Comment Cards 10
Below are responses to some comment cards students submitted in Macroeconomics.
January and February
1. Is this "crisis of under-consumption" unique to the United States or have other western nations experienced a similar correlation with increased labor productivity & building individual debt? What about non-western, first-world nations?
R: This is not an easy question to answer or, in any event, I don't have an easy answer for it. The U.S. is the largest market in the world by a considerable measure. No other country, certainly among advanced economies, has experienced a negative savings rate -- most other countries would be incapable of sustaining such a condition. The U.S. is uniquely positioned because the dollar is the chief currency held in central banks of nearly every country on the planet. The dollar is what is used when foreign countries engage in international trade. That means most countries not only tolerate large dollar reserves in their banking system but require them. Not just to buy our goods (although for that reason too) but also to buy goods from our other trading partners who may not readily accept the Yuan, the Peso or even the Euro (although there is a pub in NYC, owned by an Englishman, that only accepts Euros). Everyone accepts dollars because everyone else accepts dollars.
But we now are experiencing a rapid pay down of American consumers' debt habit. We've shut down the spending binge (read housing deflation, job losses, credit crunch) and we're paying off our consumer debt. American workers will no longer continue to fill the gap between the value of output they produce and the share of that value they receive in their pay envelopes every month with consumer debt. Notice that this has a bookend effect with China, which has a huge trade surplus with us (they have sold much more to us than they buy from us). The Bank for International Settlements website states:
China's financial conundrum arises from two sources: (1) its large trade (saving) surplus results in a currency mismatch because it is an immature creditor that cannot lend in its own currency. Instead foreign currency claims (largely dollars) build up within domestic financial institutions. And (2), economists - both American and Chinese - mistakenly attribute the surpluses to an undervalued renminbi. To placate the United States, the result is a gradual appreciation of the renminbi against the dollar of 6 percent or more per year. This predictable appreciation since 2004, and the fall in US interest rates since mid 2007, not only attracts hot money inflows but inhibits private capital outflows from financing (compensating?) China's huge trade surplus.
So China and the U.S. have this entanglement in which China's trade surplus seems to us a barrier to our own growth (rapid job growth in China and slow job growth in the U.S.). Our Fed asks them to raise the value of their currency and they comply. That should make their goods more expensive to Americans who will then turn to domestic goods, causing our job growth to rebound. But to spur that growth our Fed lowers the interest rate in the U.S. which drives investment capital out of the U.S. and into China to catch the Yuan and China's interest rates as they move higher. More investment capital in China means cheaper financing and an up-tick in China's capital stock. They can produce even cheaper goods.
This means the rest of the world like the emerging Asian economies are still willing to finance American consumers' appetite for debt but Americans want to get off the carousel partly (at least in the short-run) because they feel considerably less wealthy given the collapse of housing prices (and, indeed, asset prices of all kinds -- American's 401Ks ain't looking so good) and because (in the long-run -- i.e. even when asset prices rise again.) the population is aging, retirement is near for the baby-boomers, and Americans can no longer carry heavy debt loads as they near the end of their working lives.
2. How can banks allow people to take sometimes 3rd and 4th home equity loans out on their homes when they may have other debt as well?
R: Banks do have lending rules but because of pressure from securities and investment partners of large lenders and because the Fed lowered interest rates charged to banks for lending from the Fed (to less than 1 percent) it became the practice to offer loans to anyone, even if the loan officer extending the loan knew full well the borrower would be unlikely to repay the loan. This was done for the same reason credit card companies (owned by the banks) gave credit cards to anyone without any credit check whatsoever -- they were dealing with "other people's money" and it was costing the banks little of nothing to acquire it. So even if a debtor defaulted they would have secured all the principle plus a handsome profit. And then there was outright fraud in which lenders preyed on folks who had some equity built up in their homes and had every reason to think the value of their home would hold or rise. The banks hooked them up with A.R.M.s (adjustable rate mortgages) in which the interest rate would be very low in the initial year or two and then rise to credit card levels after four or five years. These bank customers were often lied to -- "your rate will never rise unless the prime interest rate rises". On top of that, banks put pressure on Congress to repeal the bankruptcy laws so homeowners would be obligated to pay the loans back even if they did declare bankruptcy.
But why were the financial institutions so eager to lend? The answer lies partly in the large volume of dollars swirling around in foreign central banks (because if we buy more from foreign countries than they buy from us, then the dollars we spend don't come back in purchases by foreigners of goods we produce -- it stays in the foreign country's central bank) looking for investments in dollar-denominated securities. Prior to the 1990s there were laws that prohibited investment houses like Merrill-Lynch, Lehman Brothers and Goldman Sachs from owning commercial banks whose deposits were protected by the Federal Deposit Insurance Corporation. A depositor in Citizens Bank here in Poultney, for example, is protected up to $250,000 by the Federal government in the case Citizens Bank fails -- that's true of banks all across the country and that's why for many years they were required to lend mostly to homeowners and local businesses and forbidden to use depositors' funds to buy stocks, bonds or securities. In the period from the election of Ronald Reagan to the present those laws were gradually stripped away. Stock brokerage firms could own banks and banks could own stock brokerage firms. So, firms like Merrill-Lynch and Goldman Sachs could get their hands on the vast amount of depositors' funds in commercial banks (without the authorization of the depositors) and risk them in purely speculative investments. And the investment firms saw a wonderful opportunity to capitalize on that access by packaging loans (debt obligations) into securities called derivatives (their value is derived from the payments by the homebuyer, auto buyer or credit card holder) and then sell those securities to banks in China, Thailand, India (remember, all those places holding large amounts of dollars) with the real value disguised. One has to ask why no one was paying attention to this house of cards as it was being piled up card by shaky card. I can only tell you this, Congress and the various administrations bought the argument being made by economists like Milton Friedman and Alan Greenspan that the financial markets were abundantly self-regulatory -- no oversight was necessary. These brilliant economists who were the darlings of Wall Street, the Republican party and many Democrats had been drinking the cool-aid of free-market ideology for many years. Before he died, Milton Friedman admitted to having been wrong about the abundant wisdom of the free market -- a little late Milty!
3. The Precautionary Principle seems to be purely philosophy-based. What will happen if a person's morals are not able to see the effects of an environmental threat, for example?
R: Right, this principle can be enforced only collectively rather than relying upon the decisions made by millions of individuals who decide on whether to buy this product, that product or not to buy at all. In a free market system, individuals will not likely make decisions that collectively adhere to the Precautionary Principle. The economy will grow at a pace that may be wholly reckless with regard to protecting our natural systems unless government (our collective decision-making apparatus) places limits on growth. As well, we may individually be unwilling or incapable of choosing those products that have been recycled, are safe for disposal, or whose production involve as few non-renewable resources as possible. At the first faculty workshop prior to the start of the semester I found myself standing next to our Provost as he expressed utter dismay at the Styrofoam cups Chartwells had provided us. Many faculty members brought their own cups -- alas, I did not. Perhaps it would be better if no cups were provided as a rule, then everyone would have to bring their own or go without a drink.
4. The Paradox of Thrift states that as income rises, the level of savings increases. Wouldn't people just be making more money [spending more money?], thus prices would increase?
R: The Paradox is rather that the percent of income saved rises as income rises. The more wealthy you are the less you need to spend in order to satisfy your basic needs, so it's logical that as people move from very low incomes to moderate income levels and then to high incomes they will increase their savings more than spending. Bill Gates would find it very difficult to spend his money on goods and services for himself. So, as money comes in by the bucketful you'll just pile it up in the corner because you have everything you need. It's true that the very rich (particularly the noveau-riche) can spend insane amounts on birthdays, weddings and on things to fill their multiple garages in their multiple homes. But it's still a fact that savings rise faster than income -- that is a fact that statistics bear out. Now, why does it seem we're not doing that, i.e. why is it that Americans are spending at rates that exceed their annual incomes -- it is a historic anomaly that is likely dying as we speak. See the previous responses for more on that.
5. Was Keynes' idea of government intervention what largely influenced many European countries' economic principles, such as including more 'socialist' state-funded social programs?
R: His theories probably ratified the welfare state programs of European countries rather than providing the impetus to put them in place. Europe's welfare state governing philosophy is believed to have grown out of their feudal systems which had a distinct paternalistic, albeit oppressive, character to them. Think of them as a very large company town in which your employment is guaranteed; you buy from the company-owned stores and you live in company-owned housing. If that is how you grew up then the form of capitalism that develops will likely be comfortably situated within a welfare state form of government. Remarkably (or perhaps not so much), Europeans are very aware of the class system in which they live and to which class they belong. No one minds thinking of himself or herself as a member of the working class (spend a little time in an English pub) and actively pursuing working class interests in the political arena. In the United States, people still -- after all these years -- believe we live in a classless society and have absolutely no class consciousness. They may think of themselves as employees of IBM or General Motors or Merrill-Lynch whether they sweep the floors or sit around the Board of Directors' table (well, that may be taking it too far).
6. If private roads are better for the market why aren't there more of them in use today?
R: We were making the point that roads are public goods -- many people benefit from them who either don't use them or can often avoid having to pay to use them. That was the difficulty of private companies attempting to build toll roads. People built roads specifically designed to get past the toll gate and back on to the private road (There is a road called "Shun Gate Road" that intersects with Route 22 just north of Cambridge, N.Y. and circles back to Route 22 about two miles farther on). These companies went bankrupt as a consequence. So, if a good has benefits to all and is difficult for a for-profit firm to charge everyone who benefits from it, it is better for the government to tax everyone to pay for the maintenance and operation of the service or commodity, which is exactly what is done in the case of the road system. If you go to the west coast you'll see that they have almost no toll roads and everyone calls the highways freeways -- a word I still catch myself using every once in a while, given my west coast roots. At this moment the health care system of the United States is exhibiting the classic problem of a public good. Health care has grown so expensive that healthy people have chosen to forgo coverage (California's system is going broke) which leaves only unhealthy people on the health insurance plans. Private health insurance will collapse if they have to pay back all their premiums to cover those who need treatment (the bulk of their clients). The only way to solve the problem is to have mandatory coverage and government is best suited to manage such a system. What the government is considering now -- possibly the worst of all options -- is mandatory coverage within the private sector, i.e. you have to buy health insurance from a private firm. It's like throwing consumers to the wolves, although admittedly Switzerland has something like this system (I'm not an authority on the subject).
7. I did not really understand the principle of equilibrium and disequilibrium.
R: If price has reached a level where the amount consumers want to buy is just equal to the amount sellers want to offer then the market is in equilibrium. At that price, quantity-demanded equals quantity-supplied. If the price is above the equilibrium level, then quantity-supplied will exceed quantity-demanded (sellers would love to sell at the high price but consumers don't want to buy as much). If the price is below the equilibrium level, then quantity-demanded will exceed quantity-supplied (consumers would love to buy at the low price but sellers don't want to offer as much). The latter two cases are examples of disequilibrium.
8. What determines capitalism's growth? Capital is more privately owned, more goods and capital are traded in markets, more investment in technologies and industries. Why can't we maintain capitalism without growing because capitalist growth will lead to the disappearance of all resources.
R: A truly cosmic question. I don't know if there is an answer to this. Capitalism is addicted to growth. The private capitalist market system is based on competition between firms which must constantly find ways to maintain or expand profits to survive. They do this by finding cheaper ways to produce and often that means growing bigger to obtain economies of scale. The winners get more profits, a bigger share of the market -- but the only way they can ensure they sell all these goods is to socialize consumers to constantly want more -- changing models, redesigning marketing campaigns, building obsolescence into products so that consumers are forced to come back for more (they will almost give away razors and household cleaning equipment because the profit is in the repeat sales of the razor blades, disposable mop pads etc.) and so on.
9. Can you tell us more about the recent economic theory. I believe it is [Friedman's] theory..
R: Milton Friedman was a conservative, free-market economist who believed that government intervention in the market system was the principle reason for every serious economic recession or depression that the U.S. has had. He argued that government regulation restricted businesses from making decisions that would maximize the efficiency of the market. He believed that the minimum wage law caused the unemployment of low wage workers and should be abolished. He believed that when government used fiscal policy to increase the growth of the economy it only caused inflation. He believed that if a market economy were left alone (laissez faire) it would achieve equilibrium at full employment. He was opposed to labor unions because he thought their efforts to raise wages would only increase unemployment. His theories included something called the Natural Rate of Unemployment which he believe was somewhere between 5 and 6 percent unemployment (his version of full employment) and any attempt to drive unemployment below that level would trigger ruinous inflation. The 1990s saw unemployment fall below 4 percent without inflation -- you never heard much from Friedman and his followers after this. His theories were (and to some extent still are) held with great faith at the University of Chicago department of economics.
10. You were saying that it's human nature to always want more and more. Could we potentially say that if we were always in a non-scarcity society that we would be satisfied because we would have never known the feeling of scarcity?
R: You misunderstood me. I said that the proponents of neoclassical economics (which I don't endorse) have often argued that humans are by nature insatiable. It's the so-called More is Better (MIB) notion. This is a convenient assumption because in a capitalist market system an insatiable consumer is a fundamental requirement. If consumers go on strike, exhibiting behavior that indicates they are on the whole satisfied with what they have, then the system will collapse. It's not consumers who are naturally insatiable, it's capital that is insatiable. Its appetite for increasing profits can never be sated. So we are bombarded with want creating schemes that cause us to exhibit insatiable behavior. It's not human nature that makes us this way, it is a socially conditioned response to an elaborate apparatus that capital has had 250 years to perfect -- selling things to us we didn't even know we wanted. So scarcity is ever-present -- people want more than can be immediately provided to them -- because businesses in a market society create that unsatisfied demand which in turn allows them to produce the commodities that they can sell to us at a price that turns a profit. Now, is there some cabal of a few individuals who actively pull the wool over our collective eyes? No, it is just the requirements of a system within which we find ourselves. C'est la vie.
11. Are we currently in a Keynesian market? It seems that the market can throw anything at us and make it seem that it is a product that is necessary.
R: Hmm. I don't quite know how to answer this. I would say that a Keynesian market might be an economic condition in which economists and politicians begin to look to the analysis and policy tools of J.M. Keynes for answers to the dilemma in which we find ourselves. High unemployment and low inflation combined with an unwillingness of consumers to spend and lenders to lend all would seem to be fertile ground for pump-priming, Keynesian deficit-spending policies. Somebody has to get the system moving again and what better way (Keynesians say) than to have government do it since no one else is in a position to take the risk. The old saying is "you can lead a business person to a river of loans but you can't make her drink." (Boy, is that a tired and unimaginative saying) In our case, the hundreds of billions poured into banks doesn't even make them want to lend -- it's too risky and they would rather consolidate their power (for when the economy is back on its feet) by buying each other up. The second sentence of your comment card seems to refer back to question ten. I hope the answer to that question will suffice.
12. How is market value determined?
R: So simple a question yet so fraught with pitfalls. There are far too many ways to answer this question so I'll choose one approach. Marx starts his argument by posing this dilemma: A coat exchanges for two yards of linen or, the same thing, sells for the exact same price in monetary terms -- money being the universal value equivalent (everything has its value reflected in a certain amount of money). But the outward appearances and the particular uses to which a coat and linen have and can be put are substantively different -- yet they have the same market value. So, Marx asked himself what is it that both a coat and linen have in common and he answered "the application of labor power". So, to Marx labor was the sole source of value and you should be able to determine relative value by the number of hours of simple labor time devoted to the production of a commodity. So, in the example of coats and linen it must be the case that a coat takes twice as much labor as a yard of linen to produce. Marx even provides a simple example to show the inherent common sense of the notion of the labor theory of value: Two bands of hunters come back to the campfire. One band hunted deer and the other band hunted bear. Some of the bear hunters want to eat venison and some of the deer hunters want to eat bear meat so they have to figure out what the proper exchange rate should be. Finally, someone pipes up, "Since it took twice as much time to track and kill a bear as it did a deer we should trade one bear for two deer". Makes sense, huh? Yes, until you begin the literally impossible task of determining market value based on labor time. It's called the transformation problem and it's never been solved although David Laibman of Brooklyn College and Anwar Shaikh of the New School have spent their entire academic careers trying to do so. Now, if you want a more simple answer -- price is determined at the equilibrium position when quantity-demanded is equal to quantity-supplied. But notice, that answers the question of how prices are determined but not what value is.
13. I think that Marx's notion that workers do not receive the true value of their contribution to production is not true. If the products workers produce do not sell then they receive more value in wages than they have produced -- so they exchange their security for the chance of getting wages equal to the true value of what they produce.
R: Okay, I'm not sure about the last part of your question (exchanging security for ...) but Marx's response to the first part is that producing a "what's it" (i.e. something that no one wants) is simply a waste of labor time. Both the workers and the capitalist who hired them have produced something that has no value and the experiment will be quickly over and done with. The simple historical truth is that unless and until workers could produce a surplus above their own subsistence needs a capitalist class could never have come into existence. You cannot have a class that realizes income from the ownership of the means of production (i.e. profit) unless those who are put to work using the means of production can in doing so produce more than they themselves need for their own subsistence. Why would you hire someone unless you can sell what they produce for more than you have to pay them? Now, you might say, but the capitalist organized production and invested her own money in the equipment, tools, plant and building. Shouldn't she get something from the products that her employees produced with the means of production she provided? Yes, but two things should be understood. The value of that means of production, according to Marx, is the labor time required to produce them in the factory where they were built. So, the machine's contribution to production is the value it gradually transfers to the commodities (its market price = value of labor power expended to produce it) as it depreciates over its life. So, a machine cannot transfer more value than it takes to reproduce it. But, according to Marx, labor power has this distinguishing feature -- it can produce more value than is required to reproduce it, hence it is the source of the surplus from which profit arises. The whole struggle between capital and labor is over this surplus. Employers would like to lengthen the working day and increase the intensity of the work process to expand the surplus and hence increase profits. Second, ownership of the means of production can just as easily be the province of the workers and as far as the managerial character of capital, workers can hire their own managers. So, a class that lives off the surplus would disappear. Aristotle would be shocked.
14. From an economic standpoint what would be the challenge that a student run bookstore would face?
R: The opposition of the college administration (every college and university is alike) and the economies of scale afforded the book distributors who can probably offer books for less than what a student-run organization could. The odds are stacked against a student-run bookstore because an entrenched industry has a huge advantage. Although, I'm sure there are examples of student-owned-and-operated bookstores at a few colleges. That would be a good research project for a paper.
15. How long will it take for the unemployment rate to fall to 4.2% from its current (around 10%) level?
R: I cannot tell you. The U.S. economy (indeed, the global economy) has entered new territory. We have an economy suffering from a significant shortfall in aggregate demand with no sign of recovery and a government torn by partisan bitterness. It is unlikely that a jobs program will be introduced in Congress any time soon, the Federal Reserve is powerless to affect the level of spending since interest rates are at historic lows and banks are still not willing to lend. At this moment, it looks like we're going to experience a continuing decline in economic activity. Imagine if the Republicans retake the House and Senate in the fall? They will have the leverage to stall any economic policy other than their favorite solution -- cut taxes on big business. That would be disastrous. The economic future does not look bright.
16. How can the government increase employment? Should they end unemployment compensation?
R: Okay, what if unemployed workers could not apply for unemployment compensation (legislation passed in the New Deal)? They would have no extra income to spend for necessities and aggregate spending would fall even further. That doesn't sound like an idea that will revive the economy unless you think that, given they have no alternative, they would turn around and ask their boss who just fired them if she would rehire them at a lower wage. That's unlikely to happen. Workers are laid off in a recession because we're in a recession not because they are making too much. In fact, long before a worker is laid off, he or she will likely suffer one or two wage cuts. So, in answer to your first question, the government can directly increase aggregate demand with a jobs program (spend for roads, bridges, tunnels, airports etc) that will cause a recovery in spending as the multiplier (we'll be talking about that soon) has its effect. Otherwise, we can just wait until we hit rock bottom -- maybe 25 percent unemployment -- and then business owners will once again be able to get workers dirt cheap and buy factories for a dime on the dollar. In other words, we can just ride out the storm which is precisely what free market ideology calls for. The natural rate of unemployment and the self-equilibrating market system will eventually right itself.
17. Regarding the unemployment rate actually rising since Obama has taken office while the subemployment index has fallen, perhaps you should suggest that a Democratic senator reintroduce the bill to use the subemployment rate! I would think they would rather have people hear these falling figures.
R: Yes, but the subemployment index is substantially higher than the unemployment rate. I'm sure no senator will be eager to embrace the idea. Moreover, Republicans would not want to give credibility to workers who are not looking for a job. Most of them think discouraged workers is just another term for human dross.
18. I find it interesting that the unemployment rate doubled during Bush's presidency. Although it's not entirely his fault, it can be speculated that he perpetuated the decline.
R: I believe those who took command of the economic policy during the Bush years really wanted to test the truth of the theories they had held for most of their lives. As Grover Norquest, a Bush administration official, put it, "We don't want to reduce the size of government, we want to shrink it down until we can drag it into the bathroom and drown it." And then there was Alan Greenspan who promoted free market ideology by pushing to deregulate the financial sector while he reduced interest rates to the lowest levels in 30 years. The reason they were able to successfully pull off their grand experiment was partly due to the afterglow they enjoyed in the wake of 9-11. Americans were reassured that we had the right president in office when he stood on that smoldering pile at ground zero and pledged to get those who struck America. So imagine, the economy was ticking along beautifully when Bush took office -- a perfect time to test a set of economic policies that just ten years previous had been considered irresponsibly radical. What could go wrong? Even if you were off base, the economy was riding high...the downside couldn't be too bad. Now we know. So, I don't know if this is exactly what they were thinking but the housing bubble and the financial sector swindles surely could have been avoided with a little judicial regulation and oversight.
19. Why is the labor force constantly rising? Shouldn't it plateau at some point?
R: As we have discussed, when the birth rate exceeds the rate of retirement then the labor force will continue to rise. In the next few years most of the baby boomers (those born between 1945 and 1955 or so) will be retiring and there will be a big decline in the tail of the labor force. Since the birth rate has been declining (New England colleges, for example, are very concerned about the coming fall off in high school graduation rates) we will likely see the labor force plateau. This will be an historic event outside of war time.
20. As to the "what is profit in payment for?" question, it seems to me that risk is a worthy assessor of whom is paid profit, to some extent. How would the economy work differently if this factor were excluded?
R: But no one exchanges risk for profit exactly. If you're saying that a business owner assumes risk when starting a business and does so for the purpose of realizing a profit then I would agree. We assume risk when crossing the street, skiing down a slope and placing a bet at a casino. The worker who takes a job assumes a risk that the business will fail. Her wage, however, is in payment for her labor time and the value that labor can produce. That is a clear relationship between the factor payment and the contribution to the production of value in the business. But risk doesn't produce anything, it doesn't add to the value of the product or service. Risk assessment might be said to determine a better allocation of resources across the economy (which businesses get started and which don't) given the potential for profit. On the other hand, profit to shareholders who have no operational connection to the businesses they own are, in part, a result of an unequal distribution of wealth -- profit becomes a bribe to wealth-holders to give up some of their wealth. The greater the inequality the more profit will have to be provided to those wealth-holders. So, profit in this case represents a distribution of the value from production based upon the leverage possessed by the wealthiest members of society.
21. Explain the Gini Coefficient.
R: The Lorenz Curve (review the textbook) is a graph that describes a relationship between the actual distribution of income in society relative to perfect equality. The Gini Coefficient is a measure that indicates how unequal the distribution is (how removed it is from perfect equality -- not that that's a desirable position). The closer the Gini Coefficient is to 1 the more unequal income is distributed and the closer it is to zero the more equal it is.
22. I'm confused about what the possible alternatives are to some of these regressive taxes, such as the highway toll. How would you go about making a tax like this proportional or even progressive? It seems to me that individuals would have to carry an official tax return or income statement with them when traveling to show toll workers just to receive their toll charge. Isn't this highly inefficient?
R: Yes, and I wouldn't recommend it on that account. But we can pay for road construction and maintenance through our proportional or progressive income tax and probably increase the efficiency of payment while assuring the tax burden is fairly shared. I might have mentioned that highways on the west coast are called freeways. In my experience in Portland, Oregon we paid a toll for bridges until the capital cost had been recovered after which they removed the toll. Certainly the stopping and starting on the New York Thru-way is an enormous waste of fuel and an uncounted addition to greenhouse gas emissions. The philosophy behind freeways is that highways are a public good -- everyone benefits so even if you don't have a car you should pay for the construction and upkeep of highways. The philosophy behind toll roads is that people who use the road should be the ones who pay for it. The greater the use the greater the revenues realized from that use and the larger the fund to pay for the commensurately higher wear and tear on the roads. There is much more behind the history of the choice of toll roads and freeways. It's likely that the congestion along the eastern seaboard created a need to regulate traffic. It costs more to enter New York City by car than to leave it. On the west coast there are fewer cities the size of New York and Philadelphia and far less congestion. With less congestion there is less reason to discourage travel and there is correspondingly less potential revenue from a toll road. The wide open spaces give plenty of ways a toll road can be avoided.
23. What are the distributional characteristics of the social security and medicare taxes? How will the current administration affect these taxes?
R: We pay a proportional tax of 6.2% of our income for social security. Our employer pays another 6.2% towards our social security. The income to which the SSA tax applies is capped at about $106,000 (it rises each year) and currently no one pays more than about $6,200 for this payroll tax. So the Payroll Tax for SS is proportional up to the cap and regressive after that. The medicare portion of the payroll tax is 2.9% (again half paid by the employee and half by the employer). It does not have an income cap and so the tax is proportional. These taxes will likely increase in the Obama administration while the benefits will be cut to pay for the health care reform legislation. The exact reforms are complicated and not yet worked out.
24. Isn't deflation a good thing? A car used to cost a month's wages and now it's closer to a year. Incomes haven't increased relative to prices.
R: The interesting part of this problem is that, as Keynes told us, the sum of all incomes is equal to the total value of all goods and services produced in a country. So, if prices rise generally then incomes must go up as well and by the same proportion. Inflation or deflation up to a point are not undesirable. If inflation nears double digit levels then it can be disruptive. Consumers and businesses will accelerate spending in anticipation of rising prices and further reinforce the upward climb. The value of the currency as an asset will be undermined and this can disrupt its use as a medium of exchange. At very high levels people will resort to direct barter as what happened to some extent during the inflation of 1974-75. Deflation is more symptomatic of a recession and commensurately lower levels of spending. You're more concerned with the relative levels of income and prices but behind that perception (our incomes don't go as far as they once did) is a deeper issue -- the distribution of income. If the median family income has a lower purchasing power than it did forty years ago then it has to be traced to an increase in the degree of income inequality. Now, the degree of inequality has increased but the median household income is higher than it was forty years ago. That is due, however, to more earners per household. Yet, the increase in median income has been insufficient to pay for the rising consumption of households and consequently the average household has considerably more debt relative to income than it did in 1970. I don't remember a time when a car cost only a month's wages but again that is a perception that is based on where you stand in the distribution of income.
25. Do you think America will progress again and job opportunities will increase like in the 1960s?
R: In the global race for economic dominance we seem to have been passed by. There are those who believe that the last 100 years was America's century and that the 21st will not be. I cannot predict that far ahead but nothing indicates we will experience anything like the phenomenal post-war economic prosperity any time soon.
26. What should we substitute for GDP? The Human Development Index?
R: The HDI is an imperfect measure of comparative well-being across nations but it's the only one we have.
27. If capitalism must keep growing in order to exist, what would the repercussions of a long-term significantly slower growing economy be?
R: Well, we have been experiencing it to an extent since the mid-1980s. It has been referred to as the de-industrialization of America. We've experienced out-sourcing, stagnant wages and an increased debt burden that has fueled consumption spending until recently. The financial crisis has revealed the hollow core of the U.S. economy -- financial institutions making money by selling short against the value of America's housing stock (packaging bad loans into securities and then buying insurance against the decline of those securities, i.e., making money by betting against the ability of Americans to meet their mortgage payments -- watch last week's Senate Sub-committee on Investigations chaired by Carl Levin (April 13-16 2010). The former officers of Washington Mutual Bank (David Schneider and David Beck) admitted to knowingly selling securities backed by mortgage loans that were delinquent and even in foreclosure without informing the buyers of these securities.
28. What do you mean by the sink function?
R: The forests and the oceans serve as depositories for carbon dioxide and other greenhouse gases, i.e. they serve as sinks. By trapping these pollutants a certain amount of global warming is prevented. Deforestation reduces the capture of carbon and is one of the causes of the higher average temperatures we've been experiencing.
29. Will health care reform reduce GDP?
R: Since we pay the highest health care costs and do not rise above the top 15 healthiest countries I would imagine health care reform would increase GDP. People would have fewer sick days, live longer and therefore be more productive.
30. Do homemakers who sell crafts and baked goods at fairs count as home production?
R: Yes and it would not be captured in GDP unless the income were declared.
31. Do government workers count toward the civilian labor force?
R: Those who are not in the military count as part of the civilian labor force.
32. I find the difference between what either is or is not considered part of the unemployment rate interesting. I also find it interesting that the unemployment rate nearly doubled by the time Bush left office. Although it is not entirely his fault it can be speculated that he perpetrated the decline.
R: We've become more aware recently of the odd way unemployment is measured. This explains, in part, the sense we get that things seem worse than the numbers indicate. That's because they are worse. The so-called "jobless recovery" is another phenomenon that requires explanation. How could production and sales be growing while job growth remains stagnant? This is partly explained by employers increasing the hours of existing workers and working off inventories rather than hiring new workers.
33. Why is the labor force constantly rising?
R: Because the population is constantly rising. As teenagers reach 17 years of age they are eligible for work and can be counted as employed, unemployed, or not in the labor force (military, college etc). Since more Americans reach 17 than retire each year the size of the labor force grows. When the baby boom generation begins retiring in larger numbers there may be a period when the labor force size does plateau.
March and April
1. Farm subsidies in the EU is the only way farms can stay afloat.
R: Yes, and that is true as well of American farms. The dairy subsidies in the United States allow for far more dairy farms than would exist under a free market. Prior to the Bush administration there was a website the U.S.D.A. maintained that provided the size of federal subsidies going to each farmer. It gave the name and county for every recipient. There were farmers receiving a half a million dollars and more in subsidies. They were the richest farmers. The howls were extraordinary. This is interesting because the rural areas of the United States are the most conservative, small government parts of the country. These are the recruiting grounds for the tea party and right-wing militia who fiercely oppose big government programs -- er, except for farm subsidies.
2. Why are new technologies produced in United States universities used in other countries and not in the U.S.?
R: Excellent question. I would imagine it has to do with the short-term focus of American corporations. If they fund the research and patent the resulting technology they might consider the sale of the technology more profitable for the next fiscal quarter than actually making it operational themselves. The Chinese government may bid for the technology and make it available to Chinese companies who then produce new products and sell them back to U.S. customers. Governments think long term and private businesses often don't.
3. Is the Classical Loanable Funds Theory still relevant in modern economics -- does it still have a sizable following?
R: There are still plenty of free market ideologues who at least genuflect toward the philosophy that the level of savings as it rises is offset by a rise in investment spending by businesses as corporations are lured by lower interest rates. Recent history provides more convincing evidence that interest rates are not all that important in determining the level of investment spending or borrowing generally.
4. How would increasing the minimum wage rate and the prime interest rate affect our economy?
R: You're suggesting opposing policies. Higher minimum wage rates would increase spending and raise production and employment. A higher discount rate or federal funds rate (the prime rate is not directly controlled by the Fed) would have a contractionary effect on the economy to the extent that it has an effect at all. No one is borrowing now because banks don't want to lend in an economic downturn. There is no reason to raise interest rates.
5. What do we have to do to overcome a recession?
R: It depends. Some will say that a recession is its own cure. Production, employment, prices, wages and interest rates will all fall resulting in lower production costs, depleted inventories, and depreciated plant and equipment. And all by itself, the economy will recover. No need for government to do anything but wait patiently. Others will say that the length of time for a self-equilibration to occur is too long and wastes too much potential production. History suggests that there has been no administration that has sat by while the economy crumbles. Even the most conservative administrations and congresses have called for action such as raising government spending, cutting taxes, raising the minimum wage, establishing a jobs program (more money for bridges, roads, airports etc), lowering interest rates and even establishing a government as employer of last resort (the W.P.A. as an example from the Great Depression of the 1930s). Short recessions are tolerated but even in conservative administrations, especially in a general election year, some pump-priming (increased government subsidies etc) has been undertaken to raise the employment level just before an election.