Obama’s Keynesian Economic Plan: More Spending and Tax Cuts

John Keynes still lives strong in Economics, it seems lately. His idea is that in order to get out of a recession, you must increase government spending and run a deficit for a little while. This would stimulate aggregate demand, which is the same as when you heard stimulating consumer spending. Barack Obama’s economic advisors have came and out said that Obama will increase government spending and lower taxes. The Financial Times has it here:

“The Obama economic team is reportedly considering a plan in the $675bn-$775bn (£462bn- £531bn) range, but some analysts believe the ultimate size of the stimulus will be $850bn or more.

Mr Summers said Barack Obama, the president-elect, faced “what may well be the bleakest economic outlook since world war II.” He cited estimates that unemployment could reach 10 per cent next year, with an output gap between demand and potential supply of $1,000bn – about 7 per cent of gross domestic product.

But Mr Summers rejected calls to “focus exclusively on short-term policies that generate consumer spending” – saying “that approach led to some of the challenges we face today.”

We are already in a major deficit and you have to have a balanced budget in order to do what Keynes prescribed, if you assume it works. Milton Friedman and others have proven that this is not the best policy but that doesn’t stop policy makers from trying. This only works in the short-term and in the long-term it doesn’t do much. In the short-term, it boosts consumer spending and lower unemployment. Monetary policy was the prescription Friedman created after Keynes to pretty much the same thing.

This has been the goal of all government policies is to keep inflation and unemployment low, while keeping consumer spending high. This can not be sustained forever and people will have to come down. This is what this period is known as. It may hurt now but it will help in the long term. The right government policy is to deregulate and cut spending to get closer to balancing the budget.

The more debt we bring upon ourselves the more future taxes we impose upon ourselves. We cannot even return to a balance budget after fiscally stimulating, which is a huge problem in Keynes’ reasoning.

The rest is here.


Published in: on December 31, 2008 at 4:50 pm  Comments (1)  
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An Unregulated Banking Fix

The current recession got the most serious when banking began to fail. We saw WaMu and Wachovia get auctioned off with help of the federal government. The bank that is attributed with the first major failure is IndyMac. If you haven’t heard of this bank, it is because they are mainly on the west coast. Obviously, the housing market was a boom there and they took large losses. The federal government has intervened to try and “fix” the problem with fire sales causing many people to not know what would have happened if the private sector was left to its own devices. Most assume bad since the government stepped in but according to The International Herald Tribune this is not the case for IndyMac:

“The team of buyers include the private equity firms J. C. Flowers & Company and Dune Capital Management and the hedge fund Paulson & Company, the people involved in the deal said. It was unclear exactly how much capital the buyers would inject into IndyMac, but they would be shouldering a portion of the losses the bank may have on mortgages and other assets, these people said.

The proposed deal is unusual because it is one of the first transactions involving unregulated private equity firms acquiring a majority stake in a bank holding company. Until now, private equity and hedge fund firms have taken only minority positions in struggling banks, like the Texas Pacific Group’s $2 billion investment in Washington Mutual earlier this year.

As banks began to fail, private equity firms initially came to the rescue, but they backed off over fears they would be subject to increased regulation.”

Why is this so? Hedge-funds many times deal with the stock market but will be attracted to other investments to stabilize a portion large or small of their portfolio. This is good and a private way to solve this financial crisis. This would keep the taxpayers from footing the bill, the deficit low, and be the most efficient outcome for this situation.

There will always be a demand for banking and people will always invest in something that there is a demand for. The Federal Reserve and Treasury have done a little to pave way for more private acquisition of these debts and failed banks and they should continue to do more.

The rest is here.


Published in: on December 31, 2008 at 11:38 am  Comments (1)  
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China and Trade during a Recession

Free trade brings growth to all nations but most of the time only in the long-term. Due to political situations that policy makers face, they often only care about the short-term. Most of the time during a recession people turn protectionist. This is because they begin to worry about unemployment and instead of blaming the government, people blame corporations. They then look to the government for protection. Most people expect the United States to lead the protectionist movement but an interesting article from the International Herald Tribune argues that it is in the hands of China:

“Just like the U.S. in 1930, China has massive foreign-exchange reserves and starts the recession in a very strong trade position. Thus, at the broadest level, Beijing has least excuse for measures to protect local employment by artificially curtailing imports. Indeed, China has, in theory at least, the most leeway to stimulate domestic demand and imports.

So far, such stimulation appears to be its principle response – but that will not be easy for structural reasons. Failure to get quick results could easily lead to protectionist responses, of which some glimpses have already emerged.

Competitive devaluations are perhaps the most dangerous. These measures start in Asia and eventually lead to formal trade barriers as protection against “unfair” trade practices. The post-September rise of the dollar against the Chinese yuan and most other Asian currencies (excluding the yen) caused concerns that the region would attempt to sustain exports with currency manipulation. In an unusually tart comment, the Asian Development Bank warned countries against buying dollars to depreciate domestic currencies. Some Asian currency declines have reversed, nonetheless the Asian instinct for currency undervaluation to boost exports is alive and well. China matters particularly because other countries such as Malaysia, Thailand and Taiwan have taken to following its lead.

India, Brazil and Russia have to greater or lesser degrees followed China on the liberalization path but now find that commodity exports are dropping dramatically while their domestic industries remain under pressure from Chinese imports. For the time being, protectionist measures by such nations have been isolated and industry-specific but more barriers will probably rise, particularly if China continues to run massive surpluses with them. In turn, these may provoke copy-cat moves by trade partners in regional arrangements.”

This is the prisoners dilemma of trade barriers. This means that it is in the best interest of all nations to have free trade but there will always be an incentive for one country to deviate. They will do this with trade barriers causing everyone to move that way and everyone will end up worse off.

Government should not turn to trade barriers to secure jobs in their country. All this does is support inefficient domestic jobs and at some point technology will overpower them and those people will have to lose their jobs. This will currently prevent labor and capital from moving to more efficient industries.

China has had a very short history of liberalized trade and their Communist government used to keep them closed off to the world. With the ever-slow move to political freedom, we should expect China to be very susceptible to political pressure. All we can do is continue to educate people on the benefits of the trade and hope that politicians choose trade freedom.

The rest is here.


Published in: on December 30, 2008 at 3:52 pm  Comments (1)  
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Goodbye 2008, Hello 2009…



Published in: on December 30, 2008 at 12:59 am  Leave a Comment  
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Wealth of Nations: Division of Labor

Even though it is not assigned in most undergraduate courses in Economics, all economists should read “The Wealth of Nations” by Adam Smith. This book is the formal foundation of Economics and every sentence is ingenious. You could spend hours thinking about one sentence in the Wealth of Nations and that is why instead of writing a book review on the whole book, which would do it no justice, I am going to discuss things I stumbled over or thought while reading it.

The first installation starts with division of labor. This is the single greatest invention man had ever invented. I believe it beats the wheel and fire by far. The division of labor allows someone who could maybe make one item of something a day, combine their labors with other to make many time what they could. The division of labor is what most people think of when they think of an assembly line. It also works in other ways as in a farmer can sell his corn to a distributor who then sells it to a grocery store. This is much cheaper and allows the farmer to produce more than for him to do all of those things on his own.

The interesting entrepreneurial aspect is that he believes that division of labor allows the worker to figure out how to innovate in their sector. This is because of the profit motive, which in this case is the worker trying to make as much money while doing the least possible. I know that I do this all the time when doing a boring job. It could be as simple as spacing papers that you are trying to stamp in a certain way so you do not have to keep flipping pages with every stamp. I am sure the possibilities get more complicated but I think you get the point.

There was one last interesting idea in the first section and it was when he was talking about how climate has to do with trade. I took that he also said that countries would be very tempted to nationalize these industries. This is true when it comes to places like Cuba and it has been one of the laws I adopted long before I knew that this was going to be in the book. From what I understand, he later deviates from the climate advantage and Ricardo focuses more on it.

Division of labor should not be something that is overlooked even as simple as it may seem. When people think of the human race and why it is so far advanced than dogs or any other animals, the answer lies within the division of labor. Mass production and the progression of society has all been contributed to division of labor. The reason why we today can worry about which iPod to buy and not whether we are going to catch the food we are going to eat tonight or starve is due to division of labor.

This is the first installment of many writing on the Wealth of Nations and Adam Smith. I will of course space these out and not overload my posts with just Smithian comments.


Published in: on December 29, 2008 at 3:52 pm  Comments (1)  
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Will the Real Counterfeiter Please Stand Up?

The USA Today is reporting that the Secret Service is saying that counterfeiting is up with the holiday season and the credit crunch. Here:

“Counterfeiting arrests in the USA jumped 28% this year over 2007 — the highest number since 2004, according to the Secret Service, a division of the Homeland Security Department that safeguards the nation’s currency. Counterfeiters passed $64.4 million in fake cash into the economy, a 5% increase over 2007 and also a five-year high, says Special Agent Darrin Blackford, spokesman for the agency.”

This makes sense that since the benefits of counterfeiting currency has gone up while the costs have been ever decreasing with technology. Now you can have a scanner and copies at your finger tips that will vividly print off anything. So it is very likely that counterfeiting is up. At the same time, stay at home moms do not turn into counterfeiters overnight due to an economic downturn.

The statistical problem is that it isn’t always true that more arrests mean more acts. It could be possible that the Secret Service has gotten more funding or better at catching counterfeiters. This would be through technology and more man power. I am not completely in love with econometrics but I believe a good regression to control for that would be good here.

The underlying story here is that what is the difference between the counterfeiter and the Federal Reserve. They both print money with nothing truely baking it. Back during the so called “wild cat” banking days, banks could only issue what currency they had in gold. If someone counterfeit their currency then it would cause there to not be enough gold in the vaults and this would be a huge problem. Now this isn’t a problem. If someone went out and counterfeited a one hundred dollar bill it would not make a large difference in the economy. The only difference is that the government is backing the Fed and the mint to print money.

With these bailouts the Federal Reserve will be issuing a lot of money into the economy via banks. The counterfeiters are actually helping them do their jobs. Of course, they aren’t going directly to banks.

The rest is here.


Published in: on December 29, 2008 at 12:35 am  Leave a Comment  
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An Obese Proposal

In the 21st Century, the United States along with much of the world has been accused of being plump and over-indulged. The facts are that only 1 in 6 Americans are obese, which means 5 out of 6 Americans are walking around fit and lean.  Current trends only show that the people who are overweight are only getting bigger. How could they not when they walk around and every 5th Americans they see eating at the same restaurants they are, are fit and lean?

Karl Marx is best known for saying, “From each according to his ability, to each according to his need.” This has been the slogan for redistributional practices all of the world. To use this for income only is unjust. Like income many people are born with different speeds in which they metabolize food. This is why we must ask our future President has said spread the wealth. Those who have attempted to diet know that lean people having a quick metabolism is a great wealth we can only dream of. We must transfer the fat from the people who are born with quicker metabolism than others.

People cannot choose who they are born to and there are two types of people in the world. It is those who are naturally faster at metabolizing food and those who are not. The faster metabolism allows some people to enjoy foods like donuts, greasy burgers, and other wonderful flavorful foods. The Declaration of Independance calls for the life, liberty, and pursuit of happiness. Someone who has to eat foods that they do not like it not pursuing their happiness. If we were to redistribute the fat directly, as mentioned before, this would be more efficient way to use the faster energy and lower the health care cost.

Those who eat the greasy burgers and donuts without flinching or counting the calories. They do not understand the stress that is involved in worrying day to day whether you are going to gain a pound and whether that will send you over into a heart attack. The slow metabolized person tries to switch to low fat foods but when they join their friends over for dinner they cannot help but indulge. This is a receipt for disaster in which there is no cure.

If Barack Obama wants a real plan to fix health care costs in America, he must follow this plan of redistribution. This plan will bring happiness to those who have been disenfranchised by skinny people across America and finally give them what the founders entailed. To the critics that call will call this plan inefficient, I say live a day in the life of a fat man shoes.


Published in: on December 28, 2008 at 2:24 pm  Leave a Comment  
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Good Recession News: Privatizing Parks and Roads

As most people know all across America there are many nature areas that are owned by the state and federal government. This along with almost all roads are owned by the government. As I have mentioned before during a recession people usually turn their back on Capitalism. There are some benefits of recessions and in this case it is that the governments of many states are losing revenue. This is because as productivity goes up so does governmen revenue. Since states cannot issue their own currency and inflation/steal from people, they must find another way to raise revenue. This from The USA Today:

“Like families pawning the silver to get through a tight spot, states such as Minnesota, New York, Massachusetts and Illinois are thinking of selling or leasing toll roads, parks, lotteries and other assets to raise desperately needed cash.

Minnesota Gov. Tim Pawlenty has hinted that his January budget proposal will include proposals to privatize some of what the state owns or does. The Republican is looking for cash to help close a $5.27 billion deficit without raising taxes.

GOP lawmakers are pushing to privatize the Minneapolis-St. Paul International Airport and the state lottery. Both steps require a higher authority — federal legislation in the case of the airport, a voter-approved constitutional amendment for the lottery. But one lawmaker estimated an airport deal could bring in at least $2.5 billion, and the lottery $500 million.

Massachusetts lawmakers are considering putting the Massachusetts Turnpike in private hands. That could bring in upfront money to help with a $1.4 billion deficit, while also saving on highway operating costs.

In New York, Democratic Gov. David Paterson appointed a commission to look into leasing state assets, including the Tappan Zee Bridge north of New York City, the lottery, golf courses, toll roads, parks and beaches. Recommendations are expected next month.”

This is great. It would be nice if banks and private individuals were able to own some of these assets. First, this wold allow banks to not weigh so heavily on the mortgage industry. Second, these airports and roads will be run more efficiently. This is a benefit to everyone and most people would agree that many of these things shouldn’t be run by the government. The federal government should take a look at what the states are doing. They are too busy trying to “Save Capitalism.” Anyone who says that is a Socialist. The point of Capitalism is the invisible hand not the bureaucratic hand.

It is definitely an interesting shift with the federal government socializing banks and car companies while states are auctioning assets. It could be must worse and at least us Capitalist are getting something out of this.

The rest is here.


Published in: on December 28, 2008 at 1:11 am  Comments (1)  
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Merry Christmas and Happy Holidays to All!

The title says it all and remember Scrooge wasn’t such a bad guy.



Published in: on December 24, 2008 at 1:19 pm  Leave a Comment  
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The GRE is a test much like the SAT that is used to help measure people for graduate school. I will be taking the GRE today in order to attempt to get into graduate school for Economics. Most Economics school only care about the quantitative as a Professor of mine illustrated with his scores at the University of Chicago. The disadvantage I have is that I write essays well and understand the material but fall easily to multiple choice traps. Is it true that the GRE is a good test of how well you will do in graduate school?

In undergraduate school, I have graduated in 3 1/2 years and over a 3.0 GPA but my SAT scores were just a little over average. I know plenty of people who entered the same school I did with higher SAT scores and they are struggling more. I believe it may have something to do with overconfidence. In fact, I know of one case where someone’s SAT scores were so high they thought they could apply to one top tier school and get in. They didn’t and now they are at a school with much less caliber than my own.

The GRE today will pretty much decide if I get into the school of my dreams. The same school that inspired me to move from law school to economics, the same school that I know and love the faculty and content, and the same school that inspired this blog. Maybe it is true that a Economics graduate degree is heavy in math but is taking this test about high school math that throws every trick at you without a calculator what is real in graduate school.

In the view of the school, you might say that it is rational for them. Even if there isn’t a direct correlation between GRE and success in their program, it is probably a better predictor without the test scores. One of the main problems is that these tests do not measure drive. The fact that I have graduated in 3 1/2 years and am taking graduate classes next spring without evening being in a degree program show drive. The fact that I have hired a tutor to help me figure all the tricks out shows drive.

At the one place in which I was taught that hard work pays off and slackers do not, they will judge my life by one test.


Published in: on December 22, 2008 at 1:39 pm  Comments (1)  
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