The Republican and Democratic presidential candidates differ strikingly in their approaches to taxes and spending, but their fiscal plans have at least one thing in common: each could significantly swell the budget deficit and increase the national debt by trillions of dollars, according to tax and budget experts.

Let’s take a look at McCain’s numbers first:

Mr. McCain’s plan would appear to result in the biggest jump in the deficit, independent analyses based on Congressional Budget Office figures suggest. A calculation done by the nonpartisan Tax Policy Center in Washington found that his tax and budget plans, if enacted as proposed, would add at least $5.7 trillion to the national debt over the next decade.

As for the Democrats:

Fiscal monitors say it is harder to compute the effect of the Democratic candidates’ measures because they are more intricate. They estimate that, even taking into account that there are some differences between the proposals by Senators Hillary Rodham Clinton and Barack Obama, the impact of either on the deficit would be less than one-third that of the McCain plan.

Although one-third less than the debt of McCain, that is no consolation. Robert L. Bixby, executive director of the Concord Coalition, a nonpartisan organization that advocates deficit reduction, had this to say:

With the proposals they have on the table, it looks to me like all three would make it deeper.

Let’s take a closer look at McCain’s proposed policies. The main engine of his proposal is that of a tax cut that directly benefits the wealthy and corporate. In more detail, the NYT states:

He is calling for cutting corporate taxes by $100 billion a year. Eliminating the alternative minimum tax, which was created to apply to wealthy taxpayers but now also affects some in the middle class, would reduce revenues by $60 billion annually. He also would double the exemption that can be claimed for dependents, which would cost the government $65 billion.

How do we fill this void in tax revenues? Reportedly, McCain proposes to cut some spending. From where? They haven’t said. However, the NYT says that there is talk of McCain wanting to make Social Security and Medicare less costly for government.

Take a step back. All this red ink, is it bad? Some economists have said that these tax cuts, although increasing deficits in the short run, may be an acceptable tradeoff for long term economic growth, something the USA is obviously aiming for. As for the Democratic plans, the increased spending in education and health care are “long overdue investments.” These investments are seen to be a good allocation of funds and are expected to yield good dividends.

Whoever wins the race will have a fledgling economic engine to repair. I guess we’ll see what tradeoffs and fiscal policy they can come up with.

Time after time, we’ve joked in econ class about America’s recession. Well kids, the day has finally come. (I seem to sound happy… but I’m not, hehe) Two thirds of a pool of 52 economists have stated that the U.S. is in or entering into a recession (like we didn’t know…).

“Two-thirds of the 52 economists polled said the U.S. economy is in recession. Add those who believe the economy will be in recession soon, and 79% believe that the economy will contract at some point in 2008.”

However, USA Today describes the light at the end of our rather short tunnel, apparently. The majority of the economists questioned believe that the recession will be a short recession.

“Most economists surveyed think the recession will be short and shallow. Unemployment, one of the hallmarks of a recession, will probably rise to about 6%, says David Berson, chief economist for the PMI Group. “That’s pretty low for a recession,” he says.”

Considering our textbook set the natural rate of unemployment are around 3-4%, 6% isn’t that bad! However, economists still realize that America’s economic condition is still affected by many factors out of the Fed’s control, and that’s primarily the prices of food and oil. The prices of food and oil are affected greatly by India and China’s massive demand for both commodities, so the prices of those two are extremely difficult for the government to control.

Right now, Clinton and Obama are battling it out on plans for oil prices. Clinton, along with McCain, are both in favor of tax breaks over the summer, whereas Obama is firmly against these tax breaks, citing the claims of congressional analysts that these tax breaks will only save the average family $30 on oil costs.

Finally, the article cites on last source of uncertainty, which can be traced to the real estate market, but… since I don’t much about that… Let’s just say the status of that market isn’t high flying.

Is the U.S. really just entering into a recession though? Or has the recession already been going on for awhile, or are people only realizing now that we are in a recession?

Vietnam has recovered greatly from its former war-torn state. Following the war, its economy was further torn by attempts toward communism, collectivizing land, and was further damaged by the fall of the Soviet Union, its cold-war sponsor, by depriving it of the roubles that helped hold up its economy. However, in recent years we see much improvement in the Vietnamese economy.

Since then the country has been transformed by almost two decades of rapid but equitable growth, in which Vietnam has flung open its doors to the outside world and liberalised its economy. Over the past decade annual growth has averaged 7.5%.

This growth has inevitably improved the quality of life in Vietnam with larger cities and more luxuries like designer stores. It has also improved from the brink of famine to one of the world’s biggest agricultural producers. Its exports have also grown through a whole spectrum of products from clothes to microchips with the soon-to-come billion dollar Intel factory near Hanoi. Government revenues have thus been kept steady regardless of lower import tariffs, while company taxes have helped boost it. Government spending on public services has increased while public debt remains stable at 43% of GDP.

It has also opened up to other countries, and even found itself a rotating seat in the U.N. Its communist state has reverted in a way akin to Deng Xiao Ping’s transformation of China’s now rapid-fire economy, creating much growth.

The World Bank’s representative in Vietnam, Ajay Chhibber, calls Vietnam a “poster child” of the benefits of market-oriented reforms. Not only does it comply with the catechism of the “Washington Consensus”—free enterprise, free trade, sensible state finances and so on—but it also ticks all the boxes for the Millennium Development Goals, the UN’s anti-poverty blueprint. The proportion of households with electricity has doubled since the early 1990s, to 94%. Almost all children now attend primary school and benefit from at least basic literacy.

Since education has been bolstered, perhaps labor would also have become more skilled.

With its current accounts nearly doubled since last year, Vietnam is no longer in as much need for aid money as it was before. Vietnam has also found itself to the likings of foreign investors.

Firms that draw up a “China-plus-one” strategy for new factories in case things go awry in China itself often make Vietnam the plus-one. Wage costs remain well below those in southern China and productivity is growing faster, albeit from a lower base. When the UN Conference on Trade and Development asked multinationals where they planned to invest this year and next, Vietnam, at number six, was the only South-East Asian country in the top ten.

However, Vietnam also has its share of rough patches with corrupt policemen and mistreated senior citizens. The Communist Party, government and judicial systems are also not always clearly delineated. It seems such growth sometimes outran the country’s preparedness for it.

The government is finding it much harder to manage an economy made up of myriad private companies, banks and investors than to issue instructions to a limited number of state institutions, especially as the public sector is currently suffering a drain of talent to private firms that are able to offer much higher pay

Vietnam’s future development is also shadowed by many risks such as inflation, slowing stockmarket, natural disasters, and rickety infrastructure. Nonetheless, Vietnam’s recovery is an admirable one, and sometimes even reminiscent of China’s own growth.

Just thought I’d write in French since Canada is half francophone :D.

I found this article very interesting, particularly after reading the not-so-subtly biased view on tariffs and free trade from the textbook. Obviously, McConnel and Brue would say, no, these “anti-dumping tariffs of 188% on Chinese citric acid and 65% on Canadian imports” are bad, that it does not matter

 ”whether there is reasonable indication Chinese and Canadian imports are hurting the domestic citric acid industry”

or not because free trade is the way to go. 

“Archer Daniels Midland Co. is accusing industry in Canada and China of damaging its business by selling imported citric acid in the United States at below fair value prices. Food ingredient processor ADM, along with peers Tate & Lyle Americas — like ADM, based in downstate Decatur — and Minnesota-based Cargill Inc. filed petitions Monday with the U.S. Department of Commerce and U.S. International Trade Commission asking that stiff tariffs be imposed on citric acid and certain types of citric salts from the two countries. “

At least these companies are only asking for antidumping duties, and not for widespread, permanent tariffs. However, dumping is not always a bad thing. IF it truly is dumping and not just “comparative advantage at work,” it will definitely force ADM and Tate&Lyle to pull themselves together and become more efficient. Like the textbook stated, it is slightly unfair to sacrifice consumer happiness for the well-being of a few industries and their workers. However, I do realize that I’m only able to say this because foreign competition has not affected my parents’ jobs negatively and I know that if it ever does, I’d immediately become the biggest, most hypocritical advocate of tariffs ever. When the issue doesn’t strike close to home, it’s easy to step back and declare that “it’s for the greater good, it’s for the entire economy.” But when the matter actually affects us, like it’s affecting ADM, we’ll find that it’s not so easy to stick to those free trade, laissez-faire (or as Mr. Welker says, lahsay faire) economic views.

I know, I know, it’s not something to think about right now, but this could actually apply to us, when we’re older and maybe thinking of getting eye surgery.

LASIK (short for laser-assisted in situ keratomileusis) Eye Surgery expects a large drop in demand sometime during 2008. To be specific,

“We’re forecasting a 17 percent drop for 2008,” said David Harmon, president of Market Scope, an eye surgery market research house.

[Lasik] typically costs anywhere from $800 to $3,000 or more per eye.

Analysts expect this type of surgery, which is usually not insured by H.M.O’s, to drastically decrease in its number of total consumers and revenue. Here we can see that the U.S’ state of near, if not current, recession is affecting consumers with anything, reaching out to services such as eye surgeries.

In macroeconomics, we’ve learned how demand is determined by the level of income consumers receive. As this recession causes consumer’s nominal income to decrease, demand shifts to the left. Once this occurs, firms in the eye-surgery business must lower prices to compensate for the decrease in consumers. This is what analyts believe will happen. However, these speculations are yet another determinant, this time of supply; expectations of a good or service can change the supply curve of a service.

Advanced Medical Optics [a major player in the eye surgery business], which gets more than one-third of its revenue from laser surgery systems and related gear, cut sales and earnings forecasts for the year in February, saying then that it expected a 10 percent drop in procedures in 2008. Its stock, which closed Wednesday at $20.16, is down more than 13 percent since the February warning.

LCA-Vision, the surgery center owner, said it had cut its work force by 16 percent in anticipation of slowing business. Shares of LCA-Vision closed Wednesday at $12.28, down more than 75 percent since last July.

As can be seen, the expectations of the laser eye surgery business aren’t too positive, and this in turn leads to a decrease in supply, as workers get laid off and wages are lowered. However, by decreasing their input costs, firms could strike equilibrium again as the supply curve continues to shift downward, perhaps enough to match with the decline of demanding consumers.

For now, however, I suppose all we can do is wait and see (if you still can by the time you want eye surgery) for the results of such actions firms such as Lasik have undergone. Since I’m going to avoid eye surgery, I better end this post before my vision declines even more.

P.S. Not bad for my first blog post eh?

Some people are benefitting from the supply shock that is pressuring nations throughout the world. The oil suppliers, who are obviously running up huge trade surpluses with their trading partners. With the 7-star hotels in Dubai, the construction of numerous malls that house the glamour houses of Chanel, Gucci, LV, and the various other luxury brands, Dubai’s accumulating wealth, as well as various other parts of the Middle East, are evident in the rise of millionaires. The author of the article goes as far to state that

THE Gulf is full of loud architectural statements—towers that reach over 600 metres into the sky, hotels that will be suspended under the sea.

But this newfound wealth may bring what better living conditions apparently leads to. In class we talked about how recession was good for Americans because it would force them to live healthier lifestyles, especially with the heavy inflation in food currently. On the other hand, the poor Middle Eastern millionaires are just learning about this disease that comes with over indulgence- diabetes!

The ailment is one unhappy consequence of the region’s economic transformation. Before 1961, Abu Dhabi lacked even a paved road. Since then, it has enjoyed a startling transition from pearling to petroleum, from souk to mall and from sand to glass. This prosperity has bought a sedentary lifestyle and a sugary diet, which may have triggered a genetic predisposition to diabetes among Arabs.In the neighbouring emirate of Dubai shoppers are invited to enrol in “Mall Walkers”, a power-walking club that promises to give more than your credit card a workout.

Composed of 6 countries, the Gulf Co-operation Council (GCC) may earn nearly 9 trillion by 2020 in exporting natural gas and oil if the price remains at $100 a barrel! Few of those countries have remotely close GDPs to match that! The governments of this country however, are well aware of the nature of this wealth. As a result, in the United Arab Emirates, they have promoted the construction of industrial cities, created new regions for investment and construction, for the wealthy to spend their oil wealth.

In the last oil boom, new industrial cities such as Yanbu and Jubail arose at the government’s behest. But Emaar raised its money from local investors in an oversubscribed public offering. Such “stockmarket hullabaloo” was new to Saudi Arabia, one critic says. Indeed, the private sector has never before taken on a city of this size. In the last oil boom, new industrial cities such as Yanbu and Jubail arose at the government’s behest. But Emaar raised its money from local investors in an oversubscribed public offering. Such “stockmarket hullabaloo” was new to Saudi Arabia, one critic says. Indeed, the private sector has never before taken on a city of this size.

Yet these countries are still troubled by the depreciating USD. Paid largely for their oil in USD, they often pay their workers in USD. Immigrants or migrant workers from foreign countries now demand more USD for their paychecks, as the purchasing power of their current salary has diminished greatly back in their home countries. Exchange rates create winners and losers, and those on the receiving end of a rapidly weakening currency suffer the raw deal.

The fall of the greenback, meanwhile, has raised the price of those imports not invoiced in dollars. Foreign workers complain bitterly that the money they earn in the Gulf stretches less far when sent to their families in India, Pakistan or Britain. The peg has forced the Gulf’s central banks to shadow America’s Federal Reserve, even as their economies have parted ways.

But luckily for them, the economist believes that the Middle East has enough wealth to weather the storm, and whether or not their investments currently exceed, they’ll still be very well off, which is a lot more than we can say for the American economy.

Things are certainly looking glum for Americans: their economy is entering into a recession (or a “slowdown” as Bush prefers to call it), they’re experiencing a credit crunch and the housing bubble popped. Great…

For the past few months, Bush and his Republican administration has been brainstorming various ways to stimulate the economy once again, most notably through their tax rebates. This is an indirect attempt to increase the aggregate demand and pull the American economy out of the recession. However, as we have studied in class, this policy is definitely not helping the economy a great deal, seeing as how Americans are more prone to save the majority of the rebates or use it to pay off their debts. Thus, some members of the US government have decided to switch their focus to another pressing issue: the housing issue.

As a way to rescue the Americans who have gone broke (or nearly broke) due to the housing dilemma, Democrats have been pushing for a bill that would provide the citizens with a “housing rescue package,” which would include a $15 billion package for “the purchase and rehabilitation of foreclosed property.”

Unfortunately, the view that this “bailout” would significantly help the Americans is only shared by the Democrats. Republicans have vehemently opposed this bill and it has been reported that Bush would veto this bill:

The comments, in separate letters to lawmakers, were the most forceful rejection yet by the Bush administration of Democrats’ housing aid plans. And they were the clearest indication to date that the White House intends to put up a vigorous fight against a bill to let the Federal Housing Administration take on as much as $300 billion in new mortgages for financially strapped homeowners.

If the government has the people’s best interest in mind, then why wouldn’t they approve of this package, which would undoubtedly aid those in need of monetary aid? Rep. Spencer Bachus sums it up in the following statement:

“It will unfairly benefit a few homeowners and many investors and speculators at the expense of millions of careful borrowers and renters… The message that we risk sending to financial institutions and individuals is that when they willingly take on excessive and ill-advised risk, the government will ride to their rescue.”  

Rep. Barney Frank, the panel chairman of the House Financial Services Committee also remarked that ‘the measure [is] “a pale imitation” of what the House has already done to head off a deeper housing crisis.’

Although Bush and his administration continuously opposes the housing rescue plan, they do support the central goal of these measures: to adjust the rules set by the Federal Housing Administration so that more people can meet the loan standards and thus find a way to refinance their way back into the housing economy.

So if you’re expecting a hefty monetary package from the US government, you might want to think again. Expect a few loans and grants, maybe, but a $15 billion housing relief package? Think again.

Let’s take a look at the domino effect.

So what’s the biggest thing that our AP Econ class has discussed so far? It had to do with the overspeculation in the housing market and a subsequent housing bubble that popped. More generally, what does this mean? Consumer spending habits that entail a negative savings.

For years, the U.S. economy has considered consumer spending as the cornerstone for economic growth. At one point, consumer spending [1] was said to account for nearly two-thirds all economic growth. However, soon the consumer will be reigned in, and a price must be paid.

Most of the consumer debt is self-inflicted. As the old adage goes, people have spent money they didn’t have, to buy things they didn’t need, to impress people they didn’t even like! Now it is time to pay the piper.

This is simply the first domino that started the chain reaction. The government has tried to combat consumer debt with the fiscal stimulus package but its simply too small to do much good. Borrowing against home equity values, ease in obtaining and spending credit, job losses, and gas prices are all screwing the average consumer over.

What does overconsumption in credit lead to? Screwed financial lending firms. Banks that have lent money based on the assumption of rising home equity values are now seeing that credit crunch as they try to reel in the borrowers. Consequently these banks are now needing help staying afloat. Ultimately, credit card firms are going to realize they have to begin to do thorough background checks for credit history.

Next, investments are beginning to go sour as deflation becomes a high probability.

Everyone knows that investments which move sideways - or move down - are already losing money. However, the reader’s attention should not be focused on investments are earning anything less that 10-20 % a year. Bonds are bombs right now waiting to shatter any true gain.

According to the CPI calculator [3] (an extremely conservative gauge on inflation), $100,000.00 in 2006 is the equivalent of $105,916.67. Factor in oil, consumer prices including basic living expenses, health-care, a Fed that is over-printing [4], and a Congress that is satisfied being the largest debtor in world history [5], it is easy to see that these CPI numbers are a farce.

So, with consumption down and investment dwindling it leads to an expansionary monetary policy by the Fed to combat the normal boom/bust cycles the economy would otherwise experience.

One need only view the policies of Greenspan [6] and Bernanke [7] to understand the real goal of the Fed [8] , which is to manipulate monetary policy to avoid the natural outcomes of the boom and bust cycles.

However, the manipulation comes at a price. Everyone who holds dollar-based assets will suffer the same fate. While is appears that the stock market increases - or at best stays the same - on paper, it appears that everything is o.k., when in fact, deflation has under-minded all investments.

This is not to say there will not be winners on Wall Street, but more importantly to underscore the fact that most investments will lose long term.

What are we left with? An economy that is stagnating and just barely getting along. The three goals of macroeconomic policy: stable currency, full employment, and economic growth are all taking a beating. Deflation in the values of investments combined with an increase in price levels due to oil prices. Job losses due to the rise in costs for firms. Ultimately, economic growth is going to be negative as we finally officially hit the recession.

And to quote the great Helen Chu, “when do we stop thinking?” The answer: as soon as the dominos stop falling.

Paying for college is always a painful business, and never more so as the summer of 2008 rolls around. Student loans are becoming increasingly difficult to secure, because the number of financial loaners are decreasing, especially in light of the looming recession, credit crunch in Wall Street, and a decreases in government subsidies.

“The ongoing turmoil in U.S. credit markets … could leave millions of students in a last-minute dash to secure the financial assistance they need to attend college this academic year,” Sen. Christopher Dodd, D.-Conn, head of the Senate Banking Committee, said at a hearing Tuesday.”

Although there is a great demand for these student loans, investors aren’t supplying because their costs are too high, and there is a cap, 6.8%, for how high interest rates on the loans are. Thus, what happens is that the standards for receiving a student loan become even higher and more competitive.

However, according to some experts such as Sarah Flanagan, vice president for policy development at the National Association of Independent Colleges and Universities, believe that the U.S. is not in a major crisis yet, because “a lot of smaller banks are backing out, but the bigger lenders are jumping in to fill the void.”

Still, there is a great imbalance between the number of potential loaners and borrowers. Over 75% of families require some sort of student loan, but government subsidies for lenders has fallen drastically, “reducing the margin by as much as 3/4 of a percentage point.” Also, the credit crunch, which is a sudden reduction of the availability of loans from banks, has played its roll. This is how:

“The credit crunch plaguing the mortgage industry has affected college lending. Many lenders finance their operations by bundling student loans into securities, similar to the mortgage funding process. But these days, investors are demanding an interest rate nearly 1.4 percentage points higher than they did a year ago to buy the student loan-backed securities, experts said.

“Right now every loan we make today, we’re making at a loss,” testified John Remondi, chief financial officer at Sallie Mae, the nation’s largest lender. “Every lender is in this same set of circumstances. There’s a limit to how much people will lend to Sallie Mae so we can then turn around and lend it at a loss. Not many people are in that business.”

Mark Kantrowitz, publisher of FinAid.org, paints a scary picture when he states:

“There will probably be a mass exit in the next three to 12 months. If there is no government intervention or a thawing of the capital markets, by the end of the 2008-09 academic year, I expect there will only be 15 to 25 lenders.”

Should the government, currently Republican and so very supportive of laissez-faire capitalism, step in and change the way the student loan market is looking? Well, thankfully it is. The House of Representatives have introduced bills that allow the federal government to inject money directly into the market, raise loan limits by $2000 so students can avoid costlier private loans. Finally, the Treasury Department’s Federal Financing Bank is looking into purchasing loans, thus increasing the liquidity of the market with cash.

According to Senator Charles Schumer:

“We will provide some backup. This is just too important to allow 100,000 people who deserve to go to college not to be there. The markets may come back, and if they don’t, we will have to step in.”

So, have fun filling in student loans applications. Perhaps they will start requiring three paged essays as well as a beautifully studded resume from students before they are willing to bequeathed the loan.

We discussed in class that Democratic candidates Hilary Clinton and Obama are urging for the rewrite of NAFTA, the North American Free Trade Agreement. Why? Because they believe that the three million manufacturing jobs lost since 2000 is a result from NAFTA due to outsourcing to Mexico and Canada, thus causing a huge trade deficit for the U.S..

Yes, losing those jobs do suck for the U.S. blue collared workers, and it has definitely been happening, but what Clinton and Obama do not recognize is that the grow in the NAFTA deficit isn’t due to manufacturing goods, but oil and gas imports. What I found really interesting is the fact that except for energy, the trade deficit that is caused by the loss of manufacturing jobs (the problem that the Democrats are oh so concerned about) within NAFTA has barely grown at all.

Engler states that indeed, there are factories in the U.S. that have closed and moved their production to Canada and Mexico,

“but in the case of Nafta, that job impact has been almost exactly balanced by increased U.S. production and exports of farm and factory goods.”

So in simpler terms, there is no harm done. The U.S. sales to NAFTA countries have just about balanced out their imports, non-energy speaking wise. Engler puts this in numbers:

“While the nonenergy deficit within Nafta has grown less than $4 billion since the job loss started, with the rest of the world it grew over $150 billion. Put another way, the increase in our nonenergy deficit within Nafta has accounted for only 2% of the increase in our global nonenergy deficit since 2000.”

So the problem of losing manufacturing jobs that Clinton and Obama are so concerned about…well, there isn’t really a problem, is there? They are so focused on that 2% of the trade problem rather than the other 98% of it that it seems a bit ridiculous.

Perhaps this is just another case in which politicians are so concerned in winning the people’s hearts that they disregard what is really important. Yes, people will love them if they show that they are indeed soo concerned with the loss of these manufacturing jobs. What can better win all the Americans’ hearts than telling them that we are fighting to get their jobs back? Yes, Americans have lost jobs, but that is only 2% of a much bigger problem! Instead of blaming NAFTA for job losses, there are more serious issues that needs to be considered for the good of society, not just for the votes.

My question is, what can we do about that 98% of trade deficit that have been disregarded entirely by Clinton and Obama? How has it become so serious? Sure, the U.S. loves importing the oil and gas from Mexico and Canada, their friendly neighbors, there is no reason to say no to that. But what would this trade deficit ultimately do to the country?