Sophie de Mol van Otterloo - critique on fiscal cliff could weigh on holiday sales

The article is about the predictions of the amount of sales that are happening during the holiday season. As the author mentioned, expenditures might not be as big as they were last year because of the lack in consumer confidence. There are two reasons why the consumer confidence is expected to drop. First is the December sell-off at the stock market. Around Christmas, people need money, not stocks. So when a lot of people sell their bonds the value of those bonds go down. The stock market has, as said in the original article, a huge influence on consumer confidence. When the value of stocks go down, so will consumer spending. Another reason is the fact that there are important measures coming to avoid the fiscal cliff. Measures like an increase in tax rates and a decrease in government spending, set to begin in January. The uncertainty about the exact amounts of these measures and the exact influence it has on individuals hurts the consumer confidence. A lack in consumer confidence makes people hold on to their money and spend less. Retailers will be hurt because they’re relying on the consumer for the huge December-revenue (one-fifth of industry sales), and jobs may be cut.

The author mentioned the reasons why there should be no fear for a decline in holiday-sales, but didn’t mention the question whether or not the lawmakers should act now, to make sure that people know what to expect. President Obama’s top economic advisors released a report saying that Congress needs to prevent tax hikes on middle class families, because that’s the group spending the most, otherwise consumer confidence will decline. Other recent reports by the University of Michigan and Rasmussen Reports also show a decline in consumer confidence after the election’s renewal of fiscal cliff-fears. Also the National Retail Federation and the CEO’s of Wal-Mart, Costco and Macy’s are arguing the necessity of clarifying January’s measures. But, on the other hand, consumer spending has not reflected these fears up until now. Spending over Thanksgiving weekend hit a new high of 59.1 billion dollar, a 13% increase in comparison to last year. Consumer confidence also rose to a four-year high in October, as job growth and rising home prices lifted spirits. Another reason why people are not responding to the uncertainty’s planned for January might be because consumers just don’t realize what an impact the new measures are going to have on their aggregate income, according to some experts.

It’s very important to act wisely now, with the new rise in taxes planned for next January, there will be a fall in aggregate income and there is going to be less spending, simply because people don’t have the money anymore. Retailers need the revenue made in the holiday season. It’s going to be a difficult time but it’s necessary to get America rolling again.  

Kate Higginson Critique of Lesley Williams- "CBO: ‘Fiscal Cliff’ Could Trigger Recession"

In response to Lesley Williams’ “CBO: ‘Fiscal Cliff’ Could Trigger Recession” it was a great analysis of the article, it was well written, well thought out and I enjoyed reading her thoughts on what we should do about the “fiscal cliff”.  I agreed with Lesley that we should bite the bullet and go over the cliff even though it will cause a recession within our country.  A recession now is better than continually pushing off the inevitable crash of our economy by making our country’s deficit larger.  I also agreed with the point that she made that Boles is wrong in his opinion of avoiding the fiscal cliff. 

            I did disagree with some points she made and thought she could’ve addressed a few more points.  She talks about how in class we discussed the end of the Bush Tax Cuts, but what does it really mean to be going over the fiscal cliff.  It is the automatic increase in taxes and spending cuts in the start of 2013.  I disagree also with the point she made about how the drop in GDP by .5% and the unemployment rate rising to 9% will only last a year.  I think we have a long road of recovery in front of us and this deficit is huge and we need to get ourselves out of this hole that we are in and that is going to take time.  And in the mean time our economy is going to suffer and we will be in a recession in my opinion for at least two years if not more.  There is no quick fix to this inevitable fiscal cliff that we are about to go off and our country needs to realize that.  A topic that is brought up in the article that Lesley does not really discuss is the start of negotiations between the White House and Congress and what is expected of those.  The Republicans and Democrats have been negotiating on what needs to be done and what spending needs to be cut.  The Republicans have already cut a lot of their spending and the Democrats are more hesitant.  The Republicans want to see a cut in social security, Medicare and Medicaid in order for there to be a more stable economy.  The fear is that the Democrats will not cut the spending of these programs because they do not want to put stress on the poorer people by making the rich pay more.  This is not going to help; everyone needs to pay in order to achieve a more stable and stimulated economy in my opinion.  Over all Lesley analyzed and related this article back to what we’ve learned in economics really well and I agreed with almost all of the points she made in her entry.  Really great job!

Is the US economy protected from the Euro Crisis?

 

Since the Euro crisis started three years ago, a number of measures have been taken by political leaders in Europe to stem it. None have been truly effective and they certainly haven’t convinced investors that the investment climate is right again. Europe has kept Americans on their toes, not really daring to invest until some kind of solution was found. It hasn’t been found yet, but how much impact does the Euro crisis really have on the US economy, that’s dealing with hardships of its own already?

There are many ways in which a financial crisis in Europe affects the American market. U.S. banks are exposed to the European debt, export will diminish and American consumer confidence will fall. This seems to give a bleak prospect for the US economy if the European one does crash. In this globalized world, what happens in one part of the world automatically affects the other parts. But will the U.S. really suffer that much from the Euro crisis?

Not necessarily. Two main reasons for that: American banks are healthy at the moment and are better capitalized than their European counterparts. And manufacturers have been directing their attention to the domestic market. Moreover, the countries in Europe that are actually really doing bad are mainly the southern ones, Greece, Spain, Italy and Portugal. American export to these countries consists of only 3% of the total American export. Which means it wouldn’t be a disaster if that were to disappear.

Yes, the US would probably suffer some kind of short-term economic dip if the euro were to crash, but nothing it couldn’t get over quickly. The Euro crisis shouldn’t be seen as a threat to the US economy, but as a lesson. Why did Greece, for example, almost go bankrupt? Because of years of overspending! The only thing keeping the EU on its feet is the counterweight of the Northern countries, Germany in particular, who have been doing very well. The US doesn’t have a counterweight like that, but it IS overspending and adding to the national debt constantly. What will happen to the US economy when they are unable to pay off their national debt? Interest rates will rise, inflation will rise, financial crisis will be looming!

So America, take a lesson from Europe. You are protected from the Euro crisis; you just need protection against yourself. Start getting rid of your national debt before it’s too late. Take the necessary precautions, but at least partly step off the fiscal cliff. Don’t procrastinate like Greece did, or you’ll end up like they did!   

Reference:

http://money.usnews.com/money/business-economy/articles/2012/08/17/is-the-us-economy-protected-from-the-euro-crisis

FISCAL CLIFF COULD WAY ON HOLIDAY SALES

With the holidays right around the corner, many consumers are prepping to do their holiday shopping. Also right around the corner is a fiscal cliff that is ready to increase taxes and cut government spending. There are many economic problems that will occur for many middle-income families because of the fiscal cliff, and these problems could lead to some households spending less this holiday season. The fiscal cliff is something we have gone over in class recently and I thought that going over an article that incorporates what we learned and talks about something all college students deal with would be interesting to do.

As we have talked about in class a number of factors including the Bush tax cuts and the Budget Control Act have led to the fiscal cliff. The end result of the fiscal cliff problem could mean tax increases to Americans and a decrease in government spending. Other long term problems like more debt for America are likely to occur as well.

Because the holiday season is right before these effects will occur, many consumers might be hesitant to spend a lot of money this season. If the amount of money spent this holiday season is significantly lowered compared to last year it could also have negative affects on the economy. To give a broad idea of how important the holiday season is to industries in America, a report conducted by President Obama’s top economic advisors said the holiday season “accounts for close to one-fifth of industry sales.” Some effects that could occur are “consumer confidence will go down, retailers will be hurt, and jobs may be cut.” Wal-Mart CEO Mike Duke said, “They are shopping for Christmas now and they don’t need uncertainty over taxes.”

However with how high the level of worry may be, and the amount of uncertainty in the air over this holiday season, the National Retail Federation still predicts are 4.1% increase this year in holiday sales. The recent Thanksgiving day sales were also so high that we hit a new record of $59 billion in spending.

With so many people in the industries relying upon consumers to do their part, there is reason to be scared, but it looks as if the holiday sales won’t take a hit because of the upcoming fiscal cliff. Maybe people don’t worry about the fiscal cliff and will take their chances when it hits, or maybe people don’t know about the upcoming cliff. Whatever the case the fiscal cliff certainly will play into sales next holiday season, after the tax increases for households. It will be interesting to see all the other little affects that this fiscal cliff will have on the economy and the American people.

Kurtz, Annalyn. "Fiscal Cliff Could Weigh on Holiday Sales." CNN Money. N.p., 26 2012. Web. 29 Nov 2012.

http://money.cnn.com/2012/11/26/news/economy/fiscal-cliff-holiday-sales/index.html?iid=EL

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.