Thursday, December 1, 2011

Obama economic theory


Name
11/13/11
Assignment 7: Paper 2
The article is from Bloomberg Business week for the week of November 14 to November 20, 2011 the title is called Nudge Not. This article explains the economic theory that the Obama Administration relied on in their Making Work Pay tax credit which was a part of the stimulus bill. The tax credit gave $400 or $800 if you a couple filing jointly to most Americans. This credit wasn’t given as a lump sum it was given quietly as a slight increase in their paychecks. Many people did not realize they were given a tax cut.
The thought behind this is if people received a lump sum check they would be inclined to save it while if it was given to them without their knowledge they would spend that extra income. The idea of the tax cuts being given to people without them noticing is from a school of thought known as behavioral economics. Behavior economics takes the stance that people may not always act in a rational manner. People rely on instincts, biases, and cognitive shortcuts to make decisions, which leads to poor choices.
Making Work Pay is based on the belief that people are more likely to spend money they have mentally accounted for as current income and not their mental assets account. What this means is people will measure how much they spend based on their paycheck and not the size of their bank account. This theory also believes a lump sum payment will be seen as an increase in wealth and there for is more likely to be saved. In a paper from University of Michigan by three economists they found the Making Work Pay did not get people to increase their spending, it actually caused them to spend less. The paper being released by the economists has come under fire due to it being reliant on a survey of people. To the behavioral economists people are not a reliable source of information; they are also blind to what shapes the financial choices they make. Another point behavioral economists make is that with traditional economics a tax cut is a tax cut and their shouldn’t be any different reaction to a lump sum and a slight increase in paychecks, both strategies should increase spending this was not the case.
The Making Work Pay tax cut was an attempt to give more working people larger paychecks in order to encourage them to spend more. During tough economic times the government takes actions that are thought to increase spending and there for spur the economy to grow and increase output. This strategy is to increase demand which causes people to buy more products which means businesses will increase output hire more workers and increase inventory. The most prominent of demand side theories is the Keynesian view. Keynes felt it was the government’s role to increase demand when the market was no longer operating as it should. He believed that the economy was fragile and not able to self-correct and therefore needed someone to increase demand.
The goal of the Making Work Pay tax credit was to give people more money to increase output. When people spend more they actually help create new jobs with more people willing to spend. There is a multiplier effect when it comes to the economy when a person spends money that causes more spending somewhere in the economy. One of the macroeconomic goals is to promote economic growth/ increases in output there are many way to grow an economy and some of these strategies conflict with each other. The strategies may differ greatly but they all have the same basic goal of increasing wealth and promoting prosperity within the economy. Behavioral economics is an important theory to understand because people don’t always do the rational thing and make mistakes, but it shouldn’t be assumed that they will always make irrational choices. 

recovery brightspot


Name
11/8/2011
Assignment 6: paper 1
The article that was read is from Bloomberg Business week for the week of November 7- November 13 2011. The title of the article is Surprise! Carmakers are a recovery bright spot, it can be found on page 19. By 2015 carmakers plan on hiring or bringing back 25,000 people this includes 4,000 people in the 4th quarter of 2011. In part the jobs being created are a reaction to the Japanese earthquake which caused supply disruptions which lead to low inventory on car dealer lots. Edmunds.com is an auto industry researcher who estimates that 13.5 million new cars and trucks will be purchased next year up from the 12.6 million bought this year.
The auto industry is the United States largest manufacturing sector. Most of the assembly jobs being created are moving to the Southern states due to lower taxes and lower labor costs. The new jobs being created are from Domestic, Asian, and European makers. The jobs pay $15.00 an hour lower than veteran autoworkers in unionized companies. Toyota’s executive vice-president of engineering and manufacturing predicts that the U.S auto industry will create 88,000 additional jobs. When an auto company expands or builds a new manufacturing factory it is an investment that will remain in place for many years while providing an economic boost to the community for possibly decades. The Center for Automotive Research estimates for each worker hired creates seven other jobs by suppliers or spending from the new hires. 
The value of the United States dollars has become weaker compared to the yen and euro. While in developing economies the cost labor is increasing, this has made manufacturing in the United States more appealing. International automakers added 6,350 jobs this year with 3,400 more in 2012. Toyota, Honda, Nissan and Mercedes are expecting to expand their U.S. operations.
Full employment in one of the four macroeconomic goals, this article is about jobs being created in the United States. The current unemployment rate in the United States is 9.0% so any jobs that are being created are looked at as an improvement. With the expected 88,000 additional jobs expected to be created from automakers 25,000 new jobs clearly show how the multiplier effect is expected to give a boost to the entire economy. Making sure there are enough jobs for people who want them is an important part of macroeconomics. One of the goals of the Federal Reserve is to create an environment that allows for full employment. This shows the importance of getting people to work.
When a person is hired into a new job with long-term earning potential they feel more secure about their future and tend to spend more. This increased spending causes other businesses to add more employees to serve the increased customers. With people confident in their future and spending more, creating new jobs this leads to eventual gains in the gross domestic product. Employment gains often are a sign of a strong or improving economy. The lower the employment rates the closer to full employment we get. We will not get to 0% unemployment due to people changing jobs, people who do not have the skills for the jobs that are in demand and people unemployed due to seasonal reasons.
More stories about job gains can lead to people feeling more confident in the economy, which can spur on additional spending. Someone who feels the economy is starting to create jobs will feel less stressed about losing their current job and may increase spending. Improvements in the labor markets helps support confidence in the entire economy, this could have the potential to create more jobs just because people feel better and may spend more.