{"id":328,"date":"2010-07-08T17:45:34","date_gmt":"2010-07-08T22:45:34","guid":{"rendered":"http:\/\/blogs.law.harvard.edu\/abrahamtiamiyu\/?p=328"},"modified":"2010-10-30T00:28:03","modified_gmt":"2010-10-30T05:28:03","slug":"a-note-on-the-u-s-economy","status":"publish","type":"post","link":"https:\/\/archive.blogs.harvard.edu\/abrahamtiamiyu\/archives\/328","title":{"rendered":"A Note on the U.S. Economy"},"content":{"rendered":"<p>The biggest debate in financial markets at the moment is over the need for further government stimulus in the global economy, especially in the United States.\u00a0 Here are the major arguments:<\/p>\n<ul>\n<li>More      Government Stimulus: Championing the case for more government spending to      stimulate the global economy is Paul Krugman, winner of the 2008 Nobel      Prize in Economics.\u00a0 In a recent article titled <a title=\"The Third Depression\" href=\"http:\/\/www.nytimes.com\/2010\/06\/28\/opinion\/28krugman.html\" target=\"_blank\">The Third Depression<\/a>,      Krugman argues that \u201cwhile long-term fiscal responsibility is important,      slashing [government] spending in the midst of a depression, which deepens      that depression and paves the way for deflation, is actually      self-defeating.\u201d<\/li>\n<\/ul>\n<ul>\n<li>Less      Government Spending: Although not a direct response to Krugman, one of the      more interesting arguments that I found against government stimulus      was from the editorial team at the<a title=\"The Keynesian Dead End \" href=\"http:\/\/online.wsj.com\/article\/SB10001424052748703615104575328981319857618.html\" target=\"_blank\"> Wall Street Journal<\/a>: \u201cFor going on      three years, the developed world&#8217;s economic policy has been dominated by      the revival of the old idea that vast amounts of public spending could      prevent deflation, cure a recession, and ignite a new era of      government-led prosperity.\u00a0 It hasn&#8217;t turned out that way.\u201d<\/li>\n<\/ul>\n<ul>\n<li>The debate:      <a title=\"Keynes vs. Alesina. Alesina Who? \" href=\"http:\/\/www.businessweek.com\/magazine\/content\/10_28\/b4186012969951.htm\" target=\"_blank\">Keynes vs. Alesina. Alesina Who?<\/a><\/li>\n<\/ul>\n<ul>\n<li><a title=\"Roubini vs. Taleb\" href=\"http:\/\/www.pbs.org\/wgbh\/pages\/frontline\/video\/flv\/generic.html?s=news01s40fcq793\" target=\"_blank\">Video      (5 mins)<\/a>: Nouriel Roubini debates Nassim Nicholas Taleb on the role of      government in an economy<\/li>\n<\/ul>\n<p>My take: A quick examination of the components of the U.S. economy\/GDP:<\/p>\n<p><span style=\"text-decoration: underline\">Personal consumption<\/span><\/p>\n<ul>\n<li>Most      important component of U.S.      GDP (over 60% of all economic activity)<\/li>\n<li>High      unemployment rate: According to data from the <a title=\"BLS\" href=\"http:\/\/www.bls.gov\/cps\/tables.htm\" target=\"_blank\">Bureau of Labor Statistics<\/a>, the average unemployment rate between 1985 and 2005 was 5.7%.\u00a0 Today, it is about 9.5%<\/li>\n<li>Deleveraging      (debt reduction) by U.S.      households: <a title=\"Consumer Credit\" href=\"http:\/\/www.federalreserve.gov\/RELEASES\/g19\/Current\/\" target=\"_blank\">Earlier today<\/a>, the Federal Reserve announced that consumer      credit declined by $9.1 billion in May and by $14.1 billion in April.\u00a0 Less borrowing implies weaker consumer spending<\/li>\n<li>Based on the above, the current      status of personal consumption: WEAK<\/li>\n<\/ul>\n<p><span style=\"text-decoration: underline\">Private investment<\/span><\/p>\n<ul>\n<li> According to the <a title=\"U.S. Firms Build Up Record Cash Piles \" href=\"http:\/\/online.wsj.com\/article\/SB10001424052748704312104575298652567988246.html\" target=\"_blank\">Wall Street Journal<\/a>,      \u201cnonfinancial companies [have] socked away $1.84 trillion in cash and other      liquid assets as of the end of March, up 26% from a year earlier and the      largest-ever increase in records going back to 1952. \u00a0Cash made up about 7%      of all company assets, including factories and financial investments, the      highest level since 1963.\u201d<\/li>\n<li> In addition to the hoarding of cash by U.S. companies, the current\u00a0<a title=\"May 2010\" href=\"http:\/\/www.federalreserve.gov\/releases\/g17\/current\/\" target=\"_blank\">capacity utilization rate<\/a> remains below 75%. \u00a0Thus, given that U.S.      companies have room to increase production, capital expenditures &#8211; a major part of private investments-\u00a0 might remain weak.\u00a0 As a result, companies are more      likely to use their cash holdings to engage in financial transactions,      such as stock buybacks and strategic acquisitions, rather than on capex<\/li>\n<li> Greg Mankiw, professor of      economics at Harvard, <a title=\"Are stimulus skeptics logically incoherent? \" href=\"http:\/\/gregmankiw.blogspot.com\/2010\/07\/are-stimulus-skeptics-logically.html\" target=\"_blank\">tries to explain<\/a> why companies might be      holding on to so much cash: \u201c[B]usinesses may be reluctant to invest in      an economy that they expect to be distorted by historically unprecedented      levels of taxation in the future.\u00a0 The more the government borrows,      the higher taxes will need to go, the more distorted the future economy      will be, and the less attractive is\u00a0investment today.\u201d<\/li>\n<li>Based on the above, the current      status of private investment: WEAK<\/li>\n<\/ul>\n<p><span style=\"text-decoration: underline\">Net exports<\/span><\/p>\n<ul>\n<li>Not much      is happening here to stimulate the U.S. economy<\/li>\n<li>U.S.      exports declined from $149.8 billion in March to $148.8 billion in April,      the most recent period for which <a title=\"U.S. International Trade in Goods and Services Highlights\" href=\"http:\/\/www.census.gov\/indicator\/www\/ustrade.html\" target=\"_blank\">data<\/a> is available<\/li>\n<li><a title=\"Europe Double-Dip May Bring Correction: Roubini\" href=\"http:\/\/www.cnbc.com\/id\/37974488\" target=\"_blank\">A      recent quote<\/a> (06\/29\/2010) from New York University professor Nouriel Roubini: \u201cA      double-dip recession looks likely in the euro zone, it looks like Japan right now is falling off the cliff \u2026      and now there is evidence of a slowdown in economic growth also in China.\u201d\u00a0      Given that these are major trading partners of the U.S., net exports probably won\u2019t spur growth      in the U.S.      economy anytime soon<\/li>\n<li>Based on the above, the current      status of net exports: WEAK<\/li>\n<\/ul>\n<p><span style=\"text-decoration: underline\">Government expenditures<\/span><\/p>\n<ul>\n<li>This      is the final component of GDP that the current debate is revolving around because      it is one that policy makers can directly influence in the short-term<\/li>\n<li>Informative <a title=\"Short &amp; Long Term Budget Trends\" href=\"http:\/\/www.concordcoalition.org\/files\/uploaded_for_nodes\/WebSiteTalk092010.pdf\" target=\"_blank\">PowerPoint<\/a> on U.S. government expenditures (Short &amp; Long Term Budget Trends)<\/li>\n<li>In <a title=\"Government to the Economic Rescue \" href=\"http:\/\/online.wsj.com\/article\/SB10001424052748704324304575307071188294124.html\" target=\"_blank\">Government      to the Economic Rescue<\/a><strong>, <\/strong>Alan S. Blinder, professor of economics at Princeton, argues that government intervention (TARP,      stimulus package, etc) has been good for the economy<\/li>\n<li>2009 Stimulus bill ($787 billion): Tax cuts represented one-third of the total package, fiscal relief to state governments and other social benefits also accounted for one-third, and public investment spending, the &#8220;centerpiece&#8221; of the bill, ended up being only a third of the final package with the actual outflows spread over multiple years. \u00a0Compared to the U.S.&#8217; annual GDP of $14 trillion or the <a title=\"Global Financial Assets Lost $50 Trillion Last Year, ADB Says\" href=\"http:\/\/www.bloomberg.com\/apps\/news?pid=newsarchive&amp;sid=aZ1kcJ7y3LDM\" target=\"_blank\">$50 trillion decline in global financial assets in 2008 alone<\/a>, it is no surprise that some prominent economists \u00a0have argued that the stimulus package was <a title=\"Stimulus or bust\" href=\"http:\/\/www.guardian.co.uk\/commentisfree\/cifamerica\/2009\/aug\/10\/economy-stimulus-bailout\" target=\"_blank\">too small<\/a>. \u00a0That said, it appears the stimulus has been a <a title=\"How the Great Recession Was Brought to an End\" href=\"http:\/\/www.dismal.com\/mark-zandi\/documents\/End-of-Great-Recession.pdf\" target=\"_blank\">great success<\/a> as it has helped to create almost 2.7 million jobs in the U.S.<\/li>\n<\/ul>\n<p><strong>FINAL WORDS<\/strong>:<\/p>\n<ul>\n<li>On <span style=\"color: #ffffff\">monetary       stimulus<\/span>: In their 1963       book, &#8220;A Monetary History of the United States, 1867-1960,&#8221; Nobel Laureate Milton Friedman and Anna Schwartz argue that a contraction       in U.S.       money supply contributed to the Great Depression. \u00a0Given that the Federal Reserve <a title=\"CNNMoney.com's bailout tracker\" href=\"http:\/\/money.cnn.com\/news\/storysupplement\/economy\/bailouttracker\/\" target=\"_blank\">acted       promptly<\/a> at the height of the recent financial crisis by embarking on       expansionary monetary policies, i.e., slashing of interest rates and       opening of the discount window to more financial institutions, government intervention here seems justified. \u00a0As a matter of fact, the Fed has been <a title=\"Federal Reserve Made $47.4 Billion in 2009\" href=\"http:\/\/dealbook.blogs.nytimes.com\/2010\/04\/22\/federal-reserve-made-47-4-billion-in-2009\/\" target=\"_blank\">transferring record profits<\/a> to the U.S. Treasury for the benefit of taxpayers.\u00a0 That said, going forward,       the Fed&#8217;s ability to successfully exit these expansionary policies       remains an open question<\/li>\n<\/ul>\n<ul>\n<li>On <span style=\"color: #ffffff\">fiscal       stimulus<\/span>: <a title=\"Keynesian Economics\" href=\"http:\/\/www.econlib.org\/library\/Enc\/KeynesianEconomics.html\" target=\"_blank\">Keynesianism<\/a> lives on, and the debate continues<\/li>\n<\/ul>\n<p><span style=\"color: #000000\">Abraham Tiamiyu<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The biggest debate in financial markets at the moment is over the need for further government stimulus in the global economy, especially in the United States.\u00a0 Here are the major arguments: More Government Stimulus: Championing the case for more government spending to stimulate the global economy is Paul Krugman, winner of the 2008 Nobel Prize [&hellip;]<\/p>\n","protected":false},"author":2328,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[127],"tags":[],"class_list":["post-328","post","type-post","status-publish","format-standard","hentry","category-general","post-preview"],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/archive.blogs.harvard.edu\/abrahamtiamiyu\/wp-json\/wp\/v2\/posts\/328","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/archive.blogs.harvard.edu\/abrahamtiamiyu\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/archive.blogs.harvard.edu\/abrahamtiamiyu\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/archive.blogs.harvard.edu\/abrahamtiamiyu\/wp-json\/wp\/v2\/users\/2328"}],"replies":[{"embeddable":true,"href":"https:\/\/archive.blogs.harvard.edu\/abrahamtiamiyu\/wp-json\/wp\/v2\/comments?post=328"}],"version-history":[{"count":35,"href":"https:\/\/archive.blogs.harvard.edu\/abrahamtiamiyu\/wp-json\/wp\/v2\/posts\/328\/revisions"}],"predecessor-version":[{"id":341,"href":"https:\/\/archive.blogs.harvard.edu\/abrahamtiamiyu\/wp-json\/wp\/v2\/posts\/328\/revisions\/341"}],"wp:attachment":[{"href":"https:\/\/archive.blogs.harvard.edu\/abrahamtiamiyu\/wp-json\/wp\/v2\/media?parent=328"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/archive.blogs.harvard.edu\/abrahamtiamiyu\/wp-json\/wp\/v2\/categories?post=328"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/archive.blogs.harvard.edu\/abrahamtiamiyu\/wp-json\/wp\/v2\/tags?post=328"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}