First Round of Deficit Cuts

           As of 2008, the United States economy has taken a turn for the worst. The economy has slipped into recession due to the repeal of the Glass Steagall Act, falling interest rates, and the housing market bubble. With that being said, the current public outstanding debt for the US is a little over sixteen trillion. President Obama, newly re-elected, has begun making attempts at a new deficit reduction program. Before this new plan can be implemented, it needs to be approved. The first step, currently being discussed, is the down payment.

            As we learned in class, implementing fiscal policy the correct way can indeed deduce deficits. One way to do so would by cutting spending and increasing taxes. That is exactly what President Obama wishes to do in his new deficit reduction plan. Currently his efforts are going towards getting congress to approve “a first installment on deficit reduction that would replace the automatic spending cuts and tax increases that make up the fiscal cliff” (Weisman, 1). In order to start reducing the deficit, Washington needs to get the fiscal house in order to display the severity of the situation. If an initial down payment were made, comprised of mostly increased taxes and top incomes, it would signify a legitimate movement to reducing the deficit over time. The ultimate problem with this situation is getting congress to approve these actions. Republicans in the house are apposed to this large initial down payment because they believe that the payment should be made up of Medicare savings and other entitlements. They also fear that the promises of future spending cuts are too vague and will not get accomplished. The loner this process takes to the closer our country gets to the approaching fiscal cliff.

            An agreement needs to be made soon in efforts to keep the public on board with the task of reducing the deficit. “Republicans and Democrats alike worry that canceling roughly $600 billion in deficit-reducing tax increases and spending cuts next year might spook financial markets, which could take the move as proof that the United States’ fiscal problems are politically intractable” (Weisman, 1). The fiscal deadline is now four weeks away and a decision needs to be made either way. As we discussed the annual congressional budget office’s report, it is apparent that there are many different approaches to this large-scale problem. I believe that President Obama’s initial strategy is the correct one. He is urging that a large initial down payment needs to be approved to at least start tackling the deficit. He believes that implementing this strategy will “lock in $1.6 trillion in higher revenue as the bulk of the first stage of deficit reductions before stage two even begins” (Weisman, 1).

            With the deadline approaching, Congress needs to start making agreements. President Obama has a plan that will work, if put into action. Simply arguing over the same issues is only prolonging the problem, if not adding to it everyday. “Mr. Obama’s initial proffer contained just two numbers for stage two: $1.6 trillion, the amount of new revenue a simplified tax code should raise over 10 years; and $400 billion, the savings that changes to Medicare and other entitlements should yield” (Weisman, 1). Although there are many other strategies that could also be implemented in regards to handling the deficit, one has yet to be approved and is ultimately hurting our economy further. In my opinion, our country has been ‘talking’ about solving this problem for quite some time now and needs to start producing. 

FED and Fiscal Cliff

This article is about the increased pressure upon the Federal Reserve Bank to address the fiscal cliff and the current state of the economy through open market operations. The Federal Reserve Bank is a government operated central bank that strives to maintain economic stability by controlling short-term interest rates. Open market operations are the Federal Reserve’s most important tools for exhibiting monetary policy by effecting banks reserves. The Federal Reserve, FED, is thus obligated to enact some form of monetary policy in order to combat this increasing economic uncertainty, especially as we get closer to the end of the fiscal year. Several months ago, the FED started the process of buying bonds vigorously and in December they will need to decide whether to continue doing so into 2013. They have been purchasing long-term securities and treasury bonds from banks in an effort to increase the money supply since 2008. In doing so, the banks are acquiring more money that they can then turn around and lend to businesses and individuals which reduces the interest rate. As a result of lower interest rates, investment and capital purchases are increased also promoting economic growth. This results in a stimulation of spending and consequently more production. In turn increasing the demand for labor. The demand for labor can then increase wages and reduces unemployment. However, this could possibly lead to stagflation as it did in the 1990s where there is high unemployment and high inflation. Increasing money supply will directly increase the price level because the quantity of money available is greater which means that goods and services thus overtime will become relatively more expensive. Inflation resulting from an increase in money supply however takes a long time to occur. In addition, the FED would need to create new bank reserves by effectively printing money in order to continue buying long-term bonds. This is especially troubling because it risks inducing inflation further by increasing the money supply two-fold. Mr. Bernanke in this article expresses that if we are to go over the fiscal cliff that it will be extremely detrimental and that there will be little the FED can do to mitigate it. The pressure and importance that he places upon not going over the fiscal cliff, though obviously important for him to currently do in order to try and stop it, will consequently only make the situation that much worse in 2013 if were are to go over the fiscal cliff. Mr. Bernanke, as well as many other individuals, but especially as a FED chairman, has a lot of power in what he says and this urgency only demonstrates the seriousness of how bad it will be if we do go over the fiscal cliff. Erskine Bowles today publically announced too much alarm and regret that he thought there was a two-third chance we do in fact go over the fiscal cliff. Undoubtedly, his prediction is a result of the conversations that have been taking place recently, following the election of course, between the President, CEOs, republicans, and democrats.

References:

http://online.wsj.com/article/SB10001424127887323751104578147443715538694.html

California: Is the Gloom Actually Lifting?

            In December of 2007, the United States declared that it was in a recession.  A recession, as defined by Samuelson and Nordhaus, is  “a period of significant decline in total output, income, and employment, usually lasting from six months to a year and marked by widespread contractions in many sectors of the economy” (2010, 672). Almost all Americans felt the impact of the recession, especially as the unemployment rate increased, Gross Domestic Product declined, the housing market collapsed, and many states created high deficits. Nevertheless, the US is slowly beginning to recover, with some states recovering at a faster rate than others.

            According to an article in the New York Times titled “California Finds Economic Gloom Starting to Lift,” Adam Nagourney articulates that California is beginning to see positive economic growth after being harshly affected by the recession. Even though California is ranked third in the nation for the highest jobless rate, it has seen significant improvement in its economy. For example, “California reported a 10.1 percent unemployment rate last month, down from 11.5 percent in October 2011 and the lowest since February 2009” (Nagourney, 2012). Moreover, California has seen the housing market bounce back, deficit decreases, and state confidence.

            Such economic recovery, however, has not been uniform. This has caused California to remain the state ranked with the highest poverty in the nation. With a poverty gap so high, how can California truly claim that it is experiencing an economic rebound? One means of rebutting the claims in this article is to look at the unemployment rate statistics. For example, Nagourney insinuates that California’s unemployment rate is much better today than it was a year ago. Yes, perhaps it did decrease by 1.4 percentage points; however, the percentage decrease was only 16.1 percent. This decrease is not very significant considering the overall decrease (10 percent in 2010 and 7.9 percent in 2012) in the unemployment rate in the US was 2.1 points and 21 percent (Bureau of Labor Statistics, 2012). California still does not have the overall unemployment rate decrease beat when its rate in 2010 (12.4 percent) is compared to the current rate (10.1 percent) - a 2.3 percentage point drop and an 18 percent decrease in the unemployment rate (Bureau of Labor Statistics, 2012). Moreover, some states, such as Florida have experienced a 2.9 percentage point drop (11.4 in 2010 and 8.5 in 2012) and a 25 percent decrease in its unemployment rate (Bureau of Labor Statistics, 2012). Thus, Florida has had a more significant decrease in the unemployment rate than what California has experienced thus far.

            Florida, therefore, has actual grounds to report a strong economic rebound. California, on the other hand, still has a lot of poverty problems to address- which can perhaps be improved by working on job creation and significantly decreasing the unemployment rate. But, such economic improvements cannot be made alone; it is going to take cooperation and determination from policy-makers from both political parties to allow for a state-wide and uniform economic rebound. Moreover, policy-makers will also need to address issues concerning structural, frictional, and cyclical unemployment as all types have been experienced by Americans since the recession hit in 2007. Even though this is a difficult goal to satisfy, policy-makers must aim high if the US is to ever fully recover. 

References:

Article link: http://www.nytimes.com/2012/11/28/us/california-shows-signs-of-resurgence.html?_r=0&pagewanted=print

Bureau of Labor Statistics. 2012. “Current Unemployment Rates for States and Historical Highs/Lows.” United States Department of Labor. Retrieved from: http://www.bls.gov/web/laus/lauhsthl.htm.

Samuelson, P. & Nordhaus, W. 2010. “Economics 19e.”McGraw-Hill: NY.

Sereen Sumner- the pros and cons of importing more then we export

The United States is losing their status as a major exporting country. For the first time our imports have exceeded our exports, this is called trade deficit. All nations would rather have their net exports be positive than drop to negative because when net exports are negative Gross domestic product decreases. This happens because the amount of net exports are included in the gross domestic product formula which is consumption + investments +government spending +net exports. In actuality the problem is not the number of exports we send off but rather the job opportunities that come with exporting goods. A common misconception is that other countries are creating more jobs in their perspective countries than the USA, but a bulk of our imports originate from companies owned by the USA that are just operated by other countries. This results in jobs being shipped overseas and workers from these countries being hired to work while the employees here in the states are out of a job. Many of the employees that lose their position when their job is shipped over sea have to find new skills because it is hard finding another position having a specific type of skill. The USA still earns a profit from the commodities being exported from other countries but mostly the upper class benefits from this act. The country exporting the goods also benefits because the increased demand for foreign products will strengthen their dollar and in turn lower the power of the USA dollar, having a strong dollar is important because when the value of the U.S dollar decreases foreign countries pay less for our exports and in turn we pay more for their exports.  Although having a trade deficit may sound unattractive the USA still has the largest economy and the farthest global reach, The economy is still able to consume large amounts. Other countries still find it attractive to import to the USA and the figures show that other countries are not planning on cutting down on the amount of trade anytime soon. As our gross domestic product declines the amount of products other nations want to sell us while increase.  Although being an attractive customer is a good thing, it is counterproductive if the United States wants to keep up there position of being a world power  we need to stop sending so many jobs to other countries and find a way to utilize our country in a way that helps our workforce and labor participation rate grow. 

Craig Hash-Critique of Republicans and their fiscal cliff dilemma

The fact that our national debt is that high, just completely baffles me. I do not think that there is anyway someone can really grasp how much money that is. The fact that the debt per American household is higher than that of an average American income speaks multitudes as to what our situation really is. We all ach have a hand in the debt, and the fact that our income is below what we owe shows me that we may have a problem. I found similar arguments in my post that I made, and it is really hard to fathom. I don’t know if there is a way to please when it comes to raising the tax rate. If we do raise the tax rate on incomes of over 200,000 dollars for singles and 250,000 dollars to family then small businesses will take a major blow. Many small businesses as you said claim themselves as a sole proprietorship which means that they are not taxed on at the federal level, but rather the personal level. This also means that these sole proprietors has unlimited personal liability in their investments. If the business goes down, then the owner is going down with it.

                If each party sat down and decided to work with each other in unison, then I still don’t believe that they are going to be able to come up with a plan that doesn’t harm something. Whether it directly affects our unemployment rate which is already 7.8%, destined to be even higher come the first of the year, or raising taxes on one of the classes. Something will have to happen in order for the economy to return to where it was before this downward slide that it has been on for quite some time. If we could come up with a plan such as Simpson-Bowles, then could you imagine the money saved? $10 dollars in government expenditures would be cut for every $1 that the tax revenue was raised. Regardless of what they decide to do, I saw a lot of finger pointing in this article. We all know that finger pointing has gotten us exactly where we are today, and if we do not come together then we will fail as a whole. Republicans or Democrats are going to have to push aside their egos and help keep our economy out of recession, lower this national debt that will be burdened to all of us and our children, and restore some respect to America as a national power.

Lesley Williams - CBO: 'Fiscal Cliff' Could Trigger Recession

In the article, CBO: 'Fiscal Cliff' Could Trigger Recession, Corey Boles from the Wall Street Journal explains what could happen if the fiscal cliff is passed. In class we discussed the Busch Tax Cuts that end in January, along with learning about the fiscal cliff. In groups, we came up with what we thought was the best solution - to bite the bullet and go over the cliff or attempt to salvage a few tax cuts while creating new ones. Most agreed that the fiscal cliff would be the best option in the long run. It has been predicted that the fiscal cliff will cause the economy to fall into another recession by next year. Along with the recession, included is a .5 percent drop in gross domestic product (GDP) and an unemployment rate of 9 percent. These predictions are estimated to last only a year. If the fiscal cliff does go into effect, Obama’s health care laws and defense spending will be cut drastically. It also means that we will experience tax increases as well. If the tax increases and spending cuts do go into effect, we will come out with high growth rates and lower unemployment over time. If we do not take the cliff and cut government spending, we will only be hurting our economy more. The federal deficit will continue to rise, which does not need to happen considering the deficit is at an all time high. In the article, Boles explains why the cliff should be avoided and how they plan on doing so, but I disagree. I think that the best way to get us out of debt and back on track to a low unemployment rate is to take the route of the fiscal cliff. We have been spending more than what we have been making, and if nothing is done, it will only burden our generation down the road. In class we learned that the best way to get an economy out of recession is to cut government spending and increase taxes. One to two years of a slow economy will be better than the 5 plus years it could take if we don’t take the cliff.

http://online.wsj.com/article/SB10001424127887324439804578107280483982220.html

Combating Inequality May Require Broader Tax

by Jackson Stuckey

http://www.nytimes.com/2012/11/28/business/combatting-inequality-may-require-broader-tax.html?ref=business

In this article the author discusses how tax on the top percent earners is now becoming too high.  He states that this is helping in a short term run, but over time this will end up hurting our economy.  He sights how other developed countries have a much more even tax rate on citizens, something that we do not.  Taxes in the U.S., studies have shown, get more redistributed to from the wealthy to poor more so than in every other “rich” country.  I believe this is true, the data shows that the resources the wealthy are paying for most of the services for the poor, while the poor contribute little income to them.

            He then states that our government is one of the worst at “combating income inequality,” meaning we have the largest range in wages.  This is, he says, because the government cannot create enough tax revenue to create benefits that help the middle and poor classes.  He also cites that progressive tax codes do not in fact raise more money, when a more flat tax for everyone would.

            Other countries spend more money on government programs, such as pensions, unemployment insurance, disability, ect, but the citizens also pay more for this.  Every person contributes a larger percent to have these basic rights of citizenship.  Our government focuses more on helping the older demographic and the poor, and not so much the average American.  Although I do think that the rich should still be obligated to pay taxes than the poor, I believe the ratio should not be as high as it currently is.  For the poor and middle class to have multiple programs universally the extra finding needs to go to someone.