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Saturday, December 20, 2008

President vs. the Economy

All these newspaper stories and television news items that relate to economy always seem to relate to the president. Everyone wants to know what the president is going to do to fix the economy. I do not believe that the president is the one who needs to fix anything. There is only one thing the president can do to fix the economy, and that is tax. The president maybe able to push policy and give away money, but his only real power to change the economy is in his power to tax.

The person we should all be looking at to fix the economy is the Fed Chairman, Bernanke. He is the crux of the economic welfare of this country. We sold all be asking him when he is going to change interest rates, and hope that he does not decide to print new money. Bernanke should be the one getting the spot light yet, I have heard little to nothing about him in this poor economic time.

Economists declare: Water is Wet!

There has been so much in the news recently about all these economic downturns. It is also plainly evident in these others blogs. And now that I am reaching the end of my college career, people seem to be asking me about my opinion of the market and where things are going. But just recently, we have made it official that we are in a recession. Hearing this seemed funny to me. It as been felt if not known that we were going to enter recession, all the news is about this economy. Yet recently it is breaking news that economists declare we are in a recession.

It seems a little funny to me, a couple weeks ago when people ask me if we are in a recession yet. I could only give the answer 'no' because we had not hit our two quarter drop yet. With the stock market crashing, everyone knew we were in a recession, but there seemed to be a lag time with economists. We continued to say no, even if it was painfully obvious.

Thursday, December 18, 2008

Labor Unions Are Market Failure

Reading this story about card-check, I'm struck by the idea that this is a rare example of how unions might hurt the individuals they represent. I disagree because labor unions are a source of market failure. Their purpose is to create a monopoly of labor, and in a monopoly, prices are higher than they should be for a perfectly competitive market. A corrective government should fix monopolies by breaking them up or setting prices. Our government, however, not only does not break up labor monopolies, they give in to rent-seeking and lend their power in the form of a minimum wage.

This is not only not Constitutional, it is bad for economies, industries and businesses and it is just plain wrong.

Market failures mean that the either we could be having more benefits for society without that failure or the costs to society are higher than the benefits. When people discuss labor they always focus on the workers who are "harmed" by low wages, but if wages were too low, people would not exchange their labor in the first place. And it's not even good for all the workers because when wages are raised artificially high, wages are cut and people are fired. If companies aren't allowed to do that, they eventually go out of business, putting all those workers out of jobs. One of the most striking examples is the auto industry, which has huge labor contracts that are part of the reason companies are failing.

And what about the owners of businesses, not just of big business but of mom and pop restaurants or small bookstores that go out of business or fire people when the minimum wage rises because they can't afford the labor costs. I guess it's okay to hurt them, as long as someone else is better off, right? In the long run, the only people labor unions help are those who get power from running them.

Obligitory Bailout Post

I find most talks of a bailout by government to be almost physically painful, so I try to avoid listening to them, but that is almost impossible. It seems that I've heard every argument as to the effectiveness of an auto bailout, but it's been a while since I've heard one that actually makes sense to me.

A subsidy should be used in the case of a positive externality, but we are not dealing with a market failure here. It is a government failure. The reason the auto industry is in such dire straits (and not just regular straits) is because of heavy regulation in that sector. The requirements that American cars are forced to meet due to rent-seeking by environmentalists and other groups are what is making it so difficult to compete. I don't think a subsidy is going to do anything except encourage moral hazard, which is where insuring against something bad makes that bad thing more likely to happen. If we continue to give money to failing enterprises, it will encourage more enterprises to fail. Instead, if the regulation were removed from the industry, the source of government failure would be gone and the market would correct itself.

There is also the issue of how morally right it is to borrow so heavily from the future to pay for the past. I agree with Thomas Jefferson.

"I sincerely believe... that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale." --Thomas Jefferson to John Taylor, 1816.

If we bail out the auto industry, that is what we are doing. We are borrowing against the future, and what are we going to do when that bill comes due? Why, we could borrow some more, or maybe print it, of course. But those are short-term solutions and they create problems of their own. I think it would be better to suck it up and let what needs to fail, fail. It's better than having it fail later once it's grown into an even worse mess that our children won't be able to do anything about.

For an example of just how well this works out, take a look at Japan. Who else is looking forward to our own "lost decade"? I know I am.

Monday, December 15, 2008

After rate cuts: The Fed's new ball game

Since September of 2007, the Fed has been cutting the interest rates. At the moment there have been 4.25% points of cuts since September. However, none of this has done anything to help stimulate the economy, and things have only gotten worse. Economists are expecting the Fed to cut the rate again, which it is unknown whether this will help the economy or not, but it will put the interest rate at 0.5%. This would be the lowest rate that we know of.
Despite these rate cuts, the Fed is starting to print money that would help finance its liquidity programs. Though, further down the road this could lead to more problems. "Buying up droves of Treasurys may also help encourage banks to lend, as government yields dip even lower into already historic lows. Gaining little return on those investments, banks may be forced to return to their traditional money-maker, issuing loans." The Fed is looking to start up a program it likes to call quantitative easing, which is basically just printing money and putting it into the community. As well as cutting the interest rates, the Fed has also begun to increase its lending to financial institutions to help ease the credit crunch, but once everything really started heading downhill there reserve started to run low. Thus, as a result, the central bank started printing money. Doing this has allowed them to help out corporations with their debt, increased the lending the Fed does to banks, and the recent bailouts of struggling institutions. However, with this comes inflation, and when the stock market does start to kick again the people who invested will no longer be happy with the low rate of return.

Thursday, December 04, 2008

Rising costs could push college out of reach

Something that I'm sure most of us might be concerned with is the cost of college. As the economy continues to struggle, and money becomes even more troublesome to come by, college tuition is continuing to rise. It's no surprise to me that we only have 34% of young Americans in college compared to some of the other countries. It really does show, at least in my opinion. If we want to remain the super power we do, I believe that we need to increase this number.
Something really needs to be done in the United States to fix this issue or in a few years we will most likely even have less young Americans attending college as it goes out of reach. Loans are harder to come by as well with the recent issues faced by some of the larger banks and lending companies.
College tuition in no way should be out pacing inflation the way it is, its not only hurting us as a society but also making us fall behind. However, it is interesting to see what some people are able to do without a degree. The entrepreneurs who have made millions or even billions based on their ideas and bravery to implement new technology or go for the stocks others stray from.
One could only hope that the plans that Obama has stated may in fact help this problem out, and the United States is able to increase its numbers of college attendees.
It would be interesting to see the worst case scenario where in two hundred years or so there is such a minuscule amount of people attending college that some careers and companies have to start hiring those without degrees to stay in business. Or even where its only the Community Colleges and State Colleges that have students since the Ivy Leagues are well out of the reach of students.

Tuesday, December 02, 2008


Well it's finally official, the U.S. is in a recession...Starting last year in December, which was the peak of recent economic activity, the U.S. economy has been declining. With now more than 1.2 million jobs that have been cut it's easy to see the effects. Even with all the money from bailouts and what not it looks like we'll be in trouble for awhile. People aren't spending as much as needed, because of fear of an unstable future. And that's what we need the most, for people to spend like normal and help stimulate the economy. Even with "Black Friday" and "cyber Monday" people are spending as much as hoped. Businesses are still struggling and more and more people are losing jobs. With this recent recession, it can now be known that during Bush's presidency that the U.S. has gone through 2 recessions now. The first one dating back to 2001 from March to November. I sure hope people start going like they used to, because I work in the restaurant industry and we're been hurting significantly for the past few months.

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