Posts Tagged 'government'

Looking Forward to Friday’s Jobs Report

From the Financial Times:

The US private sector shed 491,000 jobs in April, according to a closely-watched survey of business employment on Wednesday, a sign that while the job losses remain high, the free-fall may be slowing.

From CNN Money:

Separately, outplacement firm Challenger, Gray & Christmas Inc. reported that the number of layoffs announced in April fell for the third straight month. While the cuts mark the lowest total since last October, the April figure was still 47% higher than job cuts announced in the same month a year ago.

Friday’s jobs report will potentially be a big sign for our economic recovery. It will give us an idea if the bottoming of the recession is having a positive impact on jobs. The consensus is for 8.9 percent unemployment with 610,000 jobs lost in April. If Friday’s reports is better than the consensus, look for a good day for the stock market and an eventual increase in consumer confidence.

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Will We Ever Learn to Manage Debt?

Some very valuable debt management lessons. Right now, the government is going further into debt to help bail us out of our debt, ironic indeed! Either way, we end up paying interest on debt.

 The Mess That Greenspan Made

California Spends FIVE Times more on Prisoners than Students

From Dan Walters of the Sacramento Bee: 

The fastest growing segment of the state’s deficit-ridden budget, by far, has been its prison system, reflecting severe overcrowding, generous labor contracts and federal court pressure to reform inmate health care.

“Corrections,” an ironic misnomer, has jumped from less than $5 billion a year to more than $10 billion in the last decade, over twice as fast as school spending, the biggest budget item. It now costs about $45,000 a year to feed, clothe and medicate each of the state’s 170,000-plus inmates, or roughly five times what taxpayers spend on a typical public school student. And that doesn’t count what it costs to supervise tens of thousands of parolees.

The fact that California spends five times more on inmates than public school students is appalling! I do not have a clue why this is the case, or how it is in other states, but it seems that our “corrections” system is VERY broken. This enormous expense in one reason for California’s budget woes.

Is the U.S. a Capitalist or Socialist Economy?

A colleague in a different field emails me:

On the side, what’s going on in your classes.  I’m watching the economy, and all the money the government is throwing at it, and I’m wondering why? Is it going to help?  Why are we a Capitalist society on the way up, and a Socialist economy on the way down?  I know the answer is greed, but there has to be some other reasons?

 

From Wikipedia, here are the definitions of capitalism and socialism:

 

Capitalism is an economic system in which wealth, and the means of producing wealth, are privately owned and controlled rather than publicly or state-owned and controlled.

 

Socialism refers to a broad set of economic theories of social organization advocating state or collective ownership and administration of the means of production and distribution of goods, and an egalitarian society characterized by equal opportunities for all individuals and a fair or egalitarian distribution of wealth.

 

So, my friend asks, are we capitalist when our economy is doing well and socialists when it’s not? This is probably more of a political question but I will give my economist sense to what I think happens in the U.S. The U.S. economy is a mix of capitalism and socialism. There are many government jobs (I teach at a California Community College) and the government is the largest landowner in the U.S. When the economy is doing well, just about everyone is better off (There are debates on this fact and income inequality, a bit too much for this post now).

 

When the economy goes down, politicians start to feel the pressure from their respective voters. The pressure is to do something to make the economy better. Politicians do this through fiscal policy. As George Bush Sr. learned, it is not good to tell everyone the economy will fix itself later. People want action from their government, even more so than positive results. Right now, the economy and job market are declining at a very rapid pace. Politicians are forced in to crisis mode and are probably going to use over two trillion in government spending. So, the quick answer to my colleagues question is “Yes, politicians need to use more fiscal policies (possibly socialism) during economic declines”.

 

He also asks, why is the government throwing money at the problem and is it going to help our economy? The U.S. has had a debt problem for some time. Consumers and governments borrow and spend more than they should. This has led to an inflated Aggregate Demand (sum of all the U.S. demands). What is happening now (due to housing bubble, credit crunch, etc.) is the consumers have started to stop borrowing and buying. Consumers are sitting on their cash so there is a huge drop in AD.

 

Keynesian philosophy, in general and simple terms, states that the government should borrow and spend to increase the aggregate demand. If the government doesn’t do so, businesses will have to layoff more workers and we could end up in a depression. Fiscalspending should help but we really don’t know how much (this is where the academic debates are centered right now). We also don’t know if fiscal or monetary policies are better.

 

One major problem is the Fed can’t lower interest rates any more. Also, the Fed can’t force banks to lend and people to borrow. Fiscal policy is one of the last major options. There is a trad-off between borrowing now to save the economy vs. future debt. My personal take is that fiscal policy needs to be used along with monetary policies. If both policies are used properly, our downturn will be less painful. It’s a bit of a gamble but it needs to be done, otherwise, there could be some very upset voters.