STOPPING THE NEXT RECESSION

CAN THE GOVERNMENT DO IT?

The fall of Lehman Brothers

The Federal Reserve makes decisions based on great academic economists and veteran bank and corporate executives. Politics is minimal, at least compared to most other government decisions. Tremendous resources support the decisions, with great economists on staff, massive data banks and access to outside experts. You would think that the Fed can prevent recessions. You would be wrong.

The Fed just released minutes from the policy meetings held in 2008, as they do regularly with a five to six year time lag. The minutes depict a massive failure of the technocratic ideal of putting some smart people in the room and letting them run things.

Chairman Ben Bernanke is quoted as saying that he is “confounded and muddled.” The Fed eased early in 2008 and patted themselves on their backs. In March, after the Bear Stearns rescue, Janet Yellen said that “the likelihood of a severe financial panic has diminished.” That could actually be accurate, if she meant that the likelihood was going from 99 percent to 98 percent. In meaningful terms, it was just plain wrong.

Tim Geithner, then president of the New York Fed, said in March 2008, “It is very hard to make the judgment now that the financial system as a whole or the banking system as a whole is undercapitalized. Some people are out there saying that . . . . Based on everything we know today, if you look at very pessimistic estimates of the scale of losses across the financial system, on average relative to capital, they do not justify that concern.” He further suggested that talk about the risks within the financial system was harmful, clearly favoring a “trust us” message to the public. This discussion happened well before Lehman declared bankruptcy and credit markets melted down.

However, the people making decisions at the Fed (the Board of Governors plus the 12 regional bank presidents, four of whom vote at any one time) are neither stupid nor ignorant. They are all talented, and they know the issues.

Would a different set of people have come up with better policy in 2008? Forbes magazine observed  “The Fed does roughly what a consensus of elite academic economists think they should be doing". The problem in short, is with not with the people at the Federal reserve. .

Hubris is the first problem highlighted by the Fed transcripts. American monetary policy leaders were too confident about their understanding of the economy and the financial system, and too confident in their ability to use the tools of monetary policy to keep the country out of recession.

Hubris also infected the business community. On the financial side, investors and bankers overestimated their own knowledge of risk and economics. Non-financial executives overestimated their ability to plan on the basis of common forecasts of the economy.

Business Planning Lessons: 

Today’s business leaders should add a strong dose of humility to any forecast of the future. The economy is too complex for easy prediction. Not even our top economists do a good job of forecasting recessions. Moreover, our government is not able to prevent future business cycles. The Fed’s 2008 minutes make clear that we should avoid that line of thought.

When will the next recession come? 

I’m not sure. As of this writing (June 2014), I think the risk is fairly low, on the order of 10 percent risk of a recession beginning in the next 12 months. That’s a large enough risk to justify contingency planning, but not large enough to completely hunker down. 

Automatic Stabilizers and Crowding out effect

Automatic Stabilizers and Crowding out effect 

Recently in the past few economics classes we have discussed Automatic stabilizers and how they affect fiscal policy, the government, and the people. 

Automatic stabilizers are government programs currently in operation that reacts automatically to help adjust the level of aggregate demand when economic conditions change. Automatic stabilizers are good for the economy and can influence economic conditions; however they can be very controversial.  People either seem to agree with how automatic stabilizers work or they completely hate the aspects of automatic stabilizers.  

Crowding out effect refers to when government crowds out the private sector, and increases the level of taxation to battle the ongoing problem which is debt.

Achieving Economic stability 

Employment insurance, progressive tax, and welfare are all examples of automatic stabilizers, however the most controversial aspects of the stabilizers is how the government influences the economy.  A system known as the crowding out effect is used by the government; it is a concept where an increase in public spending decreases the private sector spending. The government will change their initial spending habits and level of taxation to influence the overall economy. However what they don’t understand or simply chose to ignore is that by increasing the level of taxation, people have less money to spend at businesses and in turn the economy, private sector and businesses suffer. 

 What are the different stabilizers? 

Employment insurance: it a system that kicks into effect when a person loses their job. Once a person loses their job, their income decreases and so does overall spending this leads to an economic decline. The existent of the employment insurance is to help people keep somewhat of a steady income as well as keep the economy from declining significantly.

Progressive income tax: the progressive income tax system places different incomes into different tax brackets. The more the person makes the more they will pay in taxes compared to someone who makes less than them. This has a stabilizing effect on the economy; if a person who makes more money will be taxed higher it will reduce the potential increase in spending and reduces the chances of increased inflation.

 

Welfare: is a system introduced to allow people who make less than the minimum level of well-being to get social support from the government.  The Canadian welfare system acts like a social safety net which refers to specific payments to the poor individuals. This system is known to be very flawed and is a very controversial topic.

How is the crowding out affect achieved?

The video shows us that there are two different ways that a government can introduce the crowding out effect, indirectly and directly. The government can directly crowd out a book store by increasing funding to the public library while indirectly they can crowd out a book store by increasing taxes which leads people to have less income.

 https://www.youtube.com/watch?v=EIIMHP3nLRE

Controversy in economic stability 

There is a very controversial aspect associated with economic stability. The crowding out effect is very controversial; the government increases taxes significantly to then decrease the debt that the government has accumulated. They are the reason for debt and they leave it the people to somehow fix it.  The government doesn’t take into account that some people cannot afford to pay the tax as it is, and an increase in taxes means they have less money to live. Another controversial aspect of economic stability is the welfare system; it is a lenient system that allows for people who make less than a pre-set income, to receive money from the government. The government has minimal regulations when it comes to the actual welfare system, and so people use their money on alcohol and drugs instead of being productive members of society.

A different approach.

There have been many ideas when it comes to bettering the welfare system and even the automatic stabilizer systems. The welfare system is too lenient in giving money away. Different ideas put out, include having the people who want welfare do different jobs for the city, this would mean that the people would need to earn the welfare payments rather than just get it. This would get different unattractive jobs done, keep people off the streets, and stabilize the economy. Another problem pointed out was that a lot of the money given away by the government is used for illegal activity; a way to solve this problem is to have the people who receive the payments to pass a drug test before actually receiving any money. Another aspect of economic stabilization that seems to be a problem is the crowding out effect. Ideas put forth to fix the problem include completely getting rid of the system and introduce a system where the government works side by side with the people to reintroduce money back into the economy, putting money back into businesses and stabilizing the economy. This in the long run would allow for economic growth and from there the government could steadily and minimally increase taxes and be able to pay off any debt. Another idea put forth was to change spending habits and readjust the existing budget, if the government is constantly accumulating debt then there is a serious problem with how they are spending their money. The government needs to reassess their spending habits and look for flaws in the existing budget and set aside money to pay off any debt accumulated. 

In my opinion 

I think the government needs to reassess the way they are running social programs and the way that they crowd out businesses. I agree with the alternatives provided with handling the welfare system and I think that not only should people be working for any money that they get from the government but they should also have to pass drug testing before.  I find the crowding out effect to be a huge mistake; the government should not be taking money away from businesses so that they have a quick fix to the debt. Lastly the idea of having automatic stabilizers to help during an economic down fall is awesome, that way the economy can essentially self-stabilize.

- Daniel Kosinski

Reagenomics

When the phrase "Expansionary Policy," is heard we often hear reference to Reaganomics. What is Reaganomics? Well let's figure that all out. First we need to understand some of the recent history of the American political sphere. During the 1980s, America was still caught up in fear of the Soviet machine. Disappointed with the Carter presidency, America elected Republican Ronald Reagan to the presidency. He promised to combat the "Red Menace" and repair the economy. During the late 1970s America's inflation rate had risen to double digits and the economy was in serious trouble. Reagan stepped in with an ambitious plan that he hoped would revitalize the faltering economy. The plan, dubbed "Reaganomics" by its detractors, was an anti-inflationary and investment promoting system which would stimulate business and give every American more money to go around. The nation eagerly anticipated a successful decade.

The fundamental idea behind Reaganomics ran opposite to traditional economic thinking. It has been generally agreed upon that an increase in demand will produce an increase in supply to meet the needs of the public. Reagan's administration turned this theory on its head, saying that if a supply were created, demand would follow. If industries were to produce more, the public would discover a need for the product. The plan included tax cuts for big business, allowing them to increase production. By cutting income taxes and giving Americans more money to spend, the plan would promote industry and revitalize the economy. The wealthy of America would benefit the most from income tax cuts and would spend their money, creating new jobs which would, in turn, aid the lower class. Defense spending would also promote industrial growth and create more jobs. This was the famed "trickle down" portion of Reagan's plan.

 President Reagan Speech On His Policy

An important aspect of the Reagan administration was a commitment to fight the spread of the Soviet Union's communist ideals. This would be accomplished by large increases in military spending. Programs like the B-1 bomber, the MX missile, and a complete refit of the Navy were instituted under Reagan. Secretary of Defense Caspar W. Weinberger planned to increase defense spending by 7% annually. Budget Director David Stockman relates that the "none-too-subtle implication was that anyone proposing to even nick his budget wanted to keep us behind the Russians (sic)." Obviously, the need to confront the Soviets was in the forefront of the Reagan administration's plans. The prevalent theory was that the furtherance of capitalism would be useless if it were threatened by communism. The downfall of the Soviet Union at the end of the decade would take everyone by surprise. Whether the true economic situation of the USSR was known to the Reagan administration is hard to say. Intelligence sources reported myriad dangers and security threats, because they tend to err on the side of caution. Indicators of the economic peril of the Soviets were ignored because everyone was so caught up in the perceived threat. One way or the other, the leviathan defense budget went ahead.

The chief problem Reaganomics faced, and the reason it failed to meet its overall goals was that it was internally inconsistent. Reagan's administration professed a desire for a seriously pared down federal government, but never lived up to the promise. This undermined their economic plans. In order to avoid a budget deficit, government spending had to be decreased in conjunction with taxes. The Reagan administration was singularly unable to achieve this. Whatever advances it made in lowering government spending were made up for by increases in other areas. While Education and regional development took major cuts, Medicare and Commerce grew by leaps and bounds. The greatest increase in spending, however, came from defense. Military spending grew by 63.3% from 1981 to 1989. Under Reagan the economy never took in as much as it spent. Reagan was able to achieve some of his ends. He was able to increase the rate of growth of the Gross Domestic Product to 3.9% from its rate of 0.5% under Carter. Family income rose and unemployment decreased. However, during his presidency the trade deficit rose from $15 billion to $129 billion and the budget deficit went from $74 billion to $155 billion. Most staggeringly, the national debt increased from a hefty $730 billion to a  $2.1 trillion. During the 1980s, many of the premier economic thinkers held that deficit spending was not a cause for concern. The government was not expected to behave like a corporation and could get by without paying its debts. However, upon witnessing the effects of a $2.1 trillion debt, most changed their tune. Without decreasing government spending along with taxes, Reagan was unable to achieve all of his economic goals and the nation was plunged into a deficit.

Another flaw within Reaganomics was the reliance on supply side economics. The intent of Reagan's plan was to rebuild America's military to combat inflation and redistribute income to the major corporations. Had America's economic troubles been the result of unused capacity as it was after WWII and Korea, Reagan's plan would have been very successful. The unsatisfied demand would have been fulfilled. Unfortunately, when no such demand existed, the extra production went to waste. Furthermore, in the 1980s American businesses were forced to compete with foreign products. What little demand existed was already taken care of.

Reagan's administration was unable to reconcile their desire to restore the quasi-mythical laissez faire American economy with their desire to out-price the Soviets in the arms race. It is a matter of heated debate whether Reagan meant to drive the Soviet economy into the ground by increasing defense spending. Many hold that the Soviet economy was already well along the way towards its own economic demise and Reagan's aggressive defense spending, the Strategic Defense Initiative, was merely incidental. Intentional or not, the wanton defense spending of the 1980s had lasting economic effects that would leave the economy in dismal shape by the end of the decade and the beginning of the 1990s. Fortunately, the economy has since largely recovered thanks to the efforts of Congress and the Clinton administration in balancing the budget. The government of the 1990s learned an important lesson from the problems faced in the 1980s. Reagan's plan would have been far more successful had he found a single goal and stuck to it. Defense and other forms of government spending stood in the way of his economic plans.

The long-term effect of Reaganomics is a hotly debated issue in history. Many Republicans who once rejected Reagan's ideas now hold them as a party standard, pointing to the incredible growth of the 1990's as proof that Reaganomics were effective. Opponents, however, blame the deregulation espoused by Reagan's supporters as being responsible for the crashes during the term of George W. Bush giving credit to the growth in the 1990's to George H.W. Bush and Bill Clinton.

Whatever your particular political leanings, it cannot be denied that Reaganomics has had a strong effect on the conversation of economics in America. The growth numbers during Reagan's time in office cannot be denied, even if the larger effects beyond his term may never be fully explained. Ronald Reagan remains a powerful figure in the minds of Democrats and Republicans alike. It is likely that his economic policies will continue to affect politics for years to come.

How Reagan destroyed America

Anthony S. Campagna The Economy in the Reagan Years : The Economic Consequences of the Reagan Administration, Vol. 150 (Greenwood Publishing Group, Inc., 1994)
Murray Weidenbaum Reaganomics - Its Remarkable Results (The Christian Science Monitor, Dec. 18, 1997)
Mike Noble Where Reagan Went Wrong [online] "http://oasis.bellevue.k12.wa.us/sammamish/ sstudies.dir/hist_docs.dir/reaganomics.mn.html" (Mike Noble, 1995)

WE NEED SUPPLY!

- Last week in Class...
Through May 5-9 the fine economics class of St. Maurice school had been busy preparing for the test we are to receive this week. We had been reviewing various terms, going over case studies, and sadly... cramming for biology tests/quizzes. Yet, Miss Teetaert was devoted to ensuring her class stayed motivated through various outlets of markable material. During two review periods, one for marks and the other for candy, the topic of Supply-side economics came up. The class had agreed that this term was to be defined as "Describes a stabilization policy that stresses increasing the supply of goods and services in order to reduce the level of prices and to create jobs to counter unemployment." This definition is simply not enough, and because I want to ensure everyone gets 100% on the topic of Supply-Side economics tomorrow, lets talk about it.

- Why Consider Supply-side Economics?
Both Monetary and Fiscal policy (policies we have studied) fall on the demand side of economics. They both influence the level of spending in a nation's economy. When there is a general movement to spend less the rate of inflation falls, yet the number of people unemployed rises. This is due to the fact that people are, generally, "saving" their money. In turn, businesses receive less money and cutback on production and labour forces.
On the other had, if spending was to increase the demand for employees would rise and unemployment rates would fall! This sudden rise in spending also has its drawbacks... increased spending raises prices because this thrust in demand for goods/services may overtake levels of supply. To ramp up supply in order to keep up with this sudden demand companies would have to raise prices to produce new levels of goods and services.
To combat this issue, Supply-side economics is introduced. To combat both unemployment and inflation policies would be introduced to increase the supply of goods and services. If supply increases, prices fall (or rise more slowly) therefore reducing the rate of inflation. More workers are needed to produce the additional products and conduct services, so in this way unemployment rates would fall as well.

- What needs to be done? 

Those who believe in Supply-side economics believe that the best policies for this method are carried out by cutting taxes and reducing government regulations that restrict production.  

- Implementing Tax Cuts for businesses and society 

1) This would provide businesses with more money for investment. These funds could be used for improving equipment, repairing equipment, for new construction and researching development models. Tax cuts allow a business to use saved money to produce more and ultimately stay competitive. This ensures supply increases while keeping prices static. Also, to create more product and invest in a company there is a need for additional employees to carry out these tasks. 

2) A tax cut would also provide and incentive for individuals to earn more money and increase spending. With progressive income tax higher-income individuals pay a higher percentage of their income in taxes, this discourages people from earning more money. A tax reduction puts extra revenue in the pockets of the everyday citizens. As we have learned, when people have more money they typically spend it, this facilitates the increase in supply of goods and services. 

- Reducing Government Regulations 

1) Firstly, reducing Government regulations would reduce business costs, this would then lead to a reduction in prices. Due to the fact that current government regulations greatly increase the cost of doing business, companies must counter this by increasing price. But, if regulations are lifted and demand stays the same, prices will fall. Businesses would no longer have to abide by the premium costs of regulations, allowing their prices to adjust to the money saved. This action would hopefully lead to the purchasing of more goods by consumers. 

2) Secondly, through lifting legal restrictions businesses would have the ability to produce more. Many restrictions that companies face is at the manufacturing level. If these regulations were relaxed or eliminated production of products would skyrocket. Employment at manufacturing, shipping and sales positions would rise with the ability of the company to produce on larger scales. This, of course, would lead to lower levels of inflation, because the financial penalties and/or production penalties would be eliminated; allowing businesses to supply products at new heights! 

-The Bad

1) Regulations are extremely hard to change. This is true in terms of regulations that attempt to protect the environment. If there is a relaxation in pollution controls, overtime a company may be able to produce large quantities but at what price? It does not make sense to remove vital environmental protection regulations to ensure mass production of goods and services for the present time.

2) There is no guarantee that once a company enters the stage of increasing production it will employee those within the nation. Using the method of Supply-side economics companies may take advantage of dollars saved and inject it into foreign labour. It would be safe to say that a large production company would likely outsource in order to save money during the process of increasing its inventory. In a time of great savings and freedom, why wouldn't an international business take advantage of a charitable economy and planet? 

- My Opinion 

I believe that the fundamental purpose of Supply-side economics is a great aid to a nation. It is a process that creates jobs, stimulates business nationally, lowers prices of goods and services and establishes a level of stability for both parties. I believe that tax cuts may be a measure that can help facilitate this process. Companies that have a keen sense for production value and creating consumer buzz around their products would take full advantage of these cuts. Additionally, regular citizens are able to save money that would have been taken and use it towards supporting Canadian business. 

Still, I believe the problem lies with what the business plans to do with the money it has saved. I feel that too many businesses would use this saved revenue and inject it into foreign programs where their products could be produced at low rates. I do not agree with softening or eliminating regulations. I feel that they are in place for a reason, and to remove them would have our Government bow down to business over issues we can't afford to lose. Overall, Supply-side economics is a marvellous tool in the fight against unemployment and inflation. But, as a nation, we must ensure that this tool is placed in the right hands, lest it stab us in the back. 

https://www.youtube.com/watch?v=pSOgxZ8lRUw