Myths of the Budget Deficit

This article does a very nice job summarizing the key points we talked about Thursday.

1. Cuts to programs (or taxes increases) today will have a small impact on the long-run budget deficit and will likely do more harm than good in terms of economic growth.
2. Drastic changes need to be made to Medicare and Social Security.
3. Interest rates will increase drastically by 2020.
4. The elderly get more out of the system than they paid in (longer life expectancies and higher health care costs).

Simple solutions, raise the retirement age for both Medicare and Social Security and index it to life expectancy, increase copays for Medicare recipients, and index Social Security to a cost of living index that more accurately reflects the cost of living.

I'll emphasize again the deficit is being played up as a Democrat vs. Republican debate, truth be told they are both failing in their attempts to control the long-run national debt. The reality comes down to the people. Most American's are uninformed over the national debt and don't want to pay the costs associated with cuts in Social Security or Medicare. Right now 20% of our population is over 65 and another 20% is between the ages of 50-65. This suggests that more than 40% of our population will be against these cuts.  This is not a party argument. I'm highly skeptical the Republicans or Democrats want to challenge the entitlement programs.

GDP Growth in the Fourth Quarter 2010

The numbers for real GDP were posted on Friday. The numbers are seasonally adjusted to control for the typical bump in the holiday season. The economy grew at an annual rate of 3.2%.

The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, and nonresidential fixed investment that were partly offset by a negative contribution from private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased.

This is a good sign, the economy is growing (although we would like it to be faster). Perhaps most important is the increase came through consumption, investment, and exports (not government spending). Here is a link to a table that shows us the extent to which consumption, investment, government, and net exports contributed to economic growth. It seems households have increased spending. Looking at the table we need to note:
1) Consumption on durable goods played a key role. Remember this are large ticket items that households normally cut back on when they fear a downturn.
2) Investment is negative, but fixed investment (buying capital equipment) increased.
3) Inventories are negative, but still a good sign for the economy. A decline in inventories implies either (1) firms underestimated demand or (2) had a build up they needed to sell off. If (1) is true then we should see an increase in production to keep off 2011. If (2) is true, then we only hope firms have sold off all their inventories.
4) With the increase in consumption and a decline in inventories many economists are expecting a strong recovery in 2011. If households keep spending, firms have to start producing.
5) Net exports are improving. This will help to close the trade imbalance, and further evidence that a depreciation in the dollar is helping U.S. production.

Overall, this is a good sign. Others are still hoping for more. Here's a piece by Paul Krugman. He's absolutely right, an economy needs to grow at approximately 2.5% to keep from losing more jobs. If we maintain a growth rate of 3.2% it will take nearly 7 years to get back to potential. Right now we are still $1 trillion short of where we should be. Since inventories are playing a large role keeping GDP growth down, I'm not worried about the 3.2%. If households maintain the same level of spending next quarter inventories will stabilize and we could see growth over 4%.

Posting on the Blog

I want to remind everyone when posting on the blog to treat everyone with respect (no name calling or degrading comments about other view points). I encourage open dialogue and civil debate. Not everyone is going to agree with each other or with me. I don't want everyone to agree with me, but I want everyone to be able to articulate their argument and be respectful of others.

Resorting to name calling in response to a post is immature and disrespectful. Any posts that I deem disrespectful will be deleted and noted.

99% of the posts have been great! I love seeing the different responses and views, I'm impressed with the time and thought everyone has put into their posts. Keep up the good work.

State of Europe

Here's a good review of the European economies for those that are interested.

Corporate Social Responsibility

 As you begin your studies at Gonzaga, in the business school you will encounter a lot of discussion over the corporate social responsibility of business. Milton Friedman, a Noble Prize winning economist, is famous (or infamous for some) for the following quote:

The social responsibility of business is to increase profits.

 The Economist surveyed people across the global and here's what they found.

If Washington were a country who would we be?

The Economist put together a map of the United States comparing states to other countries by GDP and population.

More on Gas Prices

When gas prices increase we consume less oil. The law of demand holds. I've said this before, by being dependent on oil (domestic or foreign oil) we will leave our economy exposed to sudden shocks in oil prices. The solution, decrease the quantity demanded of oil. How? By raising prices.  Higher gas prices, means less oil consumed as households buy more fuel efficient vehicles and creates the incentive for firms to develop new energy technologies.

Can you solve the budget deficits

Last night we heard President Obama talk about fixing the government deficit. He focused on freezing all discretionary government spending for five years. This sounds great, unfortunately discretionary spending only amounts to 12% of the entire budget. This will hardly dent the long-run budget concerns. We need to change social security and medicare. I know elderly citizens are entitled to these programs, but most of them paid into the programs when life expectancies were a lot lower and health care prices much cheaper. We need to pin retirement age to life expectancies. As life expectancies increase, retirement age increases.


Think you can solve the government's budget deficit. Give it a try by going here.

Notice the biggest saving comes from increasing medicare and social security age and by removing the tax benefits employers receive by providing employees health care.

Sidebar: Have you ever wondered why employers provide health care? Well they can offer you health care and it comes tax free. Why not give workers the income they have earned and let them decide which health care program best suits their needs. It would save $150 billion over the next 20 years.

Here's my budget fix. 

What Happened to 15 Million Jobs (Globalization and Technology)

I thought this was a very good read (although a bit long). Notice the focus on jobs starts in 2000 (not 2007).

Yes, we've had a lost decade when it comes to unemployment. The housing bubble temporarily masked the losses in employment.

State of the Union

Jobs, jobs, and more jobs! This is the focus of the upcoming SOTU speech. It's good to see President Obama move to the center, it's the only hope we have getting future deficits under control.

The economy is slowly improving, both Washington State and Spokane reported an increase in employment. The state of Washington had a gain of 8,000 jobs, this is the first gain in more than two years. Spokane County reported a gain of 2,000 jobs. Small gains, but nonetheless, it's a start.

Social Security, Medicare, Interest Payments

I've mentioned in an earlier post approximately 2/3 of all government spending goes to social security, interest, medicare, and defense. Here's a look at the picture in 2020.

Gas Prices and the Economic Recovery

I often get asked my thoughts on the economic recovery. For the most part my answer has included gas prices. For the last three years I've stuck to the same story, we'll continue to slowly recover over the next 4-5 years. But this recovery will be conditional on stable gas prices. If gas prices start to increase drastically ($5/gallon) we will see household dial back consumption which would with near certainty erase any gains that we've made in employment.

Here is a nice article talking about rising gas prices.

With that said, what can be done about rising gas prices?

In the short run not much. We can try to entice OPEC into releasing more oil to the market, but this is very unlikely to happen. OPEC countries have been hurt by the declining value of the dollar (since oil is priced in terms of dollars).

In the long run there are plenty of options (now only if we thought about the long-run 20 years ago). We can certainly increase the supply of oil, but this will only increase our countries dependence on oil by keeping price relatively lower in the short-run. With the increase in oil demand from China and India the modest gains in oil supply will be trumped by added demand. This is not a stable long-run outcome. The United States does not have enough oil to support domestic demand. We will inevitably be a net importer of oil. An increase in supply might keep prices relatively low in 5-10 years, but still higher today (again new demand from China and India).

The solution to high oil prices is to increase oil prices today. Sounds weird, but hear me out. We cannot sustain our current level of oil consumption over the next 20 years. Offshore drilling is a temporary solution and does not make us energy independent (nearly everyone agrees with this). By keeping oil prices low we will remove any incentive private companies have to develop alternative fuel/energy options. By slowly raising gas prices and letting the free market work private companies we find alternative energies profitable. Alternative energies have high fixed costs and as long as oil prices remain low companies will not find these energies profitable.  We can increase oil prices through carbon taxes (yes taxes). By raising the price of oil (slowly) and using the proceeds to help pay off our national debt or offer them back to households in the form of tax credits will reduce our need for foreign oil without jeopardizing the economic recovery. 

Romer on the Deficit

Christine Romer previously served as the chairwoman on the Council of Economic Advisors to the President. Here are her remarks.

Some background info: the current national debt is approximately $12 trillion and projected to increase to $20 trillion by 2020. The deficit will continue to grow because of entitlement programs. As of today entitlement programs, military spending, and interest payments on the debt account for nearly 70% of government spending. If the government only spent money on social security, medicare, military, and interest payments we will never payoff the debt. The burden of medicare and social security are far too much for us to support. Retirees tend to argue they have paid into medicare and deserve coverage, unfortunately with the rising health care costs and expanded coverage current retirees will receive far more in medicare payments then they ever paid in. The point I'm making is straightforward, any attempt to reduce government deficits needs to start with medicare, social security, and military spending. Anyone discussing debt reduction without mentioning the medicare, social security, and military spending should not be taken seriously.

Health Care Debate and Government Deficits

Taking over the media coverage has been the Republicans desire to repeal Obamacare (Affordable Care Act). At the center of the debate is the impact ACA will have on long-run government deficits. Here are two vastly different perspectives on the debate (here and here).

China and the US

Why China Matters?

Given the current attention focusing the relationship between China and United States i thought this summary article would help people better understand the connection. We will spend considerable time discussing US, Chinese relations throughout the term.

The Federal Debt - The Ugly Truth

Here is an opinion piece on the United States' growing federal debt (sum of all annual deficits). It's not a pretty picture and unfortunately it seems that both Democrats and Republicans are unwilling to actually address the deficit.

As the debt continues to grow two things will make it easier to repay, higher growth in our country and a little bit of inflation. Inflation erodes the value of past debt. Unfortunately, we still need people willing to buy government bonds and unfortunately this is going to come at a cost. The U.S. already spends nearly $500 billion on annual interest rates payments servicing the debt. By some projections this could reach nearly $1 trillion by 2020 (or $3,333 per person per year).

It's not a pretty picture.

Hyperinflation

This article will give everyone a sense of a hyperinflationary period.

The one hundred trillion Zimbabwe dollar bill, which at 100 followed by 12 zeros is the highest denomination, now sells for $5, depending on its condition. That bill and others -- among them millions, billions and trillions, were abandoned nearly two years ago, when the American dollar became legal tender in the hopes of killing off the record inflation that caused all those zeros.

Inflation increases to 1.5% for December

Here is a report from CNN about the current inflation rate. The increase to 1.5% is important for a couple reason. First it shows signs of life, people are starting to buy stuff. Second, it might send a signal to the Federal Reserve it's time to start raising interest rates. The Federal Reserve has set short-term interest rates near 0% which resulted in mortgage, car, and student loan rates being at the lowest interest rates ever. As consumers start purchase more stuff the Federal Reserve will need to be careful not to let inflation creep over 2-3%.

Welcome EC 202 - Students

This is your blog. As I discussed in class, the blog participation will count in your course participation grade. My expectations for the blog is that everyone will do one/two posts per week. I good post should address the article or another students comment, be articulate and not just repeat what others have already said. You should shoot for a paragraph (5-7 sentences). If you want to do shorter posts then I would expect two posts per week.

There is not a due date for posts, the posts should be completed through out the semester, someone wanting full participation needs to post every week. I know grammar mistakes happen, but please take a minute to read over your post and correct any glaring mistakes (especially spelling errors since they get underlined).