. Here it says that in order to prevent inflation, earnings must exceed inflation. This article was a little tricky to understand and connect to what I know about inflation and employment. I need some help guys.

Beef Bowl Economics

I came across an interesting article today on one of Japan's most serious problems: deflation. http://www.nytimes.com/2010/01/30/business/global/30deflation.html?pagewanted=1&sq=economics&st=cse&scp=6

There were several things in this article that struck me. notice the caption under the tiny picture on the left. It reads "Shokuan, which has vending machines but no table service, is an inexpensive place to eat."

I got to thinking about how businesses just keep trying to find more and more ways to cut costs. At Shokuan, the owners pay for a vending machine instead of paying a worker to serve food. At what point will business owners need to make a conscious decision to employ people rather than go with the impersonal yet inexpensive alternative?

Another thing that caught my attention (partially because my last post was on economics and happiness) was this quote:

"When you buy something cheap, you lower the value of your own life."

What do you think of this?

Another part in the article mentions that these lower prices are "good for households."

While deflation may help out households in certain areas, falling wages are also characteristic of deflation.

What are your thoughts on any of these points, or on the article in general?

Economic Recovery Not Translating to Jobs

According to Forbes.com the Labor Department reported a surprise increase in weekly unemployment. For the past three weeks their has been consecutive rise in unemployment. In the last week unemployment has risen to 480,000 , up from the prior weeks 472,000 and the week before 460,000. Large public companies like Walmart, Verizon, Home Depot, Warner Cable and Sony have cut thousands of jobs.

"Wal-Mart Stores ( WMT - news - people ), the largest employer in the U.S., said in January it would eliminate 11,200 jobs, including 10,000 workers at its Sam’s Club stores, and another 1,200 member-recruitment workers."

"As of last week, the Forbes.com Layoff Tracker counted 684,531 layoffs announced at America's 500 largest public companies since Nov. 1, 2008. (See “The Weekly Layoff Report: Verizon Cuts Thousands More.”

While they don't mention which states specifically these companies are cutting jobs in, it explicitly shows that unemployment is increasing in number as the weeks progress. Today we learned that the U.S. is at a 10% average unemployment rate with certain states having higher unemployment rates than others.

Is this country headed to a depression? If this pattern continues we could be headed to long-run fluctuation of unemployment. I wonder if the national average will take a steep jump or will it level back to 10% as a result of more people falling into the discouraged workers category.

www.forbes.com/2010/02/04/jobless-claims-unemployment-markets-equities-economy.html

Today in class we talked about how many cities are doing relatively well even in this economic climate. As I was reading the news today I came across this article (http://www.denverpost.com/news/ci_14303473#ixzz0ebfVXysx), which shows what other less fortunate cities are facing. In Colorado Springs, CO:

More than a third of the streetlights in Colorado Springs will go dark Monday. The police helicopters are for sale on the Internet. The city is dumping firefighting jobs, a vice team, burglary investigators, beat cops — dozens of police and fire positions will go unfilled.

The parks department removed trash cans last week, replacing them with signs urging users to pack out their own litter.

Neighbors are encouraged to bring their own lawn mowers to local green spaces, because parks workers will mow them only once every two weeks. If that.

Water cutbacks mean most parks will be dead, brown turf by July; the flower and fertilizer budget is zero.

City recreation centers, indoor and outdoor pools, and a handful of museums will close for good March 31 unless they find private funding to stay open. Buses no longer run on evenings and weekends. The city won't pay for any street paving, relying instead on a regional authority that can meet only about 10 percent of the need.

Keynes to Neoclassical to ???

Today we learned about the two most prominent models of macroeconomics and how they have both become moderately obsolete. The Keynesian model, though it held up for a number of decades, was proven to underestimate the impact of inflation. As the United States poured billions of dollars into the Vietnam War, the country was forced to send more and more money overeas and Nixon eventually severed the link between the dollar and gold imposed by the Bretton Woods system. This, in conjunction with the OPEC oil embargo in the early 70s (which was imposed over the West's aid to Israel), gave way to what has been termed stagflation. The Keynesian model seemed faulty and economists looked elsewhere. Neoclassicism, though it had been taught in universities for just as long as the theories of Keynes, finally came into vogue in the late 70s, aiding Ronald Reagan in his election.

Surprisingly, this was not all it was cracked up to be. Paul Krugman writes:

"traditionally, the U.S. government ran significant budget deficits only in times of war or economic emergency. Federal debt as a percentage of G.D.P. fell steadily from the end of World War II until 1980. But indebtedness began rising under Reagan; it fell again in the Clinton years, but resumed its rise under the Bush administration, leaving us ill prepared for the emergency now upon us"

This has much to do with lowered taxes.

From K's Economics 101

But back to the effects of neoclassical economic theory:

"We weren’t always a nation of big debts and low savings: in the 1970s Americans saved almost 10 percent of their income, slightly more than in the 1960s. It was only after the Reagan deregulation that thrift gradually disappeared from the American way of life, culminating in the near-zero savings rate that prevailed on the eve of the great crisis. Household debt was only 60 percent of income when Reagan took office, about the same as it was during the Kennedy administration. By 2007 it was up to 119 percent"

These rational neoclassical economists informed the government and consumers that debt was, in fact, a good thing. The more the better. And now here we are, with millions of Americans foreclosed upon for their inability to pay mortgages their banks told them would work for them. The best time for instituting change is when doing so won't destabilize the system. The easiest time to institute change is when the system is already evidently destabilized. Economically, where should we go from here? (disregarding that those who destabilized the system are stronger than ever and the American people are, at best, apathetic)

Good news, bad news

The good news is that productivity rose by 6.2% (seasonally adjusted) in the fourth quarter. The bad news is that unemployment is still rising. How is this possible? Firms are squeezing more productivity out of the workers that they already have and not hiring any more. Much of the gain was from the Manufacturing industry, which has been steadily increasing production.
The rise in productivity is really very good news. According to an article on Forbes.com, higher productivity raises living standards in the long run. Also productivity often increases at the end of a recession. Despite the good news, unemployment has continued to rise and that has caused concern from investors who worry about how long this recovery will take. Eventually the rise in productivity will be unsustainable without the increase of new workers.

"You can push your workers but so far," said Anika Khan, an economist at Wells Fargo ( WFC - news - people ) Securities. "At some point businesses have to begin to hire."

The real question is if productivity continues to rise, when will businesses begin to hire?
Wells Fargo expects that unemployment will peak in the second half of this year at 10.5%.
All of this looks promising, like a good sign that we are headed into the expansion period. Is this information better described by a NeoClassical view that the market will always reach equilibrium at maximum output, or does it support the Keynesian Model?

Economics and Happiness

In class on Tuesday, we talked a little about how accurate the GDP is in giving us an idea about our quality of life. For this blog post, I decided to look into the economics of happiness. Consider the results of a study done on how happy people of different countries reported themselves to be (Dark blue being the most happy, red being the most unhappy):

Now, here is a picture displaying nominal GDP per capita for 2008:

Do you notice any disparities between the two pictures? Clearly there are connections between nominal GDP and "happiness", but how do you think we could better measure quality of life? Here is an article on this topic to consider: http://www.yesmagazine.org/new-economy/the-economics-of-happiness

Detroit's Midtown to get new market in May

Good news for a small business in Detroit! The former Zaccaro’s Market in Detroit’s midtown will get new life in May when Ye Olde Butcher Shoppe opens in the same location.The former business closed after just a year in business which also had a reputation for high prices. However Ye Olde Butcher Shoppe will offer a different product mix that will suffice to customer's needs.

"We will mix high-end products with every day items,” he said. “Our prices will be no higher than a similar suburban store. They plan to hire 15 employees to run the market, which will be open seven days a week. They plan to start hiring in March.

There is still local businesses willing to plant a seed in Detroit as well as offer Detroiters job opportunities. Due to the failure of the auto companies, Detroit's economy has seemingly hindered the GDP in that it is not able to contribute as much to the overall U.S. economy. While this is just one small step in the restoration of the city I think it offers hope to the city.

www.freep.com/article/20100203/BUSINESS06/100203061/1019/Detroits-Midtown-to-get-new-market-in-May

Iditarod Faces Financial Trouble

The economy is taking a toll on many things – including the Iditarod. For the past 37 years, the challenging race has been run across Alaska. This year, however the race is facing financial troubles.

Its last remaining broadcast deal was not renewed, part of a $1 million decline in revenue as sponsors have also dropped out.
Accordingly, the prize purse shrank, and salaries and benefits for the race’s employees were reduced, said Stan Hooley, the race’s executive director.

In the New York Times article about the Iditarod’s financial plight (http://www.nytimes.com/2010/02/02/sports/02iditarod.html?em) four-time champion Jeff King is discussed. He donated $50,000 of his own money to the purse for the race. Explaining his motivation for such generosity:

“I’m not a rich man by any means,” King said. “But I think I’m one of the few people in the history of the race who has made more than they have spent racing, and I’m willing to give it back.”

King has made peace with the possibility that his rivals might go home with his money.
“I want them to continue to pay their bills,” he said, “so I can continue racing against them.”

Greece is out of the frying pan, into the fire

America is not the only country suffering from a deficit problems. A number of the countries in the E.U. are struggling to control there debt, Greece being the major concern. The E.U. has decided to support The Greek Government's plan to fix the deficit. The plan may includes wage freezes, higher retirement age, and higher gas taxes. One of the main worries by the E.U. is that if Greece goes bankrupt, it could start a domino effect with other debt racked European Countries. Worries about Greece's debt lowered the value of the Euro to a six-month low last week, according to the New York Times (http://www.nytimes.com/2010/02/04/business/global/04drachma.html?ref=business ).
So how bad is Greece's debt? According to the article Greece has a debt that is equal to 113% of it's GPD! Which means that Greece owes more money than all the Greeks spend in a financial quarter. I had a hard time try to find the U.S.A. national debt as a percentage of the GDP to compare. As of year ago it was around 80%, though it is probably higher now. Officials in Athens say they want to reduce the debt to 3% of the GPD by 2012. That seems to me to be an impossibly large decrease in dept in so short a time.

"Worse, a sudden and drastic upward revision of its deficit following a change of government last year exposed alarming deficiencies in Greece’s abilities produce reliable economic data."

Is comparing National debt a good use of the GPD? Given Greece's unreliable data, how much trust should be put in these numbers? And what do you think this debt problem means for Greece and for the E.U.?

The Final Frontier... of Privatization?

To take a break from the more critical articles I've posted, here's something a bit less controversial: the future of NASA. Obama has recently called for the end of several key features of the government-run space program, to save money, while calling for that money (and more) to instead go to private corporations willing to do the same jobs. The proposal assigns operations in low-earth orbit (LEO) to the private sector, while using NASA trained astronauts for the actual mission content. NASA will instead focus on the long-term goal of either returning to the moon or going to Mars.

I suppose many would question the use of government funding for space exploration in the first place, given the variety of other needs here on Earth. I fear I might be among these doubters, despite my strong belief in the necessity of space exploration. Unfortunately, this necessity is not quite as necessary as the elimination of poverty and the providing of proper education.

But perhaps more interesting to talk about than the mere feasibility of a government-run space program is whether the out-sourcing of these jobs to private corporations makes economic sense. I believe not, because space yet lacks that which we have found drives all private business: profit. Space travel is set to remain prohibitively expensive in the near future, putting a great damper on any real tourism. Though the presence of valuable resources has been theorized (Helium3 on the Moon, metals in the asteroid belt), these remain out of reach even for the most heavily-financed enterprise. As such, these private space companies will be forced to live off the occasional fancy of the mega-rich, as well as the government dole.

Any thoughts?

Lisbon 2020?

In March of 2000, the European Council met in Lisbon and commissioned the Lisbon Strategy, also known as the Lisbon Agenda or Lisbon Process. The goal of this agenda was to revitalize Europe's economy and "make Europe, by 2010, the most competitive and the most dynamic knowledge-based economy in the world."

I came across a NY Times article that addressed the Lisbon Agenda and how it...didn't exactly work out:

http://www.nytimes.com/2010/01/26/business/global/26inside.html?scp=1&sq=lisbon%202020&st=cse

This sentence sounded familiar: E.U. "The 2020 strategy, which is due to be adopted around midyear and is aimed at doubling Europe’s growth potential to a modest 2 percent a year." (Remember production possibilities frontiers? We could all draw the shifts that Europe wants to make).

The rest of the article plays into a lot of concepts we have been discussing in class, including GDP.

"...Their successors are pondering whether to try again, stop setting such ambitious goals or give their aspirations teeth by conferring new powers on the European Commission."

Considering what we discussed in class today (Tuesday).

1. What "teeth" could be given to the European Commission to try again to surpass the US's economy?

Uncle Sam Want's You...to Have a Job

15 million Americans are unemployed and currently seeking work. Unfortunately few companies want to hire therefore shifting the responsibility to the government. I think government intervention in the market is the best thing to do because things are obviously not working. President Obama has come up with a few imperfect tools for generating jobs:

1.) Add directly to the federal payroll by hiring permanent or contract workers.
2.) Direct money to states and local governments so that they can hire or at least avoid layoffs.
3.) Direct money to projects that need workers.
4.) Give tax credits to businesses that hire now.

His first initiative is to go after private sectors (The part of a nation's economy which is not controlled by the government.) It is Obama's intent that with tax breaks that private employers will do the hiring. However, if this goes wrong the government will have to add to the federal payroll.

“We have to help stoke the private-sector engine of job growth,” said Jared Bernstein, chief economist in the vice president’s office, speaking for the administration. “Government cannot by itself create the employment necessary to fully offset the millions of jobs lost. What we can do is help to create the conditions fertile for robust hiring by the private sector.”

Mr. Obama has some other options. He could channel money to state and municipal governments with the proviso that it be used to subsidize the wages and benefits of police officers, teachers, sewer workers, engineers and others who have been furloughed or soon will be.

I assume that due to the nature of private sectors that they are more capable of offering jobs so I'm for this idea because I think that it is most likely to work. Obama has a few ideas on how to open up the job market but which will he choose is still up in the air. What are your thoughts on President Obama's decision to restore the job market?

www.nytimes.com/2010/01/31/weekinreview/31uchitelle.html?ref=economy

The GDP and the Stock Market

Today in class we discussed the GDP (Gross Domestic Product) and how it is calculated. Four times a year some group of economists and mathematicians get together and calculate the GDP and then publish it. Last Friday they released the report which said that the GDP was up by 5.7%. So the GDP is just a number that measures the well being of the economy, it doesn't actually effect the economy, right?
I read an article in the New York Times about the closing of the stock market at the end of January. It said that overall the market was down and listed a number of reasons. However, it also said that there had been an initial rise after the release of the positive GDP report reassured investors' faith in the economy. Then stocks drooped again as investors took a closer look at the GDP report and saw that most of the growth was from firms restocking their inventories.

''The GDP report looks shiny and new on the surface,'' said Alan Gayle, senior investment strategist for RidgeWorth Investments. ''But once you open up the hood, you start to see it's not as great as on the outside.''

These uncertainties caused stocks to drop again. The expectations of Investors based off the GDP report affected prices. As we learned about earlier expectations affect both producers and consumers. But I had no idea that people would base their expectations off the GDP. Without getting to far into the mechanics of the stock market, is it reasonable of investors to base their expectations on the GDP? After all that we learned about the GDP in class, what are the advantages and disadvantages in using this number in our financial markets?

Funding for Science

President Obama announced his budget and it includes a lot of funding for new scientific research. From a New York Times article (http://www.nytimes.com/2010/02/02/science/02nih.html?hpw):

the budget request for the Department of Health and Human Services was $81.3 billion, up from $79.6 billion a year ago. And the National Institutes of Health saw its budget request rise by $1 billion, to $32 billion, more than was requested last year.

In other science-related budget requests, the National Science Foundation would get $7.4 billion, a nearly 8 percent increase from the budget last year.

The article goes on to say that scientists had feared that the increased spending on fixing the economy would have negatively impacted the spending on scientific research. 

Stiglitz: Obama's Falling Down on the Job

Joseph Stiglitz recently published an article in the New York Daily News, giving some credit to the President's handling of the economy, but remaining highly critical.

He cites three main failings:

1. "They underestimated the severity of the downturn. As a result, the stimulus program was too small"
   
2. "The mortgage restructuring program was not well-designed: It allowed no write-down of principal, so it did little about the one quarter of mortgages where homeowners owe more than the value of their house"
3. "The bank bailouts didn't do what they were supposed to: restart lending... while 140 smaller banks were allowed to fail, billions were poured into the big banks, who poured much of the money out in dividends and bonuses."

What we talked about in class today was very relevant to this and other posts I have made the past few days. The government continues to go through the subsidiary of the private financial institutions to reinvest in the economy, yet the these institutions have yet to do so. Meanwhile, firms are unable to hire new employees, who are then unable to purchase goods, or even pay off the debts they owe. To some extent, channeling government money to direct loans to reinvigorate businesses looking to expand the scope of their enterprise (specifically: jobs) would undercut the bailout money already provided to the banks with the same goal. However, as we have just given the bailout money with little stipulation as to its use, the banks don't seem about to act anyway.

I believe that most of you (liberal, conservative, and libertarian alike) would agree that continued government grants to the financial giants is ultimately self-destructive, given our spiraling national debt and the irresponsibility of the private institutions. In my last post, Evan argued for government investment in small banks, given "careful auditing" (which I interpret as ensuring it not go to massive bonuses or executive comfort), would let the profit motive will drive the most efficient use of money in the quickest amount of time. Though I moderately support the expansion of the SBA, at least in conjunction with support to small banks, I have significant doubts that small banks would act much differently lending-wise than the bigger, more secure banks.

What does the expanded circular flow model mean in regard to the recession and the stimulus? If we rely on the financial institutions to be the kick start to the economy, and they refrain from doing so, where do we go next?

CBS sells out last of Super Bowl ads

With the Super-bowl around the corner, many people across the world are ready to hang out with friends and watch the game. Who am I kidding, people are ready for the commercials during the Superbowl. USA Today states that CBS sold their last 30-second spot for a commercial. This is six days before the actual game which is much better than last year.

CBS said the final spot for the NFL championship game, one of the most watched TV events in the U.S., sold Monday morning, six days before kickoff.

That's a few days ahead of schedule. Last year, NBC still had two 30-second spots remaining two days before the game as the economy was mired in a recession, and announced only on the eve of the game that it sold out a total 69 spots.

The prices for the 30-spots topped at 3 million a piece which I feel is quite expensive. I think that this article shows two things-

1) This may be a sign that the economy is getting better, considering how fast the time slots were able to sell.

2) This shows the power of the people in a free market.

The Price of A Healthy Diet

The other day I was talking to a good friend of mine about food, when a touchy subject came up. I said something about how I really only like whole wheat bread and without knowing it I had struck an emotional nerve. My friend started ranting about how there is no affordable whole wheat bread and how poor people cannot afford it and how they are stuck with wonderbread. Although this was something that in the back of my head I was aware of I realized that my access to fresh and nutritional food is just another thing that I take for granted in my life. The way our economy is set up mass produced food is cheaper than fresh ingredients. The more shelf-stable a good is generally the less it costs and generally the less nutritionally rich it is. An article in the Washington Post described why poorer people have more difficulties gaining access to fresh food.

Calorie for calorie, junk foods not only cost less than fruits and vegetables, but junk food prices also are less likely to rise as a result of inflation. The findings, reported in the current issue of the Journal of the American Dietetic Association, may help explain why the highest rates of obesity are seen among people in lower-income groups.

http://well.blogs.nytimes.com/2007/12/05/a-high-price-for-healthy-food/

With many families and persons facing a time of economic hardship cutting back of the weekly grocery bill may be the first step to change overall spending habits. When it comes down to eating cheap, unhealthy food or no food at all, of course people are going to choose to eat. However it is exactly this unhealthy eating that in the long run leaves Americans prone to disease and the need for healthcare, only in this day and age access to adequate healthcare is also up in the air.

"People are eating cheaper, more fattening foods; care is more difficult to find; and as a result we're going to have more and more people presenting at a later stage of the disease process," says Roslin. "If you're concerned about paying your rent and making ends meet, it's very hard to think about the future implications of diabetes and other illnesses."

http://www.newsweek.com/id/194980

Now I know that many of you may be sick of me harping about farm subsidies, but the reason why unhealthy food is cheaper than vegetables stems from the subsidies. Cheap corn is processed into cheap additives and calorie dense foods that appear in almost all processed products. Without subsidized corn we would not have the food industry's favorite high fructose corn syrup hidden in so many things. If we subsidized the growing of vegetables and the processing of whole grains then more Americans could afford to buy that whole grain bread that their doctors are saying is good for their heart instead of chowing down on cheap alternatives and crossing their fingers that later down the road all will be well.

The Plight of Small Businesses

The President stopped in Tampa, Florida in late January to give a speech and converse with citizens, the full-text of which can be found here

The majority of this is irrelevant, but someone online pointed out an interesting exchange between the President and a small business owner:

Q: My name is Steve Gordon. I'm from Clearwater. And I manufacture -- I own a small company, environmental company. I manufacture the Instant-Off water-saving device that fits on any faucet worldwide. I'm frustrated because I can create 500 jobs; I've gone to the banks, I can't get a loan. And I speak for all businesses in the United States. (Applause.) We are tired of dealing with banks. And I don't understand -- and this is my question for you, is that I know you care, I know you're trying. And I appreciate the pledge of $30 billion to small businesses. But lending it to the banks to lend to us is not the answer. It's just not.

What I suggest, and the question is, why can't you use the SBA just like you lent directly to Wall Street, you lent directly to the automakers, you lent directly to the banks -- why can't the government make small businesses available directly to us? (Applause.)

President Obama: [after his first response about success he sees so far, and an acknowledgement that Mr. Gordon may not see it as enough, the President continues] Keep in mind, a small business loan of any sort, or a large business loan of any sort requires some sense of, all right, what's the business plan, what are your projected earnings, et cetera, et cetera. And somebody has got to do that. Now, if the SBA were to suddenly take over that entire function we'd have to stand up a massive bureaucracy -- a huge one. And we'd have to train all those people and it would take too long, and you'd be frustrated -- why is it that this big government agency can't seem to run anything?

So what we've decided to do instead is to take $30 billion that was repaid by the banks and make that available under criteria that will encourage small banks to give those loans to you. And if we do that effectively, we can potentially get that money out the door more quickly.

Clearly, Obama is exactly the Socialist-bogeyman the Right has made him out to be, up there alongside the likes of Ronald Reagan, a notorious Communist-sympathizer.

I do understand where he's coming from. An expansion of the duties of the SBA, or any other government agency, would take time and money to set up. Obama believes that private enterprise, given government money with "encouragement" to lend, can respond more quickly and more efficiently. However, this ignores the role many of these very same enterprises had in the crisis, as well as the significant absence of reinvestment in the economy with the money received thus far.

I would argue that it could be useful to allocate at least some of the $30 billion to expand the scope of the SBA, to directly lend money to promising small businesses. This could run the danger of undercutting local banks, but something needs to change. As we've learned in class, the market's main characteristic is efficiency, efficiency of profitable return. A less profit-focused government agency might make funds available to proposals that are less efficient from a profit sense, but useful for the economy as a while and other reasons.

There is an immense interplay between government, banks, and business owners. What role do you believe is most appropriate and helpful for each actor? What are your thoughts in general?