Kassens ECON 122

Thursday, April 18, 2013

This article in the economist was about inflation and how it affects our economy. Inflation adjusts the prices that can hurt our economy when people cannot make a salary to compete with the inflation rate. It also hurts a country globally because it damages the currency amount when committing with other nations. The United States has faced this issue when dealing with global business. Over recent years the United States currency had decreased in value. This article mainly reviews how inflation has affects the economy over time, And how no matter what economist try to do the business cycles are unpredictable.

This article states things that are obvious such as, a lower inflation helps the economy because “we” as the population have more money to circulate the system. But they are important parts. Comparing this article to Heilbroner’s 3 big questions allows us to think critically about what we should value and how we should value it. The first question he asks in What is produced? He refers to goods and services. When we account for inflation, if we increase the price of goods we then in effect have to increase the pay of people for their service. While this doesn’t always happen, this is the only way for people to survive.

The second question Heilbroner asks is, How is it produced? When he refers to this he means land, labor, or capital. When inflation occurs, it means that the cost of living increases. For people to help themselves survive, the have to increase their income in some way. So if a man rent out his land for $500.00 a month but the inflation becomes bad, he might then need to increase it to $600.00 a month. Now with a random fluctuation it is hard to continuously adjust. Keynesian economist think that these cycles occur independently. But adjustment cannot always be lowered after the market becomes more stable. An example of this is housing and rent. If you rent a house and your renter increases the house, he is probably not going to decrease it later in life because he is earning a greater profit and knows you can pay it. This is why inflation after periods of time are hard to adjust like the article states.

Finally the question Heilbroner asks is for whom it is produced. Now at first this question seems obvious. Like diapers are produced for a mother of a new born. But when inflation comes in play there are multiple factor that get involved. When asked for whom its produced for, the following question or even answer would be, who can afford it and is it made to be afforded by all or few. This article talks a lot about unemployment, and when unemployment rate increases this 3^rd question has to be reevaluated. If incomes adjust, does a company have to reevaluate their target group, or adjust their prices.

http://www.economist.com/economics-a-to-z/i#node-21529397

The cartoon above illustrates how growth and recession work in business cycles. As we have mentioned earlier in the semester, recession is defined as a time of decline in income, total output and employment in the economy. The amount of time a recession lasts is on average about six to twelve months although some can be longer are called depressions. After years and years of observation, it is popular thought that the consumers pull an economy through a growth stage, as is illustrated above. When consumers feel like they are financially secure enough to spend their money then they stimulate the economy with their purchases which moves it forwards. When an event occurs that consumers no longer feel safe spending their money then they tend to save it up and that does not stimulate the economy because of the lack of demand from consumers. Keynes came up with the theory that lack of Aggregate Demand is a major cause of economic recessions. Because aggregate demand determines the country's final output, it is made up of four factors: consumption, investment, government spending, and net exports. This shows that simply getting people to spend more money is not the only answer of getting out of a recession. The complete answer to turning an economic recession into a growth still does not seem to have been found based on the state of our economy today and it is a rather big problem. As illustrated above, consumers are what pulls the economy through the growth stages with their purchases, because those purchases stimulate all aspects of the economy, but when a recession hits, the consumers are hit rather hard by the economy that it once helped be successful. According to the NBER, recession not only affects consumer spending but it also affects the real GDP of the country, real income of the people, employment of the people, industrial production and wholesale and retail sales. Today we have a larger than average percentage of people without jobs and many have lost hope in getting back their previous job or getting a new one period because there just don't seem to be any out there. Consumers are also hit with inflation which makes what little amount of money that they are making not go as far as it once would have. It seems that if an answer to fixing all aspects of the economy by making everyone and everything work together to collectively increase aggregate demand in order to get out of the recession, the consumers will continue to be hit the hardest by the economy.

The Federal Reserve is Raising Taxes to Create Jobs?

The Federal Reserve is Raising Taxes to Create Jobs?

Kennan Miller

This article is written by William Dunkelberg and raises many questions in response to a statement from Janet Yellen, The Vice-Chair of the Board of Governors of the Federal Reserve System. The Statement she made was, “Progress on reducing unemployment should take center stage for the FOMC, even if maintaining that progress might result in inflation slightly and temporarily exceeding 2 percent.” Two main questions are presented. First, how does Federal policy increasing their fund by at least 2 trillion dollars help to create jobs? Secondly, When the inflation rate becomes higher than two percent, what is the actual cost paid by spenders for these jobs to be created?

When the Federal policy increases its money supply, it is obviously intended to work with positive effects. However, Job creation has currently been weak. The interest rates have been at zero. Based on Keynesian policy, lower interest rates should result in increased growth which includes reduced unemployment. But, the interest rates are currently as low as they can go but no jobs are being created. Based on the past, it has been shown that when an economy is in this situation, investment spending will be lower. In today’s economy, investment spending is still most likely going to be low. When there is a low amount of investments, the total expenditure equation, which measures total GDP in an economy, will be lower ultimately signifying a poorer economy.

A process called Quantitative Reasoning (QE) is also created from the Fed introducing 2 trillion more dollars. Because money can be created by the Fed from nothing, they create money in order to buy long term treasuries from commercial banks. The result is more money being put into the economy which should reduce the long term interest rates. This process is supposed to work however, because interest rates have already hit as low as they can go, there is no positive effect in job creation.(Plumer)

When inflation rises above two percent, it can be comparable to taxes. Inflation means there is more money supply but, the value of each dollar is lower resulting often in higher prices. This is an extra cost imposed on consumers since the jobs are ultimately created through government spending. William Dunkelberg compares having the rise above two percent to past suggestions to reinstate the two percent FICA tax.

Because two percent inflation is considered the normal rate, when it rises above two percent, it is in essence creating an effect that is similar to a tax increase. The difference comes from how the money is earned. Through inflation, more money can be created and put into an economy. However, when inflation occurs, the current buyer actually has less value in the money they currently have. A result from the lessened value is a decrease in purchasing power. Purchasing power becomes reduced because prices will increase with the inflation of money to match the money supply and money demanded.

This article presented two main questions towards Janet Yellen which I have explained here. The main objective from the article is to point out that if the policy that is being talked about takes effect, there will most likely be difficulty in truly creating jobs as interest rates are already as low as possible and Keynesian theory has not worked currently. Also, inflation rising above two percent will cost the consumer because of the loss of value in their dollar as well as the increase of prices from more government spending, a higher money supply, and less purchasing power.

Dunkelberg, William. "The Federal Reserve Is Raising Taxes to Create Jobs?" Forbes. Forbes Magazine, 15 Apr. 2013. Web. 18 Apr.2013.

http://www.forbes.com/sites/williamdunkelberg/2013/04/15/the-federal-reserve-is-raising-taxes-to-create-jobs/?ss=wall-street

Plumer, Brad. "QE3: What Is Quantitative Easing? And Will It Help the Economy?" The Washington Post. The Washington Post, 13 Sept. 2012. Web. 18 Apr. 2013. <http://www.washingtonpost.com/blogs/wonkblog/wp/2012/09/13/qe3-what-is-quantitative-easing-and-will-it-help-the-economy/>.

Weakening Seen in Economic Growth

http://www.nytimes.com/2013/04/17/business/economy/weakening-seen-in-economic-growth-data.html?ref=unitedstateseconomy

This article is all about how economists think that economic growth is become weaker. Prices of consumer goods fell for the first time in four months. As we learned in class, a change in price causes movement along the demand curve. In this case, quantity demanded decreases since consumer prices fell. Two more parts of our economy that decreased over the past few months is production in industries and sales on houses. All of these occurrences prove that the Fed should continue their monetary stimulus plan like they’ve said all along to speed up economic growth.

Recall our discussion in class about the Consumer Price Index. We learned that it is produced by the Bureau of Labor Statistics and how it is used as a measure of the change in prices of goods and services over a period of time. The Consumer Price Index recently fell by 0.2% due to the drop in gas prices last month. In February, the CPI increased by 0.7%. Although the CPI decreased, consumer prices rose 1.5 percent over the past year.

A recent report from the Fed showed that levels of production in factories fell by 0.1%. This was due to output of metal and electronics declining. The production of automobiles surprisingly increased. The automobile industry seems to be doing pretty well lately in our economy. Overall production in industries rose by 0.4% last month despite weakness in factories. This was due to an increase in utilities’ output.

It seems as if we have hit a “speed bump” in economic growth when examining data from the past two years. Manufacturing, sales in retail, and employment are three areas that seemed to get weaker last month. Raising taxes and a cut in government spending could be two explanations for why our economy growth seemed to slow down a bit.

One possible way the Fed plans to help stimulate our economy is by buying $600 billion worth of bonds. This plan is what we call quantitative easing. If this plan goes through, it will lower interest rates, increase stock prices, and hopefully increase consumer spending. All of this could create more jobs and speed up economic growth. Then in return, businesses and individuals’ confidence would potentially increase, causing the aggregate demand curve to shift to the right.

Reuters. "Weakening Seen in Economic Growth Data." The New York Times. The New York Times, 17 Apr. 2013. Web. 18 Apr. 2013.

Wednesday, April 17, 2013

High Unemployment Rate In Euro Zone

By: Laurel Morrison

New York Times’ article, “Unemployment in Euro Zone reaches a Record 12%,” goes into depth discussing the reason for the high unemployment and possible solutions to lower the rate. The Euro Zone is a combination of seventeen countries of the European Union with the same legal currency, the euro. This is considered an economic and monetary union (Samuelson, 605). Since the Eurozone was created in 1999, the unemployment rate has gone down in Europe, but is still higher than the United States’. 12% Unemployment rate in Euro Zone means 26 million people without work across the 17 countries. The European labor market has been on a decline for 22 months straight (Jolly). Greece has the highest unemployment rate in the union at 26.4%. To try to stabilize Greece’s increasing debt, the union is trying to get each country to lower its government spending to prevent further debt. I believe this could backfire though, because government spending also stimulates the economy, which could be beneficial to lowering the unemployment rate. One reason there is such a high unemployment is related to wages becoming higher than productivity in recent months. Decreasing wages significantly and hiring cheaper labor can possibly correct this problem. Due to the high unemployment rate, the workers have little control in the amount of wages.

Some possible solutions to the high unemployment rate in Europe mentioned in the article emphasized reducing labor market barriers and welfare benefits. I can see how this could benefit for the economy, because the large portion of unemployed completely relies on the welfare. If welfare was to be lowered and the government used this spending to stimulate the economy, then this could cause a decrease in the unemployment rate. The article quoted Mark Cliffe, chief economist for ING group, describe this situation as “Europe is pursuing a policy that is self-evidently failing.” This just shows that without any intervention, the unemployment rate may continue to rise. By raising taxes and import tax, the government may be able to lower than raising debt. And if they lower export tax, then it may stimulate trade to create more jobs. While there may be many ways to affect the unemployment rate, too much intervention can also be harmful to the Euro Zone’s economy.

Work Cited

Jolly, David. "Euro Zone Unemployment Reaches a Record at 12%." The New York Times. The New York Times, 03 Apr. 2013. Web. 17 Apr. 2013.

(http://www.nytimes.com/2013/04/03/business/global/unemployment-in-euro-zone-reaches-a-record-high-of-12-percent.html?pagewanted=1&_r=0 )

Samuelson, Paul. Economics 19e. McGraw-Hill Irwin Inc., 2010.

The Measuring stick

The cartoon above shows the measuring stick for GDP. GDP stands for “Gross Domestic Product.” This is the total market value of all final goods and services produced in an economy in a given time period; therefore, when the goods and services in an economy increase, so does GDP. There are two different values in which GDP is calculated. The Nominal Gross Domestic Product which measures the value of all the goods and services produced in current prices. On the other hand, Real Gross Domestic Product measures the value of all the goods and services produced in the prices of some base year. In regard to measuring, Gross Domestic Profit is difficult to measure, for this reason we leave it to economists; however, the calculation is fairly easy. Gross Domestic Product has two approaches. The first approach is the expenditure approach and it is the sum of consumption, investment and government spending, plus the value of net exports, minus the value of imports. The second approach is the income approach and it is calculated by adding wages, interests, rent and profit. Logically, both methods approximately equal the same total, but never equal the same.

GDP is important in the economy because it is the primary indicator that economists use to measure the overall standard of living in a country. Its goal is to tell us what is going on with output; if there is a growth or contraction in the economy. Therefore, it is important to distinguish the differences between GDP and GNP (Gross National Product). GDP as mentioned above includes goods and services produced within an economy; whereas GNP doesn't include goods and services but instead goods and services produced by U.S. businesses operating in foreign countries. Some of the changes in GDP are simply caused by the business cycle. The business cycle is a series of cycles of economic expansion and contraction. This happens when the economy experiences booms, downturns and recessions in the economy and vice versa. However, the level of real GDP in an economy depends on Aggregate Demand and Aggregate Supply and where the equilibrium intersects.

In the cartoon for example, inventory is causing the increase in GDP. Although changes in inventory make up a small section of GDP, it plays an important role. In fact, changes in inventory causes changes in the aggregate demand and therefore also causes changes in future economic indicators. For example, an increase in large amounts of inventory may reduce the aggregate demand thus causing firms to cut back on production and output. This is due to the fact that the more a firm produces, the more inventory and the more excess there is going to be in the future. Overall, an increase in inventory affects investments and therefore GDP. This happens because the change in inventory eventually increases expenditures.

Cartoon: http://blog.timesunion.com/derosier/the-measuring-stick/2142/#comments

The challenge of getting Americans to save more

The article I have chosen is entitled “The challenge of getting Americans to save more.” This article discusses pensions and the problems that arise when economists attempt to motivate Americans to save their own money in private accounts without relying on Social Security. The article goes into detail on how Social Security may not be perfect, but the finances can be fixed in a manageable manor. It also states that the rumors of Social Security not being around for our younger generation are not true. The main issue on this topic is the confusion that many people have, believing that Social Security is a means of insurance against poverty in old age and a means of income replacement for those in middle age. Many people also hold the misconception that Social Security is a saving scheme for a comfortable retirement, which is also false. Social Security will in no way provide enough money for one to live off of based off of an average middle class income. This article states, “A 45-year old who earns $35,000 can only expect about $16,000 a year from Social Security when he retires. If he earns the median income, about $50,000, he'll get about $20,000. According to the 2009 Survey of Consumer Finance the median financial (does not include housing) wealth for people approaching retirement is about $70,000. That will provide about $3,500 of inflation-protected income a year in retirement—not much to live on.” Basically this is saying the need to save more is very relevant.

The article states the two different ways of creating more funds during retirement and they are either increasing benefits given by the government, which is taking money (in tax form) from younger generations or savings. With the first method being highly frowned upon, the only other form of creating a substantial amount of retirement reserves is to save more on your own throughout your lifetime. The method that could make this possible is to create easier access and incentives to save money in private accounts. In a ‘perfect world’ the government could establish government-sponsored accounts to aid Americans in saving. Though a large majority saw George W. Bush as a political bust, this was one of his ideas that got quickly kicked to the curb because he presented it using the words “private” and “Social Security” in the same sentence, which is truly unfortunate.

One benefit of a government-sponsored savings account would be the access and ability to see how much someone is actually saving. Though it may be hard for a lower-income family to save five percent of their income, the account would not require them the large contributions to Social Security and they would be able to contribute what they can afford into this account and save it at a higher interest rate than a normal bank, to have when they are able to retire. Those who fall in lower-income to middle-income workers are the people that end up struggling in retirement because they are unable to save throughout their life.

One major downside to this argument is that in the macro scheme of this, it would encourage people to save more than consume and it would put a damper on the overall growth of the economy, but is it not a greater burden to have people facing poverty in retirement? Though this goal may not be attainable until advanced middle age because of higher wages being earned during this time, people will no longer have young children to care for, and possibly have paid off the mortgage; it is still in the best interest of Americans to start saving early and often in life to prepare for a wealthy retirement. It is wrong to rely on Social Security for the later period of your lifetime.

S., A. C. "Pensions: The Challenge of Getting Americans to save more." The Economist. The Economist, 21 Mar. 2012. Web. 15 Apr. 2013.