I was checking out the Shanghai Daily’s macro-economics news page this morning and here’s the headlines to the three latest stories:

Inflation fears grow on price rise figures — Shanghai Daily - English Window to China News

German producer prices rose at the fastest annual pace in 13 months in January, underlining European Central Bank concern that inflation is accelerating.

Prices for goods from newsprint to plastics jumped 3.3 percent from the same month a year earlier, compared with 2.5 percent in December, the Federal Statistics Office in Wiesbaden said yesterday, Bloomberg News reported. Economists expected a 2.8- percent gain…

“Energy prices are clearly the main driver of inflation,” said Peter Meister, an economist and bond analyst at BHF Bank in Frankfurt. “While inflation should moderate in the coming months we don’t expect the rate to fall into the ECB’s comfort zone before year-end.”

Continue Reading »

Here’s a comment from student Alice Su to a previous post about Washington’s $170 billion fiscal stimulus package:

It seems to me that this tax rebate is not truly addressing the problem of recession–undoubtedly, it does, as Nancy Pelosi said, “put money in the hands of hardworking Americans”, and this looks like a nice act done under a bipartisan agreement that makes lots of citizens feel better. But only in the short run. Offering a one-time tax rebate like this is like trying to stick a band-aid on a bullet wound.

So the question isn’t “Why put more medicine in now than is necessary?” but rather, “Does this medicine actually do anything to help?” It looks like all it does is temporarily reassure Americans, maybe make the recession a little more cushioned and make the government able to say “LOOK we’re cutting back on taxes! Don’t you love us?”, but it won’t actually do anything that will feasibly fight against the “vicious cycle.”

So does this mean that recessions are inevitable, that there really is nothing you can do to fight them except… wait for it to get better?

In the podcast they mentioned something about fine-tuning interest rates and such to prevent occurrences like the Great Depression. How does that actually work though? And how is the government supposed to know how they should “fine-tune” taxes and interest rates and government spending if they’re in a period of growth/peak? They won’t know what’s needed until they’ve entered the recession, and by then it seems like it’s too late to stop it and all they can do is try methods like the tax rebate in this blog post to just “slightly offset the negative effects.”

Sometimes students simply amaze me in their uncanny ability to pierce through the logical fallacies of the world in which we live. Despite the lauding rhetoric coming from politicians about how this package will help lead the economy towards a new period of expansion, the package’s true impact will probably be more of, as Alice so astutely points out, “like a band-aid on a bullet wound”.

Here’s the kind of thing you’ll hear from Washington:

Bush signs stimulus package - Feb. 11, 2008: CNNMoney.com

President Bush said Monday he is pleased with the $170 billion economic stimulus package passed by Congress last week. The White House announced that he plans to sign it Wednesday.

The government hopes the package, which will send most Americans tax rebate checks by May, will either prevent a recession or make one relatively brief…

“I really want to thank the Congress for getting this bill done,” Bush said. “It’s going to help deal with the uncertainties in this economy.”

But is it enough, asks Alice? And what about the “fine-tuning” of interest rates going on at the Fed? How are fiscal and monetary policies supposed to be employed by governments to fight recession?

These are some of the questions we’ll be discussing in the next unit of AP Macroeconomics. Stay tuned for the answers… and in the mean time, students, keep reading critically and asking those tough questions that politicians simply hope Americans are just too ignorant to think about! Great job, Alice, thanks for the insightful commentary!

FT.com / Asia-Pacific / China - China ‘on course for growth slowdown

Among many Americans today there seems to be a negative opinion towards China. It is popular to bash China (remember Red Storm Rising!?) and blame the country’s cheap labor and booming export sector for the loss of American jobs. Undeniably, however, the US depends on China as a source of cheap imports, which help keep the overall price level for American households down and relieves inflationary pressures in the face of a weakening dollar.

Likewise, China depends on the US for its own economic health. In China around 40% of GDP comes from exports (vs. less than 10% in the US); of the $1.22 trillion of exports from China last year, 21% went to the United States (source: CIA World Factbook). This means that something like 10% of China’s national income comes from US households’ demand for Chinese products. Significant, to say the least. Continue Reading »

Jessica Ng asks,

Hi Mr. Welker,
I was just wondering whether the business cycle pertains to ALL economies, including both market and command economies?

Great question, Jessica. I thought I’d put this one out there for everyone to discuss. What do you think, readers? Based on what we’ve learned about the business cycle, would you think that this pattern of economic expansion, contraction, recession and recovery would be likely to happen in a command economy, where all economic decisions are made by a central planning agency? In other words, are business cycles unique to market economies, or can an economy run by the government also experience these patterns of instability? Post your thoughts in a comment below.

Powered by ScribeFire.

Can the stimulus save us? - from CNNMoney

Today the US Congress approved a $170 billion stimulus package that will consist of rebate checks to be mailed to 117 million low and middle-income households. The details of the package are as follows:

Tax rebates to 137 million people. A rebate of up to $600 would go to single filers making less than $75,000. Couples making less than $150,000 would receive rebates of up to $1,200. In addition, parents would receive $300 rebates per child.

Tax filers who do not owe income taxes but have at least $3,000 in income would get a $300 rebate.

The IRS will start sending out checks in early May, said Treasury Secretary Henry Paulson.

“Payments will be largely completed this summer, putting cash in the hands of millions of Americans at a time when our economy is experiencing slower growth,” Paulson said in a statement.

Business tax breaks. The bill would temporarily provide more generous expensing provisions for small businesses in 2008 and let large businesses deduct 50% more of their assets if purchased and put into use this year.

Housing provisions. The bill calls for the caps on the size of loans that may be purchased by Fannie Mae (FNM) and Freddie Mac (FRE, Fortune 500) to be temporarily raised from the current level of $417,000 to nearly $730,000 in the highest cost housing markets.

It also calls for an increase in the size of loans that would be eligible to be insured by the Federal Housing Administration.

Politicians from both parties joined forces on this act of expansionary fiscal policy. The hope, of course, is that with more money in their pockets, Americans will start spending again, firms will start investing, and these increases in expenditures will shift the US economy towards a path of expansion, increasing employment and output.

But what will the impact of this “stimulus package” be? Will Americans spend their rebate checks in the way Congress hopes they do? Some fear that low and middle-income households will take their newfound income right to Wal-Mart and buy Chinese imports, or put a large proportion of it into savings, or pay off existing credit card debt, three actions which would represent “leakages” from the circular flow, leading to no new income or output. Savings and spending on imports would do nothing to stimulate the US economy, therefore, before concluding that the tax rebates will help fend off a US recession, economists must consider the American peoples’ marginal propensities to save and to import. Only new spending on American goods and services will contribute to aggregate demand.

The provision of the stimulus package more likely to result in increased spending in the US is the business tax deduction for spending on new capital. Capital goods such as heavy machinery tend to be made in America by American workers, so encouraging firms to invest in new capital is likely to have a positive demand-side effect on US income and employment. Furthermore, more capital for US businesses is likely to increase productivity of workers in those firms which have invested, leading to greater income and output: this is the desired “supply-side” effect of stimulating business investment. When aggregate demand and aggregate supply increase simultaneously, economic growth is the result.

Unfortunately, the provisions aimed at encouraging business investment represent only around one third of the total stimulus package. Most of the $170 billion will end up in the hands of households, which I suppose should come as no surprise in this election year, when both the Democratic and Republican parties want to appear as the benevolent parties that helped make the average American household a little bit richer in 2008!

For some informative insight from Harvard economist Martin Feldstein, who is president of the National Bureau of Economic Research, click here.

Powered by ScribeFire.

Alice Su, an AP Econ student, asked a very good question in class today during our discussion of the business cycle, which illustrates the tendency of national economies to fluctuate between periods of expansion and recession. Karen wanted to know what a government could possibly do to try and avoid the dismal prospect of repeated recessions on and on into the future that the business cycle seems to suggest is the fate of any economy.

To answer Alice’s question, we can look at the United States right now, where the Bush administration and the Democratic led Congress have teamed up to approve a fiscal stimulus package aimed at boosting consumer spending and business investment, thus putting the economy back on the path of expansion and economic growth.

A government can only try to stimulate aggregate demand and/or aggregate supply in times of recession. The tools at the government’s disposal include changing tax policies and increasing or decreasing government spending. In times of recession, tax cuts should encourage businesses and households to spend more, increasing GDP. Likewise, new government spending increases GDP directly. The current stimulus package approved by the White House and Congress focuses on the tax side. Listen to the excerpt from a recent episode of WBUR Boston’s OnPoint radio show.

 

 OnPoint - Fiscal Policy Discussion [6:22m]: Play Now | Play in Popup | Download

Continue Reading »

Salon.com: Economic growth slows from a sprint to near-paralysis - How the World Words

From the article:

However you slice it, a drop from 4.9 percent quarterly GDP growth to 0.6 percent is a bona fide cliff dive. There is now a very strong possibility that economic historians will say a recession began in December 2007, when consumer spending finally began to buckle, unable to stand any more pummeling by the housing bust.

But it’s not yet a done deal. There is some encouraging news on the jobs front, where the service sector is ticking right along, offering some cover to the dwindling band of optimists who think a recession can still be avoided. But pessimists have the heavier artillery on their side. The main component of the slump in GDP was the housing bust — residential fixed investment declined by 24 percent in the fourth quarter of 2007. And there is no evidence yet that the housing bust has hit bottom. The most recent statistics on new home sales, housing starts, and building permits all plumbed depths not seen in at least a decade.

Discussion Questions:

1. Where on the business cycle does the US economy appear to be from the article?
2. What component of GDP has most contributed to the slowdown in growth? Why has this component slumped?
3. What options does the government have to try and turn around the recent decline in growth and the likelihood of a recession.
4. What options does the Federal Reserve have for trying to turn the economy around?

Powered by ScribeFire.