How Washington F@$!# the Budget

CNN reviews the biggest f@#!$ up's that gave us our budget nightmare. The only one that I disagree with is the TARP program, the ultimate cost of the program was $19 billion (pennies compared to the Bush tax cut) but saved the economy from a potential depression. Money will spent. Republican or Democrat, everyone has to be discouraged with the policies passed during the Bush administration. Even today (evidence by extending the Bush tax cuts) both parties have not gotten the message. Both budgets (Ryan's and Obama's) are half hearted attempts of fixing the deficits. Here is an example why we need tax reform.

How Professors Really Feel

I love The Onion.

Pricing Strategies

A bit off topic, but I thought this was interesting.

Big Banks and Lending

Here is an article that fits nicely with our discussion on bank reserves and them not lending. Think about the money multiplier.

I'm Not Surprised

Economists don't like either debt reduction plans currently being proposed. Why? They don't target medicare, medicaid or they are unequitable.

Graph of the Century

Here's a great graph by Robert Shiller (here's the article). How in the world did with miss the housing bubble?

Key Economic Indicators

A slightly older article, but check out the two indicators listed under oldies but goodies. Why was the yield curve such a good predictor of future economic movements?

Where are the jobs

There are jobs available, but not workers to fill them. What does this sound like?

Nice Review of Key Economic Indicators

CNN has a few nice pictures that provide a good background on the current state of the economy.

I'm Confused

I'm even confused by this article.

So it sounds like it costs more to shutdown government than it does to keep it operating. We are shutting down because we cannot pass a short-term spending bill to fund the government budget. We cannot pass a short-term government spending bill because we cannot agree on the areas for spending cuts. We have to cut spending because of our growing deficit. Yet, by doing nothing the costs of not operating the government will exceed those that would have occurred had we not shut down causing the deficits to increase.

So it seems to me it would be better to pass a short-term budget that maintains all federal programs at their current budgets until we can pass a long-term budget bill that cuts some of the programs. Clearly the threat of shutdown is not causing Republicans and Democrats to work faster. I would think there are somethings both sides of the aisle agree should be cut. Start there and include them in the short-term budgets. This allows debate to continue of the big ticket items (defense, medicare, etc.). Maybe I'm missing something, but it seems like logic and common sense have left the Capitol.

Why Government needs to figure out their budget

The slow down in GDP will result in fewer jobs? How many? Think about Okun's law.

Here's the hard way: Potential Output at the beginning of 2011 was $14.178 trillion and by 2012 potential will be $14.455 trillion. Real GDP at the end of 2010 was $13.380 trillion. The output gap to begin the year was (13.380 - 14.178)/14.178 = -5.64%. This results in an increase in cyclical unemployment of approximately 2.8% which amounts to approximately 4.5 million people.  If the economy grew at 3.3% real GDP by the end of 2011 will be 13.380*1.033 = 13.821, the output gap would be (13.821 - 14.455)/14.455 = 4.4%, cyclical unemployment would fall to 2.2%.

But if output only grows at 2.7% than real GDP by the end of 2011 will be 13.380*1.027 = 13.74. The output gap is (13.74 - 14.455)/14.455 = 4.95% and cyclical unemployment would be 2.5%.

Here's the easy way: output was revised lower by 0.6%. Recall for every two percent decline in output will increase cyclical unemployment by 1%. So a 0.6% decline in GDP would increase cyclical unemployment by 0.3%.

Is 0.3% a lot? The unemployment rate is 8.8% or 14 million people unemployment. Despite being a small number, 0.3% still corresponds with nearly 500,000 workers. I think the government needs to figure out there budget pretty quickly, the uncertainty is causing a large drag on the economy.

Spending too much or taxing too little

The existence of automatic stabilizer will cause government deficits to increase during recessions. Tax revenues are largely based on incomes, a decline in income will decrease tax revenues. Additionally unemployment compensation and welfare payments increase during recessions. Obviously the debate today is whether or not will increase taxes or cut spending.

The Mortgage Mess

CBS's 60 Minutes has an interesting video on the mortgage mess.

An Update on Unemployment

The economy is recovering, the unemployment rate continues to decline.

Why we need trade

Without question the Midwest was the hardest hit area following the collapse of the housing boom, but it's improving. Ironically the improvement in the Midwest is because of trade (not despite it).

A New Economic Paradigm?

Proof economics needs a major revision can be found here.