Shanghai American School Economics Student Podcast

As the presidential campaigns continue, the issue of our national debt has made its way to the foreground. Our national debt has increased from $5.6 trillion in 2001 to the staggering $9.1 trillion it is now. So what do the presidential hopefuls have in mind to help augment this situation? As much as I would love to continue to outline three positive plans here, I can’t. They don’t exist. Have a read at what the NY Times has to say:

The Republican and Democratic presidential candidates differ strikingly in their approaches to taxes and spending, but their fiscal plans have at least one thing in common: each could significantly swell the budget deficit and increase the national debt by trillions of dollars, according to tax and budget experts.

Let’s take a look at McCain’s numbers first:

Mr. McCain’s plan would appear to result in the biggest jump in the deficit, independent analyses based on Congressional Budget Office figures suggest. A calculation done by the nonpartisan Tax Policy Center in Washington found that his tax and budget plans, if enacted as proposed, would add at least $5.7 trillion to the national debt over the next decade.

As for the Democrats:

Fiscal monitors say it is harder to compute the effect of the Democratic candidates’ measures because they are more intricate. They estimate that, even taking into account that there are some differences between the proposals by Senators Hillary Rodham Clinton and Barack Obama, the impact of either on the deficit would be less than one-third that of the McCain plan.

Although one-third less than the debt of McCain, that is no consolation. Robert L. Bixby, executive director of the Concord Coalition, a nonpartisan organization that advocates deficit reduction, had this to say:

With the proposals they have on the table, it looks to me like all three would make it deeper.

Let’s take a closer look at McCain’s proposed policies. The main engine of his proposal is that of a tax cut that directly benefits the wealthy and corporate. In more detail, the NYT states:

He is calling for cutting corporate taxes by $100 billion a year. Eliminating the alternative minimum tax, which was created to apply to wealthy taxpayers but now also affects some in the middle class, would reduce revenues by $60 billion annually. He also would double the exemption that can be claimed for dependents, which would cost the government $65 billion.

How do we fill this void in tax revenues? Reportedly, McCain proposes to cut some spending. From where? They haven’t said. However, the NYT says that there is talk of McCain wanting to make Social Security and Medicare less costly for government.

Take a step back. All this red ink, is it bad? Some economists have said that these tax cuts, although increasing deficits in the short run, may be an acceptable tradeoff for long term economic growth, something the USA is obviously aiming for. As for the Democratic plans, the increased spending in education and health care are “long overdue investments.” These investments are seen to be a good allocation of funds and are expected to yield good dividends.

Whoever wins the race will have a fledgling economic engine to repair. I guess we’ll see what tradeoffs and fiscal policy they can come up with.

Economists say USA is in recession

Time after time, we’ve joked in econ class about America’s recession. Well kids, the day has finally come. (I seem to sound happy… but I’m not, hehe) Two thirds of a pool of 52 economists have stated that the U.S. is in or entering into a recession (like we didn’t know…).

“Two-thirds of the 52 economists polled said the U.S. economy is in recession. Add those who believe the economy will be in recession soon, and 79% believe that the economy will contract at some point in 2008.”

However, USA Today describes the light at the end of our rather short tunnel, apparently. The majority of the economists questioned believe that the recession will be a short recession.

“Most economists surveyed think the recession will be short and shallow. Unemployment, one of the hallmarks of a recession, will probably rise to about 6%, says David Berson, chief economist for the PMI Group. “That’s pretty low for a recession,” he says.”

Considering our textbook set the natural rate of unemployment are around 3-4%, 6% isn’t that bad! However, economists still realize that America’s economic condition is still affected by many factors out of the Fed’s control, and that’s primarily the prices of food and oil. The prices of food and oil are affected greatly by India and China’s massive demand for both commodities, so the prices of those two are extremely difficult for the government to control.

Right now, Clinton and Obama are battling it out on plans for oil prices. Clinton, along with McCain, are both in favor of tax breaks over the summer, whereas Obama is firmly against these tax breaks, citing the claims of congressional analysts that these tax breaks will only save the average family $30 on oil costs.

Finally, the article cites on last source of uncertainty, which can be traced to the real estate market, but… since I don’t much about that… Let’s just say the status of that market isn’t high flying.

Is the U.S. really just entering into a recession though? Or has the recession already been going on for awhile, or are people only realizing now that we are in a recession?

Halfway from Rags to Riches 

Vietnam has recovered greatly from its former war-torn state. Following the war, its economy was further torn by attempts toward communism, collectivizing land, and was further damaged by the fall of the Soviet Union, its cold-war sponsor, by depriving it of the roubles that helped hold up its economy. However, in recent years we see much improvement in the Vietnamese economy.

Since then the country has been transformed by almost two decades of rapid but equitable growth, in which Vietnam has flung open its doors to the outside world and liberalised its economy. Over the past decade annual growth has averaged 7.5%.

This growth has inevitably improved the quality of life in Vietnam with larger cities and more luxuries like designer stores. It has also improved from the brink of famine to one of the world’s biggest agricultural producers. Its exports have also grown through a whole spectrum of products from clothes to microchips with the soon-to-come billion dollar Intel factory near Hanoi. Government revenues have thus been kept steady regardless of lower import tariffs, while company taxes have helped boost it. Government spending on public services has increased while public debt remains stable at 43% of GDP.

It has also opened up to other countries, and even found itself a rotating seat in the U.N. Its communist state has reverted in a way akin to Deng Xiao Ping’s transformation of China’s now rapid-fire economy, creating much growth.

The World Bank’s representative in Vietnam, Ajay Chhibber, calls Vietnam a “poster child” of the benefits of market-oriented reforms. Not only does it comply with the catechism of the “Washington Consensus”—free enterprise, free trade, sensible state finances and so on—but it also ticks all the boxes for the Millennium Development Goals, the UN’s anti-poverty blueprint. The proportion of households with electricity has doubled since the early 1990s, to 94%. Almost all children now attend primary school and benefit from at least basic literacy.

Since education has been bolstered, perhaps labor would also have become more skilled.

With its current accounts nearly doubled since last year, Vietnam is no longer in as much need for aid money as it was before. Vietnam has also found itself to the likings of foreign investors.

Firms that draw up a “China-plus-one” strategy for new factories in case things go awry in China itself often make Vietnam the plus-one. Wage costs remain well below those in southern China and productivity is growing faster, albeit from a lower base. When the UN Conference on Trade and Development asked multinationals where they planned to invest this year and next, Vietnam, at number six, was the only South-East Asian country in the top ten.

However, Vietnam also has its share of rough patches with corrupt policemen and mistreated senior citizens. The Communist Party, government and judicial systems are also not always clearly delineated. It seems such growth sometimes outran the country’s preparedness for it.

The government is finding it much harder to manage an economy made up of myriad private companies, banks and investors than to issue instructions to a limited number of state institutions, especially as the public sector is currently suffering a drain of talent to private firms that are able to offer much higher pay

Vietnam’s future development is also shadowed by many risks such as inflation, slowing stockmarket, natural disasters, and rickety infrastructure. Nonetheless, Vietnam’s recovery is an admirable one, and sometimes even reminiscent of China’s own growth.

Voilà- l’article vous devez lire maintenant, avant de parcourir l’analyse: ADM Veut des Tarifaires Contre le Dumping d’Acide Citrique  

Just thought I’d write in French since Canada is half francophone :D.

I found this article very interesting, particularly after reading the not-so-subtly biased view on tariffs and free trade from the textbook. Obviously, McConnel and Brue would say, no, these “anti-dumping tariffs of 188% on Chinese citric acid and 65% on Canadian imports” are bad, that it does not matter

 ”whether there is reasonable indication Chinese and Canadian imports are hurting the domestic citric acid industry”

or not because free trade is the way to go. 

“Archer Daniels Midland Co. is accusing industry in Canada and China of damaging its business by selling imported citric acid in the United States at below fair value prices. Food ingredient processor ADM, along with peers Tate & Lyle Americas — like ADM, based in downstate Decatur — and Minnesota-based Cargill Inc. filed petitions Monday with the U.S. Department of Commerce and U.S. International Trade Commission asking that stiff tariffs be imposed on citric acid and certain types of citric salts from the two countries. “

At least these companies are only asking for antidumping duties, and not for widespread, permanent tariffs. However, dumping is not always a bad thing. IF it truly is dumping and not just “comparative advantage at work,” it will definitely force ADM and Tate&Lyle to pull themselves together and become more efficient. Like the textbook stated, it is slightly unfair to sacrifice consumer happiness for the well-being of a few industries and their workers. However, I do realize that I’m only able to say this because foreign competition has not affected my parents’ jobs negatively and I know that if it ever does, I’d immediately become the biggest, most hypocritical advocate of tariffs ever. When the issue doesn’t strike close to home, it’s easy to step back and declare that “it’s for the greater good, it’s for the entire economy.” But when the matter actually affects us, like it’s affecting ADM, we’ll find that it’s not so easy to stick to those free trade, laissez-faire (or as Mr. Welker says, lahsay faire) economic views.

http://www.nytimes.com/2008/04/24/business/24lasik.html?_r=2&hp&oref=slogin&oref=slogin (My hyperlink button doesn’t work, for those of you that are annoyed by the long link)

I know, I know, it’s not something to think about right now, but this could actually apply to us, when we’re older and maybe thinking of getting eye surgery.

LASIK (short for laser-assisted in situ keratomileusis) Eye Surgery expects a large drop in demand sometime during 2008. To be specific,

“We’re forecasting a 17 percent drop for 2008,” said David Harmon, president of Market Scope, an eye surgery market research house.

[Lasik] typically costs anywhere from $800 to $3,000 or more per eye.

Analysts expect this type of surgery, which is usually not insured by H.M.O’s, to drastically decrease in its number of total consumers and revenue. Here we can see that the U.S’ state of near, if not current, recession is affecting consumers with anything, reaching out to services such as eye surgeries.

In macroeconomics, we’ve learned how demand is determined by the level of income consumers receive. As this recession causes consumer’s nominal income to decrease, demand shifts to the left. Once this occurs, firms in the eye-surgery business must lower prices to compensate for the decrease in consumers. This is what analyts believe will happen. However, these speculations are yet another determinant, this time of supply; expectations of a good or service can change the supply curve of a service.

Advanced Medical Optics [a major player in the eye surgery business], which gets more than one-third of its revenue from laser surgery systems and related gear, cut sales and earnings forecasts for the year in February, saying then that it expected a 10 percent drop in procedures in 2008. Its stock, which closed Wednesday at $20.16, is down more than 13 percent since the February warning.

LCA-Vision, the surgery center owner, said it had cut its work force by 16 percent in anticipation of slowing business. Shares of LCA-Vision closed Wednesday at $12.28, down more than 75 percent since last July.

As can be seen, the expectations of the laser eye surgery business aren’t too positive, and this in turn leads to a decrease in supply, as workers get laid off and wages are lowered. However, by decreasing their input costs, firms could strike equilibrium again as the supply curve continues to shift downward, perhaps enough to match with the decline of demanding consumers.

For now, however, I suppose all we can do is wait and see (if you still can by the time you want eye surgery) for the results of such actions firms such as Lasik have undergone. Since I’m going to avoid eye surgery, I better end this post before my vision declines even more.

P.S. Not bad for my first blog post eh?

How to Spend It

Some people are benefitting from the supply shock that is pressuring nations throughout the world. The oil suppliers, who are obviously running up huge trade surpluses with their trading partners. With the 7-star hotels in Dubai, the construction of numerous malls that house the glamour houses of Chanel, Gucci, LV, and the various other luxury brands, Dubai’s accumulating wealth, as well as various other parts of the Middle East, are evident in the rise of millionaires. The author of the article goes as far to state that

THE Gulf is full of loud architectural statements—towers that reach over 600 metres into the sky, hotels that will be suspended under the sea.

But this newfound wealth may bring what better living conditions apparently leads to. In class we talked about how recession was good for Americans because it would force them to live healthier lifestyles, especially with the heavy inflation in food currently. On the other hand, the poor Middle Eastern millionaires are just learning about this disease that comes with over indulgence- diabetes!

The ailment is one unhappy consequence of the region’s economic transformation. Before 1961, Abu Dhabi lacked even a paved road. Since then, it has enjoyed a startling transition from pearling to petroleum, from souk to mall and from sand to glass. This prosperity has bought a sedentary lifestyle and a sugary diet, which may have triggered a genetic predisposition to diabetes among Arabs.In the neighbouring emirate of Dubai shoppers are invited to enrol in “Mall Walkers”, a power-walking club that promises to give more than your credit card a workout.

Composed of 6 countries, the Gulf Co-operation Council (GCC) may earn nearly 9 trillion by 2020 in exporting natural gas and oil if the price remains at $100 a barrel! Few of those countries have remotely close GDPs to match that! The governments of this country however, are well aware of the nature of this wealth. As a result, in the United Arab Emirates, they have promoted the construction of industrial cities, created new regions for investment and construction, for the wealthy to spend their oil wealth.

In the last oil boom, new industrial cities such as Yanbu and Jubail arose at the government’s behest. But Emaar raised its money from local investors in an oversubscribed public offering. Such “stockmarket hullabaloo” was new to Saudi Arabia, one critic says. Indeed, the private sector has never before taken on a city of this size. In the last oil boom, new industrial cities such as Yanbu and Jubail arose at the government’s behest. But Emaar raised its money from local investors in an oversubscribed public offering. Such “stockmarket hullabaloo” was new to Saudi Arabia, one critic says. Indeed, the private sector has never before taken on a city of this size.

Yet these countries are still troubled by the depreciating USD. Paid largely for their oil in USD, they often pay their workers in USD. Immigrants or migrant workers from foreign countries now demand more USD for their paychecks, as the purchasing power of their current salary has diminished greatly back in their home countries. Exchange rates create winners and losers, and those on the receiving end of a rapidly weakening currency suffer the raw deal.

The fall of the greenback, meanwhile, has raised the price of those imports not invoiced in dollars. Foreign workers complain bitterly that the money they earn in the Gulf stretches less far when sent to their families in India, Pakistan or Britain. The peg has forced the Gulf’s central banks to shadow America’s Federal Reserve, even as their economies have parted ways.

But luckily for them, the economist believes that the Middle East has enough wealth to weather the storm, and whether or not their investments currently exceed, they’ll still be very well off, which is a lot more than we can say for the American economy.

White House opposes housing package

Things are certainly looking glum for Americans: their economy is entering into a recession (or a “slowdown” as Bush prefers to call it), they’re experiencing a credit crunch and the housing bubble popped. Great…

For the past few months, Bush and his Republican administration has been brainstorming various ways to stimulate the economy once again, most notably through their tax rebates. This is an indirect attempt to increase the aggregate demand and pull the American economy out of the recession. However, as we have studied in class, this policy is definitely not helping the economy a great deal, seeing as how Americans are more prone to save the majority of the rebates or use it to pay off their debts. Thus, some members of the US government have decided to switch their focus to another pressing issue: the housing issue.

As a way to rescue the Americans who have gone broke (or nearly broke) due to the housing dilemma, Democrats have been pushing for a bill that would provide the citizens with a “housing rescue package,” which would include a $15 billion package for “the purchase and rehabilitation of foreclosed property.”

Unfortunately, the view that this “bailout” would significantly help the Americans is only shared by the Democrats. Republicans have vehemently opposed this bill and it has been reported that Bush would veto this bill:

The comments, in separate letters to lawmakers, were the most forceful rejection yet by the Bush administration of Democrats’ housing aid plans. And they were the clearest indication to date that the White House intends to put up a vigorous fight against a bill to let the Federal Housing Administration take on as much as $300 billion in new mortgages for financially strapped homeowners.

If the government has the people’s best interest in mind, then why wouldn’t they approve of this package, which would undoubtedly aid those in need of monetary aid? Rep. Spencer Bachus sums it up in the following statement:

“It will unfairly benefit a few homeowners and many investors and speculators at the expense of millions of careful borrowers and renters… The message that we risk sending to financial institutions and individuals is that when they willingly take on excessive and ill-advised risk, the government will ride to their rescue.”  

Rep. Barney Frank, the panel chairman of the House Financial Services Committee also remarked that ‘the measure [is] “a pale imitation” of what the House has already done to head off a deeper housing crisis.’

Although Bush and his administration continuously opposes the housing rescue plan, they do support the central goal of these measures: to adjust the rules set by the Federal Housing Administration so that more people can meet the loan standards and thus find a way to refinance their way back into the housing economy.

So if you’re expecting a hefty monetary package from the US government, you might want to think again. Expect a few loans and grants, maybe, but a $15 billion housing relief package? Think again.

So we always learn of the different possible effects that could cause the US economy to be spiraling downwards, but what effects are actually combining to produce our present-day, screwed economy?

Let’s take a look at the domino effect.

So what’s the biggest thing that our AP Econ class has discussed so far? It had to do with the overspeculation in the housing market and a subsequent housing bubble that popped. More generally, what does this mean? Consumer spending habits that entail a negative savings.

For years, the U.S. economy has considered consumer spending as the cornerstone for economic growth. At one point, consumer spending [1] was said to account for nearly two-thirds all economic growth. However, soon the consumer will be reigned in, and a price must be paid.

Most of the consumer debt is self-inflicted. As the old adage goes, people have spent money they didn’t have, to buy things they didn’t need, to impress people they didn’t even like! Now it is time to pay the piper.

This is simply the first domino that started the chain reaction. The government has tried to combat consumer debt with the fiscal stimulus package but its simply too small to do much good. Borrowing against home equity values, ease in obtaining and spending credit, job losses, and gas prices are all screwing the average consumer over.

What does overconsumption in credit lead to? Screwed financial lending firms. Banks that have lent money based on the assumption of rising home equity values are now seeing that credit crunch as they try to reel in the borrowers. Consequently these banks are now needing help staying afloat. Ultimately, credit card firms are going to realize they have to begin to do thorough background checks for credit history.

Next, investments are beginning to go sour as deflation becomes a high probability.

Everyone knows that investments which move sideways - or move down - are already losing money. However, the reader’s attention should not be focused on investments are earning anything less that 10-20 % a year. Bonds are bombs right now waiting to shatter any true gain.

According to the CPI calculator [3] (an extremely conservative gauge on inflation), $100,000.00 in 2006 is the equivalent of $105,916.67. Factor in oil, consumer prices including basic living expenses, health-care, a Fed that is over-printing [4], and a Congress that is satisfied being the largest debtor in world history [5], it is easy to see that these CPI numbers are a farce.

So, with consumption down and investment dwindling it leads to an expansionary monetary policy by the Fed to combat the normal boom/bust cycles the economy would otherwise experience.

One need only view the policies of Greenspan [6] and Bernanke [7] to understand the real goal of the Fed [8] , which is to manipulate monetary policy to avoid the natural outcomes of the boom and bust cycles.

However, the manipulation comes at a price. Everyone who holds dollar-based assets will suffer the same fate. While is appears that the stock market increases - or at best stays the same - on paper, it appears that everything is o.k., when in fact, deflation has under-minded all investments.

This is not to say there will not be winners on Wall Street, but more importantly to underscore the fact that most investments will lose long term.

What are we left with? An economy that is stagnating and just barely getting along. The three goals of macroeconomic policy: stable currency, full employment, and economic growth are all taking a beating. Deflation in the values of investments combined with an increase in price levels due to oil prices. Job losses due to the rise in costs for firms. Ultimately, economic growth is going to be negative as we finally officially hit the recession.

And to quote the great Helen Chu, “when do we stop thinking?” The answer: as soon as the dominos stop falling.

Student Loan Turmoil Stresses Families:

Paying for college is always a painful business, and never more so as the summer of 2008 rolls around. Student loans are becoming increasingly difficult to secure, because the number of financial loaners are decreasing, especially in light of the looming recession, credit crunch in Wall Street, and a decreases in government subsidies.

“The ongoing turmoil in U.S. credit markets … could leave millions of students in a last-minute dash to secure the financial assistance they need to attend college this academic year,” Sen. Christopher Dodd, D.-Conn, head of the Senate Banking Committee, said at a hearing Tuesday.”

Although there is a great demand for these student loans, investors aren’t supplying because their costs are too high, and there is a cap, 6.8%, for how high interest rates on the loans are. Thus, what happens is that the standards for receiving a student loan become even higher and more competitive.

However, according to some experts such as Sarah Flanagan, vice president for policy development at the National Association of Independent Colleges and Universities, believe that the U.S. is not in a major crisis yet, because “a lot of smaller banks are backing out, but the bigger lenders are jumping in to fill the void.”

Still, there is a great imbalance between the number of potential loaners and borrowers. Over 75% of families require some sort of student loan, but government subsidies for lenders has fallen drastically, “reducing the margin by as much as 3/4 of a percentage point.” Also, the credit crunch, which is a sudden reduction of the availability of loans from banks, has played its roll. This is how:

“The credit crunch plaguing the mortgage industry has affected college lending. Many lenders finance their operations by bundling student loans into securities, similar to the mortgage funding process. But these days, investors are demanding an interest rate nearly 1.4 percentage points higher than they did a year ago to buy the student loan-backed securities, experts said.

“Right now every loan we make today, we’re making at a loss,” testified John Remondi, chief financial officer at Sallie Mae, the nation’s largest lender. “Every lender is in this same set of circumstances. There’s a limit to how much people will lend to Sallie Mae so we can then turn around and lend it at a loss. Not many people are in that business.”

Mark Kantrowitz, publisher of FinAid.org, paints a scary picture when he states:

“There will probably be a mass exit in the next three to 12 months. If there is no government intervention or a thawing of the capital markets, by the end of the 2008-09 academic year, I expect there will only be 15 to 25 lenders.”

Should the government, currently Republican and so very supportive of laissez-faire capitalism, step in and change the way the student loan market is looking? Well, thankfully it is. The House of Representatives have introduced bills that allow the federal government to inject money directly into the market, raise loan limits by $2000 so students can avoid costlier private loans. Finally, the Treasury Department’s Federal Financing Bank is looking into purchasing loans, thus increasing the liquidity of the market with cash.

According to Senator Charles Schumer:

“We will provide some backup. This is just too important to allow 100,000 people who deserve to go to college not to be there. The markets may come back, and if they don’t, we will have to step in.”

So, have fun filling in student loans applications. Perhaps they will start requiring three paged essays as well as a beautifully studded resume from students before they are willing to bequeathed the loan.

“What Nafta Trade Deficit?” by John Engler from the Wall Street Journal

We discussed in class that Democratic candidates Hilary Clinton and Obama are urging for the rewrite of NAFTA, the North American Free Trade Agreement. Why? Because they believe that the three million manufacturing jobs lost since 2000 is a result from NAFTA due to outsourcing to Mexico and Canada, thus causing a huge trade deficit for the U.S..

Yes, losing those jobs do suck for the U.S. blue collared workers, and it has definitely been happening, but what Clinton and Obama do not recognize is that the grow in the NAFTA deficit isn’t due to manufacturing goods, but oil and gas imports. What I found really interesting is the fact that except for energy, the trade deficit that is caused by the loss of manufacturing jobs (the problem that the Democrats are oh so concerned about) within NAFTA has barely grown at all.

Engler states that indeed, there are factories in the U.S. that have closed and moved their production to Canada and Mexico,

“but in the case of Nafta, that job impact has been almost exactly balanced by increased U.S. production and exports of farm and factory goods.”

So in simpler terms, there is no harm done. The U.S. sales to NAFTA countries have just about balanced out their imports, non-energy speaking wise. Engler puts this in numbers:

“While the nonenergy deficit within Nafta has grown less than $4 billion since the job loss started, with the rest of the world it grew over $150 billion. Put another way, the increase in our nonenergy deficit within Nafta has accounted for only 2% of the increase in our global nonenergy deficit since 2000.”

So the problem of losing manufacturing jobs that Clinton and Obama are so concerned about…well, there isn’t really a problem, is there? They are so focused on that 2% of the trade problem rather than the other 98% of it that it seems a bit ridiculous.

Perhaps this is just another case in which politicians are so concerned in winning the people’s hearts that they disregard what is really important. Yes, people will love them if they show that they are indeed soo concerned with the loss of these manufacturing jobs. What can better win all the Americans’ hearts than telling them that we are fighting to get their jobs back? Yes, Americans have lost jobs, but that is only 2% of a much bigger problem! Instead of blaming NAFTA for job losses, there are more serious issues that needs to be considered for the good of society, not just for the votes.

My question is, what can we do about that 98% of trade deficit that have been disregarded entirely by Clinton and Obama? How has it become so serious? Sure, the U.S. loves importing the oil and gas from Mexico and Canada, their friendly neighbors, there is no reason to say no to that. But what would this trade deficit ultimately do to the country?

Tax Cuts at Center of McCain’s Economic Plan

It’s easy to see how politics and sound economic policy may not mix very well; in fact, trying to put the two together usually ends up in contradiction and confusion that puts economically concerned voters in great distress. (Example: Remember that one econ class when Welker was talking about taxes, trying to decide if he was more liberal or conservative, and then got so agitated that Jeff said “You’re having a midlife crisis” and Welker threw a smartboard marker at him yelling “I’M 29!!”? Case in point. :P)

In this case, McCain’s speech about his economic policies on Tuesday contains so many contradictions, both with classroom economic theory and various parts of his own policy platform, that I find myself questioning whether he is taking a solid stance on the economy at all, or is simply trying to say whatever will appeal to his audience the most.

First, McCain’s economic plan, dripping with supply-side sentiment, is centered around a series of tax cuts. In addition to making Bush’s tax cuts permanent, he also calls for cutting corporate taxes, phasing out the alternative minimum tax, doubling the value of exemptions for each dependent to $7,000 from $3,500, and giving people the option of using a simpler, shorter tax form. As a finishing tax-cut touch,

One of Mr. McCain’s tax proposals would take effect even before the Republican Convention: he called on Congress to suspend the 18.4 cent a gallon federal gas tax from Memorial Day until Labor Day. Mr. McCain said that doing so would provide “an immediate economic stimulus,” but some environmentalists said that the change might encourage more people to use their cars, while Mr. McCain has made combating global warming central to his campaign.

Hmm. Here’s where the first hints of contradiction kick in. Besides the conflict between wanting to end global warming and yet encouraging more cars on the road, we’ve all studied the Laffer Curve, and I think I can speak for all the SAS Economists when I say that the U.S. Economy is not at a place where further tax cuts will lead to an increase in tax revenue or benefit the economy. Furthermore, what about the enormous budget deficit that Mr. Bush has so graciously left us with? As the author of this article discreetly points out, McCain seems to have forgotten that he previously promised to balance the budget by the end of the first term; rather than offer the economic stimulus that McCain is claiming it will, the tax cuts would probably just plunge the nation deeper into debt.

What answers do McCain’s economic policy have to offer these questions? Well, he also proposes a one-year freeze on most “increases in discretionary spending” while he reviews every federal program, department, and agency… with the exception of spending on the military. Supposedly, the money saved from eliminating earmarks as well as getting rid of unnecessary “discretionary spending” will add up to $100 billion annually, and that is how McCain says he will pay for the lowered business taxes. However, he neglected to address the issue of all the money being spent on the wars in Iraq and Afghanistan, and whether any of that might be categorized as unnecessary “discretionary spending”, or whether we should be spending anything over there in the first place.

An analysis by the Center for American Progress Action Fund, a liberal think tank, estimated that the overall cost of Mr. McCain’s tax cuts would be three times as much as the $100 billion he estimates that he can save. And they questioned whether his programs would really save $100 billion a year.

While I’m not saying anything in support of Obama or Clinton’s economic policies, McCain’s plan seems so shaky that I would think twice before buying into how he’s going to save our country. Personally- especially since this tax-cut-focused speech was given on the day of the deadline for filing taxes- it looks to me like another plan designed for the purpose of politics, and not with sound economic policy in mind.

The world’s fastest production car, the Bugatti-Veryon, at £970,000 a pop is selling like hot cakes at Lamborghini London’s sales yard located in the heart of Kensington. The car, which has a top speed of 252 miles per hour, is proving popular among the super wealthy in London. Lamborghini London’s general manager Dominic Lancaster says that his targets are being raised after a spate of sales to City financial executives. Having already sold its quota of 30, it’s now targetting 50.

However as these Bugatti-Veryons are speeding down roads in the UK, the economy is coming to a halt:

The Bank of England believes economic growth, which was more than 3 per cent last year, will slow to 1.6 per cent by late 2008. But, on the flip side, with oil at record levels, priced at over $100 a barrel and food prices having risen by almost 40 per cent in the past 12 months, due to record prices for soft commodities including wheat, inflation is rearing its head.

This inflation can obviously, be attributed to cost-push, as input energy causes are still increasing.

Inflation also diminishes the value of money, which has a negative on financial assets. When prices are rising, investors tend to demand higher levels of compensation from those holding their money. This means interest rates rise and so does the return required by investors in the stock market. The result: share prices fall across the board.

So who do we avoid investing in and who do we pick to hedge this inflation? Obviously, avoid investing in banks as their profitability decreases with rising interest rates. The higher cost of money will affect, negatively, all the companies who depend on “financial engineering” for profits. Even though consumers will have rational expectations, the demand for retail goods, if the price increases, will still decrease. So, avoid retail manufacturers too.

What do we look for?

“The strongest businesses perform best during periods of high inflation: companies with a unique product or service for which they can maintain real levels of pricing. The most important thing is to continue to invest in what you believe are good companies.”

For example one strong candidate is beverages producer Diageo.

Its results in February indicated that the appetite (or thirst) for Guinness beer and Johnnie Walker scotch is strong even in difficult economic environments.

It is also important to note necessity providers such as healthcare or energy companies.

So as the inflation continues to slow economic growth in UK, even the Bugatti-Veryon may skid to a stop.

Check out the full article here.

Troubled U.S. homeowners fall prey to ‘rescue’ scams

The government is giving middle class citizens a care package of 300 dollars each, but is this money going to waste as American families struggle to keep their homes, losing their money to frauds?

“Property ownership is an integral part of the American dream,” [Debra Zimmerman] said. “When homeowners face losing that dream and someone says they can help, they jump at the chance.”

Could the effect of this recent growth in fraud decrease the intended effect of the government’s policies of giving middle class families tax returns in the hopes of encouraging them to spend more?

Though I suppose this particular topic isn’t as related to what we’re learning in class, the title of the article caught my eye. Reading this article causes me to lose some faith in man. Though we’ve seen it in history, certain individuals now are taking advantage of the housing crisis in America to profit from the losses of the already suffering individuals; stealing their houses or scamming them for their money that could have potentially saved their homes if they were not cheated.

I came across this article about Mr. Welker’s favorite topic on my hunt for a suitable story on inlation, but it’s just as good and a whole lot more interesting.

It completely supports the supply side view that taxes reduce the financial attractiveness of working. Granted, Mr. David Gross had another motive, but it still illustrates the fact that yes, for some people, higher tax rates do induce less work. I don’t think anyone else would go so far as to drop a job that pays $100,000 a year just in order to NOT fund the war in Iraq. I don’t know whether Mr. Gross should be considered heroic or just plain stupid. But, I guess that for him, the benefit of knowingly stripping the government of a few thousand dollars, a portion of which would go to fund the war, outweighed the cost of giving up $70,000 of income. I also found the blurb in the beginning quite interesting: “low-income families receive a $1,000-per-child credit and a special credit for the working poor.” Also,

Your annual income wouldn’t have to be quite as low as you’d imagine for you to be free of the income tax. Because of deductions, credits and exemptions, a family of four can earn about $43,000 and pay nothing. For a single person without kids, that threshold is $10,300.

It seems that our government really takes care of the less fortunate.

Hong Kongers turn to stronger renminbi

Historically, Hong Kong seems to be associated with every other country but its own - China, I mean. They complained after that 99 year contract China made with the UK and then they went and pegged their HKD to USD.

Because the HKD is pegged to USD, Hong Kong banks are forced to go along with the American Federal Reserve to prevent a recession - but of course its still “prevent” a recession, no one’s going to admit there already is one - as China raises interest rates trying to slow growth.

As a result,

“Hong Kong residents can open renminbi accounts within the territory, but banks offer very low rates of interest – an annual rate of just 0.8 per cent on a six-month time deposit, for example. Ms Lau can get 3.8 per cent in Shenzhen.”

You can see why Hong Kongers are going back to China so easily, those opportunists.

“Liu Qiao, professor of finance at the University of Hong Kong, said: “[I] “would not be surprised if renminbi deposits account for 10 or even 20 per cent of foreign deposits within the next two years. ”

If the recession in the US turns into a Great Expansion, I wonder how fast HK people are going to drop China for the US

Yeah, that’s right, we’re learning about the Laffer Curve, which is probably more oversimplified than any other economics concept we’ll ever learn. I was doing some reading about the Laffer Curve on Wikipedia to get some further knowledge on the curve itself (fascinating what I do in my free time): Check out our Laffer Curve in class:

This looks pretty parabolic! Of course, we’re never dealing with something that simple. But I’ll get to that later. First of all, the point of the curve itself is to illustrate that if we’re above point “m” on the graph, lowering the tax rate makes both the people and the government happier (more tax revenue). However, most economists criticize the Laffer curve demonstration in saying that the government’s tax rates are already below “m”, so it’s not like lowering the tax rate is going to help at all. So the way to maximize revenue would be to increase the tax rate, but to what level? One economist states that this level is usually around 65% (Pecorino, 1995)! That’s insane, and no politician would go up on the podium and announce a tax increase that high.

Now, onto the shape of the curve. We’re looking at some total fiction right there. Martin Gardner, one of my favorite science/math authors, satirizes this concept by creating an alternative graph:

Yeah.

Yes, this does in fact keep with what the original model looks like for close to 100% and 0% tax rate, but just goes crazy (as shown in these statistically rigorous scribbles) in the middle. The Curve in itself makes the assumption that everything is smooth and parabolic, that is to say, easy to find point “m” on the graph. The rationale for such chaotic levels of tax revenue isn’t just made up; in fact, the chaos actually appears in data collected over a 50-year span by a statistician.

As a result, we’re not supposed to look at the literal meaning of the curve, and rather what the ideal curve implies.

Today in AP Euro we discussed briefly the “special relationship” between Britain and the US that appears to have existed since WWII, after the Big Three were divided by political beliefs. But I came online to Economist and saw an article titled The bust begins “Housing Market woes spread to Britain”. Oops. At this point, do they really still want this “special relationship”? The closeness of political ties often equates to closer economic ties, but in times of crisis like this, when everyone sees the US economy failing and possibly entering recession, would we want to be “special partners”?

Course the writer of this article has a sense of humor, or simply found that an amusing way to start would be by stating that “for years the housing market in Britain has defied gravity.” Analogous to the American condition? Possibly. After all, people who couldn’t afford to buy houses were allowed to buy houses because banks assumed that housing prices would simply continue to rise. Case and point that it is WRONG. Did the burst of the housing market bubble in the US not provoke the British government to take measures to regulate prices? I mean, the Chinese government certainly has attempted to cap the house prices especially in cities like China.

Still, I suppose the British should be more optimistic than the Americans right now.

Mortgage lenders are reluctant to talk down the market, so it says something that both the Halifax and Nationwide are predicting “modest” declines in house prices this year. Forward-looking indicators suggest a gloomier picture. The number of mortgages approved for house purchase was almost 40% lower in February than a year before.

The banks in Britain are obviously reining in the mortgages and loans they make towards housing investor, perhaps trying to prevent the financial industry of London from falling into disarray like the Wall Street firms that have had to repeatedly write off huge packages of loans that are unlikely to ever be returned. Could this save them from a downturn in the economy?

These findings are not shocking given the extraordinary house-price boom of the past decade. Between the first quarter of 1997 and the first quarter of 2007, house prices rose by 214%. This was the third highest among 20 countries covered by The Economist. It contrasts with a rise of 135% in America up to its peak in 2006.

We’ve all heard that the higher you rise, the harder you fall. 214% versus 135% indicates that if Britain doesn’t do something about it, and leave the economy be, a very harsh recession could be in the picture, although Britain does have one thing in its favor. The English pound has actually risen to historic high levels against the American dollar in the past few months- possibly saving it from the international trade pressures the US currently faces.

And look: Britain is doing something about it

Some relief may come on Thursday if, as expected, the central bank cuts the base rate from 5.25% to 5.0%. But that would probably do no more than counter the effects of the lenders’ latest moves to constrict credit.

Yet the increase in money supply won’t increase the willingness of banks to loan out their money. Nobody wants to be the next America in the upcoming months. History repeats itself: rather soon and fascinating isn’t it.

Consumer borrowing slows

Two summers ago, I got the chance to go to the United States all by myself for summer school. I was so psyched because I finally had the chance to be free and independent, especially financially. What I was looking forward to the most is of course, getting a credit card. Imagine my dismay when my dad handed me a piece of plastic, telling me it was a debit card, not a credit card. It turned out that my parents were a genius to give me a debit card instead of a credit card because I definitely would’ve maxed out the little amount of credit I got.

Sadly, many Americans aren’t as smart as my parents were (or at least aren’t as good at predicting the future).

Now that the United States is officially entering into a recession, more Americans are panicking about their financial situation. How do they react to the lowering value of the dollar and the burst of the housing bubble? Borrow less, of course.

“This is standard consumer behavior in the face of a recession,” said Bill Hampel, chief economist of the Credit Union National Association. “When consumers are worried about losing their jobs, they borrow less.”

Ironically, although there is now a decrease in credit borrowing from consumers, Americans are still depending too much on their credit cards to make their ends meet.

The consumer credit situation right now is what Arnold [Curtis Arnold, founder of CardRatings.com, a consumer advocacy group] called a “perfect storm.” Credit card issuers are raising interest rates on consumers because they are facing higher delinquency rates and mortgage foreclosures.

The high interest rate coupled with the recession is proving to be a major problem for Americans. Since their wealth is decreasing, they start to swipe their credit cards wherever they go. This is mostly due to the inflation caused by a supply-shock, a constantly increasing price for gas. Well, once they start using those credits, the amount of interest they have to pay back builds up until the consumers realize at the end of the month, when the bills come, that they have no way of paying back all that money they owe to the bank. So what do they do now that they don’t have any money in their bank accounts? Use their credit card next month to buy the things they need, such as food and gas. This vicious cycle is apparent in the mountains of credit card debt that American consumers have acquired. As Hampel stated:

“What growth there will be, will be in credit card debt.”

So don’t depend so much on your little piece of plastic. It could ultimately lead to your financial destruction…

The Fed has begun to institutionalize a new revolution of monetary policy.

Previously, the Fed has only really been a big factor by lending out to banks, or by being the bankers’ bank. Right? Well not anymore! The Fed has begun to pursue a policy of keeping the economy afloat with new radical measures.

In the short run, Bernanke is waging a war to keep the financial markets from collapsing. The biggest move so far: On Sunday, Mar. 16, the Fed brokered the fire sale of troubled investment bank Bear Stearns (BSC) to JPMorgan Chase (JPM) and announced that it would be willing to lend directly to major Wall Street brokers, which have never before had access to loans from the central bank.

Now, the Fed will be able to DIRECTLY inject new money into the economy and affect firm’s ability to invest in new capital. Before, firms had to borrow from banks to invest and because of the slump-approaching-recession, banks have been less willing to lend out money. Now, the Fed can actively keep the money supply high and investment growing.

At the same time, by stepping in so aggressively, Bernanke is pouring an enormous slug of money into the financial system. To be sure, its full impact won’t be felt right away, because banks are reluctant to lend and consumers are afraid to borrow. Indeed, consumer spending is likely to lag, leading to job cuts in coming months and a deepening of the recession.

Eventually, though, the Fed’s stimulus will show up as some combination of stronger economic growth and higher asset prices. It also could boost inflation, further eroding the value of the dollar and raising the risk of a run on the world’s most important currency. The possibility that a primarily domestic crisis could quickly become global highlights the need for international cooperation.

Inflation would be a deadly impact of injecting so much money into the system. As the price level is already rising due to high energy prices, the Fed, which basically just prints new money and pours it into the system, could exacerbate the situation. With the dollar falling in value, more dollars in circulation further depreciates its value. But the idea is to get investment back on track and to improve productivity in essence, what we discussed in increasing investment to shift the aggregate supply back out and offset its inward shift due to high energy prices.

The engine that eventually pulls the U.S. out of recession will most likely not be consumption but corporate investment. That will be good for big global corporations with clean balance sheets and access to markets around the world. The very fact that they already have plenty of cash will likely make investors all the more eager to fuel their expansion.

The Fed surely is taking a revolutionary stand here but the worry is, once the Fed gets involved, how can it pull itself back out once the economy is back-on-track? If it calls in the loans it is making to the companies, it could effectively cause another slump. It is up to you though whether the ends are worth the means.

New York Times Article: Rescue Tests the Fed’s Credibility

Currently, many financial institutions in the United States are failing. These are the banks and investment firms who have financed a great deal of mortgages that are now heading for default. Now, in an almost unprecedented move, the Fed is pooling vast resources to these Wall Street giants in hopes that they will come around again. The NYT reports that:

Over the next few months, the central bank will lend hundreds of billions of dollars to banks and investment firms that financed a mountain of mortgages now headed toward default.

The Fed is currently already undertaking some short term programs in hopes to pull up these institutions. For monetary policy the Fed will:

On Tuesday, Fed officials are all but certain to sharply reduce their benchmark interest rate on short-term loans, the federal funds rate — for the sixth time in six months. The Fed has already reduced the rate in rapid stages to 3 percent from 5.25 percent, and many analysts predicted Monday that it might lower it by a full percentage point more.

The Fed has also been doling out short term loans totaling $400 billion. However, Sunday the Fed started offering investment banks no-limit loans, upping the stakes tremendously. With the plan so clear, there are still many vague pointers. No one knows for sure how much money in loans will be demanded and how many securities the Fed will have to hold against borrowing banks. Furthermore, where is this money to come from? If banks still falter and cannot repay their loans, billions from taxpayer dollars might be needed to keep the US economy from ruin.

However, Alan Blinder, a professor of economics at Princeton and a former Fed vice chairman, commented: “These kinds of crisis- prevention measures always have to balance potential moral hazard costs down the line against the clear and present danger that something is going to happen right now.

For now we can only wait and see how this rescue effort plays out.