March 29-April 16

March 31

Q1: If these aggregate supply and demand charts are "total" spending as well as supply and demand -- How can you relate import and export supply and demand when numerous countries are considering all goods and consumption within the country?

A: The aggregate supply curve only refers to that which is domestically supplied. That is the only production that affects employment in the U.S. (even though a good produced say in Italy and shipped to the U.S. does trigger some economic activity when it enters the U.S. -- distribution and sales in the U.S. & consequently employment will rise as a result of the Italian product being bought by Americans --  that is included as "service sector" transactions and will be recorded in GDP, but not the sales revenue that returns to Italy). Aggregate demand considers the trade sector in the subtraction of the value of imports from the value of exports. The resulting "net exports", if a positive figure, causes a rise in production and employment domestically. 

Q2: Doesn't a trade organization established by one group of nations like the WTO offer a conflict of interest compared to having an unbiased organization or less biased organization like the U.N.? How would this be resolved?

A: The WTO was formed out of the Uruguay Round of the GATT (General Agreement on Tariffs and Trade) in 1994. It has been argued by many on the left that corporate interests dominated the negotiations that produced the final governing body. This is a fascinating subject and I'm not going to have space to do it justice, but let me offer one insight. This organization which can be argued is a pressure group to prevent or inhibit the ability of any nation to restrict the mobility of capital is a result of the rise of so-called "impatient capital." Throughout the 1950s and into the 1970s the vast majority of the nation's corporate stock was owned by households (about 90 percent). Households tended to hang on to stock for long periods of time. By the end of the 1970s, household ownership of stock dropped to 59 percent. By the year 2000, households held only 42 percent and institutional investors owned 46 percent and were responsible for about three-quarters of all stock trades (RRPE 2003 274). Institutional investors are much less patient. This is the reason for all the churning of the stock market since the 1980s and it forces corporate investment decisions to be just as antsy -- jumping from this short-term project to another. No corporation wants to be stuck anywhere too long. The WTO is the strong-arm that ensures no democratically-elected government can pass legislation that might slow the free-flow of capital anywhere around the globe. The United Nations has never really been an effective force for controlling capital movement. 

Q3: Keynes' naive theory was that if we change the AD curve, that will automatically allow the AS curve to be upsloping?

A: Keynes Naive theory was that changes in AD would not affect the slope of AS, i.e., AS would be a horizontal line. So, aggressive fiscal stimulus (increases in government spending for example) would increase production and employment but not general prices. He was right -- in the depression of the 1930s. By 1970, however, we were experiencing rising prices even without being near full employment. Those who believed in the classical view, that the economy was always at or around full employment, were back in the saddle again. If you believe AS is steeply sloped then you say to government -- "stay away from fiscal stimulus or you'll just cause inflation."

March 31

Q1: If the Keynesian model is based upon high government spending and low taxes how do democrats/liberals/progressives believe in staying with the Keynes' model by having high spending and somewhat higher taxes as opposed to conservatives who believe in low taxes and lower spending?

A: Excellent question. No politician really invokes Keynes' name any more when they discuss economic policy. You're right -- democrats seem to want to raise taxes (however, they argue that they want to raise them on the rich, balance the budget and/or use it to rebuild the nation's infrastructure and invest in education and thereby create jobs and raise the skills of the workforce) and increase spending. Conservatives say they want smaller government, but government has actually grown faster under Republican presidents than under Democratic presidents. Conservatives are desirous of a smaller level of social spending but they often make up for that by ambitious programs to rebuild the military and project the American empire. So, it seems that both parties want bigger government. One wants to pay for it through higher taxes and the other wants to pay for it through borrowing. Arguably the conservatives are more fiscally progressive and the progressives are more fiscally conservative. Got that? I don't either. 

Q2: Are smaller economies easier to control or predict? If so, would government ever propose an idea to split our economy to regain better control?

A: Actually, the opposite is true. The bigger the economy relative to the world's economy, the more control you have over your own fate. This is why, some say, countries are madly searching for larger markets to form. The North American Free Trade Agreement (NAFTA), the European Union and other free trade areas, export free zones and such are all efforts to combine countries into more powerful trading partners, so they can negotiate better terms of trade and protect their countries from cheap imported goods.

April 2

Q1: Why does it seem like government makes decisions and ideas for funding, yet states will always direct funding and state taxes. If we're all working under one budget -- why do states have funding problems?

A: The U.S. Congress and the executive branch pass and sign legislation that may impose new programs on states (like the No Child Left Behind Act -- a bill that requires states to administer state-wide standardized tests in the schools and demonstrate that teachers have proper credentials) without giving states more federal dollars to pay for the program. The states could refuse to comply with the requirements of the program at the risk of losing federal dollars for other programs (like road building). Vermont is in the process of doing just that. 

Q2: If the United States has a national debt of 5 trillion dollars, how can the nation handle the pressure of such debt without crumbling?

A: The debt is less than the annual GDP of the U.S., the value of the dollar (i.e., its exchange rate with other currencies and its purchasing power) is very stable, and the bulk of the debt is held by Americans (i.e., we owe it to ourselves).

Q3: How do you determine if you have a fiscal restraint or stimulus?

A: If the government's structural deficit rises, then the administration is undertaking fiscal stimulus. If the deficit falls, then the administration is undertaking fiscal restraint. If you change the word deficit to surplus in the previous sentences, then stimulus changes to restraint and vice versa.

April 5

Q1: A budget surplus creates a fiscal drag. A budget deficit creates a fiscal stimulus.

A: That's right. A budget surplus means the government is taking more tax revenues out of our pockets than it is injecting back in through government spending. That slows the economy. A budget deficit does the  opposite -- it injects more money into the economy than it extracts through taxes.

Q2: When a change in taxes is decided by government officials -- does it immediately go into effect that year or is there a transition time? If so, how long?

A: Actually, this is one of the flaws of fiscal policy. The time between a decision to raise or lower taxes and the actual effect of the tax change on the economy can be many months. A bill must be written, passed by Congress and signed by the President before it is enacted. The same is true of changes in the spending levels of government. Just to give you an idea of how fixed the budget is (and to make some political hay here), the Bush administration is under fire for having taken $700 million that was a part of the budget to fight the Taliban in Afghanistan and transferring it to prepare for the war in Iraq. This may be found to have been illegal, i.e., it didn't have the authorization of Congress. 

Q3: Can you explain the automatic stabilizer more?

A: When the economy grows (GDP increases), national income rises and thereby tax revenues will automatically rise even if we had a flat tax. A progressive tax pushes up revenues even faster in a period of economic growth as taxpayers move into higher tax brackets as their incomes rise. Assuming Government spending is unchanged, the rise in tax revenues will produce a budget surplus (or reduce a deficit) and will slow the increase in GDP -- taxes are a leakage from the income-consumption stream. In an economic downturn, tax revenues will fall, so the fall in Americans' incomes will be cushioned by a fall in tax revenues and a budget deficit might open up (or a fall in a budget surplus). That means the fiscal policy automatically produces a stimulus no matter what the administration's economic policy is. President Hoover (and initially Roosevelt) tried to balance the budget during the early years of the Great Depression of the 1930s. This just made the crisis worse -- to balance the budget during a downturn means you have to keep raising taxes to receive the same revenue because people have lower incomes. Eventually, Roosevelt reversed the policy to try to get people back to work (Works Progress Administration (WPA) programs, for example, involved the federal government paying for things like historians writing state histories, songwriters [Woody Guthrie] producing songs about railroads, dams and mountain ranges etc.). 

April 16

Q1: How can conservatives accuse the government of crowding out the private sector, when government is using and relying on the private sector more for programs that use to be controlled by the government directly? Haliburton privatizing welfare [you mean warfare] etc -- wouldn't that stimulate more growth of the private sector?

A: The answer is complicated. Halliburton Corporation contracts with the United States,  foreign governments and private companies to supply oil producing equipment and build pipelines. They principally deal with governments. Funneling tax dollars to private corporations to undertake projects (particularly in foreign countries) will do less to stimulate U.S. economic growth for several reasons. The federal government uses a cost-plus contract arrangement (so the discipline of the market to force firms to be efficient is absent) and often government contracts are granted on a no-bid basis, as was true when Halliburton got contracts to rebuild the Iraqi oil infrastructure. So, no other companies bid against Halliburton for the contracts and the contracts allow the firm to simply pass extra costs back to the government and still receive substantial profits. So, many fewer jobs are created in the domestic market as a result of this "privatization".

Q2: How is some of the national debt owned by foreign countries?

A: Foreign investors can buy U.S. government bonds and securities like any other investor. Since the U.S. dollar is one of the most stable currencies in the world, investors and central banks all over the world want to hold their assets in dollar-denominated securities. The risk of fluctuation in the value of the dollar is minor. As well, countries whose companies do business with the U.S., need dollars held in their central banks to facilitate the purchase of American goods. As Americans' savings rate declines, however, they have less discretionary income to buy income-earning assets and as our trade deficit with other countries grows, foreign central banks have a build-up of U.S. dollars beyond what their companies and consumers need to buy the goods they want from our country. The only other use of the U.S. dollars held by foreigners is to buy government and corporate securities in the U.S. This reduced demand for U.S. dollars can cause its exchange rate to fall (the exchange rate reflects the supply of and demand for a currency) and the purchasing power of the dollar to decline causing domestic inflation. This occurred in the 1970s. 

Q3: Therefore, to distinguish the difference between crowding in and out is that for the economy to be better off the government should be involved in crowding in. Is that right?

A: Yes. Rebuilding the countries' infrastructure (roads, bridges, airports, energy facilities) will stimulate economic growth as will investing in training and educating a workforce  to match the skill requirements of business or investing in the development of new technologies or research and development. If government simply takes over production that had previously been in the private sector, or if it increases spending on military build-ups and wars, it will not translate into increased growth of the private sector. 

 Q4: You said poor people spend more than rich people -- is there a medium or is it determined by income? Because -- thre are obviously more poor people than there are rich people according to society standards. So...more people spend more! -?

A: Poor people spend a higher percentage of their income than rich people. So, transferring $5 billion from the wealthiest 10 percent to the poorest 10 percent will raise the level of total spending. Yes, it's just a fact -- if you have very little income, you must spend most or all of it just to get by. If you get another $1,000 transferred to you from a wealthy taxpayer, it's likely that $1,000 will be entirely spent, when it likely would have been mostly saved by a higher income person.