Greece and Austerity

As the previous post points out, Greece is in trouble. To get out of this trouble (as we talked about in class) they rely on the bonds market. The only way people will finance this spending (by buying their bonds) they need assurances that the spending will get under control. This results in what the media calls "Austerity" movements.

The problem arises when its citizens do not accept the fact that they are basically broke. They need to curb the spending and increase taxes to satisfy the bonds market. It appears as if they are catering to the Wall Street element, but it is really like learning to live within your means. This is the problem going on now in Greece as protests cripple the nation.

Solving the Deficit

The article we went over in class. Try solving the deficit on your own and see what our Federal Government looks like. Imagine the political will it would take to do it.

Fannie and Freddie

We spoke about TARP in class and mentioned the issue of Fannie and Freddie (the quasi private mortgage giants). This is an excellent piece (I think it is the first piece actually). It is worth listening to (click on the "Listen to the Podcast" link)

Update I: Here is an interesting article about how the executives for Fannie and Freddie were paid millions. Tough to justify the heads of these failed organizations millions in salaries from taxpayers.

Update II: Part 2 here and Part 3 here

Please be sure to at least listen to the first one.

Future of Education

There is plenty of uncertainty associated with the future subsidizing of education by the Federal Government. This is apparent in the fight in states fighting with their teacher unions. Two good opinion pieces (good for perceptive, not so good for citations on position papers) are found in the NY times. The first by the left leaning Paul Krugman. The second by right leaning David Brooks.

Unions

Plenty of information out there on unions and the role they play in our economy. This is esecially the case now that states are considering limiting their power to collectivly bargin. There is a great recent Q and A piece. This is more from a previous post. Enjoy

Social Security Numbers

An excellent paper by Gokhale and Smetters that explains some of the discrepancy in the Social Security numbers we found in the Taking Sides article (Baker's view). The money quote:

Although the Social Security Trust Fund is not projected to be exhausted
until 2042, Social Security's $10.4 trillion present value imbalance is accruing
interest and will grow by $600 billion during 2004 alone.

Crowding Out Before Our Eyes

The cautionary tale of our current fiscal spending is called the "crowding out effect". The Federal Government demands more bonds to finance their deficit and in turn the interest rates climb. This decreases private investment. (page 122 of our text) Greece has spend far more in terms of their deficit (and debt) as a percentage of GDP. This is the outcome.

In the United States we are also seeing this take place before our eyes. This is the latest evidence suggesting we are spending too much.

Keynes-Hayek Rap

F.A. Hayek is best known for his libertarian views (smaller government intervention) that are spelled out in his book “The Road to Serfdom”. John Maynard Keynes is best known for advocating government spending to temporarily stimulate the economy which is spelled out in his book “The General Theory of Employment, Interest, and Money” (“The General Theory” for short). Both well known economists but their views could not be further apart. So what is the natural thing that happens when two well known economists get together? A rap breaks out naturally. I like the lyrics and scenes. Think of the party as the recent stimulus. (I could not figure out how to get you tube embedded so I had to link to Marginal Revolution)

The stimulus package after one year

This chart makes you wonder about the stimulus package’s effect on the economy. It comes from Greg Mankiw’s quest to keep our government accountable.

Politics and the Media

Politicians often feed off of people not understanding the difference between deficit and debt (and the media seems unwilling to take on the task). This article outlines how we reached a record deficit in 2009. The print inquirer article puts it best (I don’t understand why the article changed once it hit online).

This deficit represents “… more than $4,700 for every man, woman, and child in the United States.”

It is as if everyone in America just increased the balance on their credit card by 5k (including my two year old daughter!). The scary thing is that next year will probably be just as bad. Another quote:

“President Barack Obama has pledged to reduce the deficit once the Great Recession ends and the unemployment rate starts falling. But economists worry the government lacks the will to make the hard political choices to cut spending and raise taxes to get control of the imbalances.”

This completely ignores the fact that the powers that be must cut the DEBT, not the deficit. Even if Obama cuts the deficit in half every year for the next seven years the debt will continue to grow (and it will be your generation that will pick up the tab). Politicians get votes by ignoring this issue (so at least I can understand why they do it) but I can not figure out what the media gets

Deficits and Debt into Historical Perspective

If I told you someone tallied up $10,000 in credit card debt and asked how bad that was you would probably tell me you do not have enough information to answer that question. One vital piece of info would be how affluent that person was. For example, if that person were a college student your answer may be different then if it were Bill Gates.

With this general idea in mind we explore the complex world of public finance. If I tell you that a government deficit was $100 billion, you should similarly ask which government, and how affluent they are. The gauge of affluence is measured by economists as Gross Domestic Product (GDP). Thus to put our current spending into perspective we examine how much the government outspend tax revenue this year (the deficit) as a percentage of GDP, and how much money we owe out as a result of past deficits (debt) as a percentage of GDP:

In case you are wondering, the debt was very large in the early 1900’s due to the World Wars.

(Charts were generated by usgovernmentspending.com)

Deficit and Debt

Wonder how the government can spend more than the tax revenue it brings in? They do it by issuing bonds, which increases the national debt.

As they do this more often (which is the case lately) economists look for any potential ‘crowding out’ that may occur. Some may see this article as evidence to crowding out.

Scarry

Government Spending put into perspective

Excellent summary of spectrum of Economists’ views on Fiscal Policy

The great fiscal economic debate: To stimulate or not to stimulate, summed up in the Sunday’s Inquirer here. Two good opposing sides: the left leaning stance here, and the right leaning stance here.

Protectionist policy in the stimulus package II

An update here: Obama appears to be backing down.

Interesting advertisement by the Cato Institute

Cato is known to be relatively conservative. Here is an ad against the Fiscal stimulus package.