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 4^th 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. 

Consumer Education Resources

Name

10/29/11

Bus254: Macroeconomics

2c. Question2c: Consumer Education Resources (5 points).

            You have the power to stop identity theft. By using this link you can read information on how to avoid being taken advantage of. It gives you advice such as not being intimidated by emails or callers that suggest severe consequences of not giving them your information. It also suggests never clicking on a link in an email you believe to be fraudulent. The link also provides the contact information of the three major credit bureaus. The links are provided just in case you become a victim of identity theft. This link is important to people in today’s modern world because identity theft is the fastest growing crime in the world.

            Home Mortgages: Understanding the Process and Your Right to Fair Lending. What this link does is explain the process of looking for a mortgage provider. It then goes on to explain the application process. The third section explains the consumer protections and rights as a borrower to fair lending. The fourth section has a list of government agencies that could assist in certain aspects of home purchasing. The link will help people understand new laws and their rights when starting on a search for a home.

            Savings resources for consumers: Top 10 ways to prepare for retirement. What this link shows is a simplified top 10 list of major issues a person should consider when planning retirement. The first thing is to start saving or keep saving and make saving for retirement a priority. Second on the list is all about knowing what you will need for retirement. Such as most people will need 70% of pre-retirement income but some low income earners may need 90%. Number three on the top ten lists is contribute to your company’s retirement savings plan. The article says it will reduce your tax bill as well as possible additional contribution from your company. Number four say if your employer has a pension plan learn about it. Number five suggests learning basic investment principals. Number six is a very important part of retirement saving do not touch the retirement savings. Number seven suggests that if your employer does not offer a plan ask them to start one. Number eight suggests putting money into an IRA. Number nine talks about learning about Social Security benefits. Number ten says ask questions regarding your retirement to learn more then what this list advises. This list is needed to give people direction and to explain the importance of starting a retirement account early. Everyone wants to retire and to do that today requires planning ahead to make your goals come true.

Sandra Pianalto Speech

Name

10/29/11

Bus 254: Macroeconomics

2b. Question 2b: (15 points) Sandra Pianalto Speech

The Federal Reserve Bank that serves Toledo, Ohio is located in Cleveland, Ohio on 150 East Fourth Street. In the speech U.S. Manufacturing and the Economic Outlook the major concern expressed was human capital. What the speaker stresses is that we need to make investments in education and training. America is falling behind in college graduation rates in 1995 we ranked 2^nd in graduation in 2008 we ranked 13^th. The state of Ohio ranks 38^th out of the 50 states in the United States in graduation rates.

 The speaker believes that investments in human capital help with productivity and the standards of living. America needs to improve its educational performance, as we continue to fall behind we will find it difficult to lure businesses and the jobs we want to the United States. Education is becoming a vital necessity for manufacturers with less blue-collar workers and more college educated employees. With productivity in the United States increasing the number of employees needed decreased.

In the last two decades manufacturing has lost 3.7 million jobs due to improved productivity. This trend has been the same across nearly all industrialized countries. The decline in manufacturing has mostly been blue-collar workers. While on the surface the decline in employees due to improved productivity seems negative, it has allowed companies to modernize by investing in new plants and equipment.

            U.S. manufacturing during the recession lost 2 million jobs. Production has had some recovery but is still below pre-recession levels. The Manufacturing sector during the recovery has had mixed results, the automotive industry as improved fairly well while manufacturing related to construction has seen almost no growth. The Japanese tsunami disrupted supply chains for the auto industry but as companies we able to repair their supply chains they were able to increase their production of autos. Even with the mixed results of manufacturing the overall growth still doesn’t come near pre-recession levels. The recovery yielded 300,000 jobs compared with a loss of 2 million during the recession.

            The speaker also outlines how consumer, business and government spending is still too low to give much momentum to the recovery. This means that most of the current unemployed in the country are due to cyclical unemployment and less structural in nature. The unfortunate reality is that many of the unemployed today remain unemployed for extended time. About half of the unemployed have been unemployed for 6 months or more. The U.S. economy has only created 2.5 million jobs since 2009. While during the same time the government has cut around 500,000 jobs.

            Manufacturing in the United States has many different challenges. The most important of them is educating citizens to be able to compete with the rest of the world. By producing skilled workers America can combat the low-wage labor of developing countries, using productivity and quality to generate sales. Manufacturing over time changes and America has to change with the times. We have done this many times before and must continue to do so. Today our challenge is education and we must rise to meet that challenge.

Ben Bernanke Speech

Name

10/27/11

Bus 254: Macroeconomics

2a.       Question 2a: (15 points) Ben Bernanke Speech

The Federal Reserve Chairman Benjamin S. Bernanke has seen some improvements in the economy. Within the U.S. the financial markets and banking system has seen large improvements since the financial crisis. Manufacturing within the U.S. has risen almost 15% since its lowest point. The improvement has been mostly caused by growing exports helping to lower the United States trade deficit noticeably. The growing exports demonstrate how products and services made in the United States have been able to compete worldwide. Businesses have continued to invest in equipment and software helping to make productivity gains in some sectors. While there has been improvement the recovery has not been as strong as the U.S. would have preferred. New government information shows the recession was deeper than estimated, while the recovery has been weaker than previously estimated. United States output still hasn’t achieved levels that were in place before the recession. With slow growth in the economy, the rate of joblessness and household incomes continues to be slow.

Mr. Bernanke Believes the United States federal budget is not sustainable. The chairman has recognized four key objectives that need to be considered when setting tax and fiscal policy. The first is to achieve long-run fiscal sustainability. With growing deficits and the federal government being forced to borrow more and more something has to be done. We cannot continue to borrow the money we need indefinitely. The second key objective is to avoid fiscal actions that could impede the ongoing economic recovery. Basically the U.S. government should keep in mind the near term goal of recovery when developing a plan to reduce the deficit over the long-term.

 Third is fiscal policy should aim to promote long-term growth and economic opportunity. The goal of reduced deficits should not impede the growth of the economy in the long-term either. The fourth objective is to improve the process for making long-term budget decisions, to create greater predictability and clarity, while avoiding disruptions to the financial markets and economy. What the chairman seems to mean with his fourth objective is to tell the government they have to make better long term budget decisions. Making sure that the budget decisions they make can actually be paid for without causing massive changes in the economy. Businesses will not want to operate in a country without stability so predictability and clarity are important to economic growth. The chairman does not believe the United States budget spending is sustainable. He believes the nation has to make a fundamental choices with how we spend most of which will not be easy. Mr. Bernanke believes these decisions must be made it is ill responsible and unsafe to ignore them further.

The chairman made the statement that monetary policy is a powerful tool, but it not a panacea. What he meant by that is that while monetary policy to make progress within the economy it is not able to fix every problem the United States faces. Policymakers with cooperation from the private sector are needed to promote economic growth and job creation. Fiscal policy is of vital importance to ensure growth and sustainability. Along with fiscal policy other policies such as labor markets, housing, trade, taxation and regulation have major roles in the economy and will contribute to economic growth. The Federal Reserve will continue to do its part to help promote the best possible economic opportunity for all American citizens.

Financial Crisis.

Name

10/26/11

Bus 254: Macroeconomics

1b.       Question1b: (20 points) Financial Crisis.

During the early 21^st century easy access to credit along with low rates on mortgages gave more people the possibility of owning a home. After the recession of 2001 the Federal Reserve enacted a policy aimed at stimulating the economy which leads to the lower mortgage rates. With easy credit and low rates people bought houses, causing home prices to rise and for new house construction to reach all time highs. From 2000 – 2006 U.S. home prices rose 10% a year on average.

            The securitization of mortgages had helped fuel the housing boom due to its rapid growth. Securitization of mortgages is the act of bundling of mortgages into securities that then are sold to investors and traded in financial markets. Securitization of low-risk mortgages has existed for many years and has expanded the market, making it easier for investors to hold mortgages. Unfortunately in the early 2000s riskier mortgages were securitized in huge amounts. The riskier mortgages included subprime mortgages; a subprime mortgage is made to borrowers with low credit scores. When subprime borrowers defaulted on their mortgages during the housing boom the lender could easily refinance or sell the property to avoid a default. With high profits and low defaults investors and lenders became complacent in the mortgage-backed securities market. With increased compliancy underwriting standards dropped lenders demanded little or no down payment or documentation. Ratings agencies gave investors reassurance by rating mortgage-backed securities as low risk.

            As new houses came into the market people realized that home prices could no rise forever. In 2006 home prices began to falter than fell sharply. With home prices falling sales and construction came to an immediate halt. For new home owners and people who refinanced their home value fell below what they currently owed on their mortgage. Subprime borrowers began to fall behind in mortgage payments which eventually this spread to prime mortgages made to people with high credit scores.

            As delinquencies started to increase it became clear that residential mortgages were much more volatile than people had assumed. As the market imploded the level of expected losses rose dramatically. Due to the millions of U.S. mortgages repackaged as securities the losses spread around the world. In the early part of the housing bust the International Monetary Fund estimated worldwide losses to be $240 billion, in April 2009 that estimate climbed to $1.4 trillion.

            As estimates for mortgage-related losses rose, investors and financial institutions became nervous over their risk as well as the risk of others. Anxiety increased because of the difficulty to determine the value of many loans and mortgage-backed securities. The complexity of financial instruments increased the vulnerability of financial institutions to losses. Businesses became reluctant to lend to each other. In 2007 fears about the financial health of other firms led to huge disruptions in lending. Institutions used the lending market to fund day-to-day needs for cash. With firms reluctant to lend rates on short-term loans increased sharply compared to overnight federal funds rate.

            The fall of 2008 saw the failure of two large financial institutions Lehman Brothers and Washington Mutual. American Insurance Group as well as several others also threatened to fail. With some many institutions connected in a large complex web the failure of one could start a cascade of losses all through the financial system. A large money market mutual fund incurred sizeable losses which extended the crisis to a section of the financial system thought to be safe. The losses lead investors to pull their money out of the market. Short-term debt securities for corporations froze due to declining confidence. With confidence in the financial sector heading south the stock prices of financial institutions around the world fell off a cliff. The global financial system found itself on the brink of a meltdown.

            The Federal Reserve took action to prevent a full meltdown of the financial system. With short-term markets freezing up the Federal Reserve expanded its own collateralized lending to financial institutions to make sure there was access too much needed funding for day-to-day operations. Under normal conditions the Federal Reserve only loans to institutions that take deposits through a process known as discount lending. During the collapse of confidence in 2008 investment banks also had difficulty in obtaining short-term funding making them vulnerable to credit cutoffs resembling bank runs. In March 2008 the Federal Reserve created two programs to provide short-term secured loans to primary dealer similar to discount-window loans.

            Bear Stearns in 2008 was close to failure, its failure would have created a domino effect that would have disrupted the markets severely. The Federal Reserve attempted to contain the damage by facilitating the purchase of Bear Stearns by JP Morgan Chase. The Reserve provided loans backed by specific Bear Stearns assets. Within several months the investment bank Leman Brothers collapsed due to no private company willing to acquire the troubled investment bank. The Federal Reserve did not issue direct loans to Lehman due to a lack of collateral. The failure of Lehman resulted in a financial panic which threatened to spread to several key financial institutions, including American International Group which is a large insurance company. AIG was central to guaranteeing financial instruments its failure could have lead to a cascading effect of failures and cause a meltdown of the global financial system. To protect the global financial system the Federal Reserve provided secured loans to AIG.

            In response to the financial crisis the U.S. government passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. The reform act establishes the Bureau of Consumer Financial Protection; the bureau has authority over a range of financial services providers. The mission is to ensure that people are treated in a fair and transparent way in the financial marketplace. The bureaus director will be appointed by the President and confirmed by the Senate, the bureau will be autonomous within the Federal Reserve.

            The financial reform legislation requires regulators to focus on the entire interconnected system instead on individual firms. This new perspective is known as a macro-prudential view. The legislation gives the Reserve the power to act when a group of institutions practices create risk within the financial system. In order to properly understand the possible risks regulators need to collect accurate and up-to-date information on the interconnections of financial firms.

            In recent decades there has developed a banking system that is less rigorously regulated. During the crisis this unregulated system was vulnerable to panics and was a major source of credit-market disruption. The Dodd-Frank legislation attempts to remove regulation gaps by focusing oversight on how the firm functions and its level of risk to the economy. The act creates a Financial Stability Oversight Council to watch the overall risks within the financial system and the broad economy. Federal Reserve has been given authority to regulate all systemically important financial institutions, even non-banks.

Federal Reserve overview and study.

Name

10/26/2011

Bus 254 Macroeconomics

1a.       Question 1a: (15 points) Federal Reserve overview and study.

The Federal Reserve Bank has two basic goals. The first is to promote sustainable output and employment. The second is to ensure stable prices which means low, stable inflation. The Federal Reserve does not directly control inflation, output, or employment and it does not set long-term interest rates. The Reserve indirectly influences these vital economic variables, mostly by using the federal funds rate. The federal funds rate is the interest rate institutions in the Federal Reserve System charge each other for overnight loans of reserves, which are often needed to meet minimum requirements. Depository institutions in the reserve system are required to hold a minimum reserve balance at Federal Reserve Banks.

 When the Federal Reserve wants to slow inflation it uses monetary policy tools to raise the federal funds rate. When the federal funds rate rises monetary policy is called tight, or contractionary. When the Federal wants to counter recessionary pressures the Fed uses it’s polices to lower federal fund rates. When rates fall monetary policy is said to be easy, expansionary, or accommodative.

The Federal Reserve has historically used three tools to conduct monetary policy: open market operations, the discount rate; and reserve requirements. Recently it has come up with new ways to affect monetary policy such as paying interest on reserve balances. The Reserve has also used temporary nontraditional tools in the last few years to combat a weak economy.

Open market operations are the Reserves most used policy tools. What the open market operations are, are basically buying and selling U.S. government securities on the open market with the goal of aligning the federal funds rate with a publically announced target set by the Federal Open Market Committee. The open market operations are conducted by the Federal Reserve Bank of New York at its trading desk. If the Federal Open Market Committee lowers the target federal funds rate, then the trading desk will buy securities on the open market. The Federal Reserve pays for the securities by crediting the reserve accounts of the banks that sell the securities. When the Reserve buys securities in the open markets it is creating money. When the Federal Reserve creates money and credits it into reserve accounts it puts downward pressure on the federal funds rate. With lower federal funds rates, the interest rates that are directly and indirectly linked also tend to fall. With lower interest rates businesses and consumers are encouraged to spend stimulating economic growth.

When the Federal Open Market Committee raises its federal funds rate then the trading desk sells government securities, collecting payments from banks by withdrawing money from there reserve accounts. Less money in reserve accounts means less money in the banking system putting pressure on the federal funds rate. By selling government securities market interest rise which slows consumer and business spending which slows the economy but also reduces the rate of inflation.

The Federal Reserve may also change the reserve requirements, which is the amount a financial institutions are required to hold in reserve. By changes this it can add or remove money from the Banking system, it is rarely used. The discount rate is also an option the Federal Reserve has its disposal to influence the amount of money in the banking system. Unlike the open market operations the discount rate is set by the Federal Reserve. The discount rate is used as a lender of last resort which occurs when the open market lending freezes up. The Reserve in 2008 was granted authority to pay interest on reserve balances. This has the effect of creating a floor beneath the federal funds rate because banks are not willing to loan to each other at rates far below what they can earn by leaving their reserves on deposit with the Federal Reserve. The Federal Reserve also devised nontraditional tools to lower borrowing costs for consumers and businesses. One tool used was large-scale purchases of long-term securities, including Treasury securities, federal agency debt and federal agency mortgage-backed securities. These purchases lowered long-term interest rates including mortgage rates.