Ask an Economist #3

[JerichoHill]

@Inna
You wrote some really nice answers. When you're not in full on rant mode, you write some very intelligent stuff. Kudos.

How can Obama lower taxes, if America has a huge debt and is importing all?

First, importing what all? We export and import. Secondly, Bush lowered taxes which helped create the debt. Thirdly, as I understand it, under Obama's scheme some taxes are lowered and others are raised and that its revenue neutral, taxwise, just that the folks who earn <250K pay less in takes.

What do you think will replace capitalism, you surely dont think this sytem is forever?

Capitalism as the pure free market has been replaced already with I guess, you'd say democratic capitalism? Free markets for the most part with government intervention in certain segments? The wealth generated by the capitalistic societies had a feedback effect that once we hit a certain wealth threshold, we could afford some social programs. The debate today seems to be on just what social programs.

I don't see "markets" being replaced.

 

[alcal]

First, importing what all? We export and import.

Yes, but balance of trade is in negative. Just see China-USA import-export.

 

[RedRalph]

Put it this way, in 150 years, what broad trends do you think will have happened in economics (I'm not asking you to say specifics, but just, lets say, ownership of capital will be concentrated in more/fewer hands etc)?

 

[JerichoHill]

Yes, but balance of trade is in negative. Just see China-USA import-export.

I do not put alot of stock nor worry in trade imbalances. If one did, that would be a decidedly mercantistic attitude.

Net Exporters tend to be 2nd world manufacturing economies. I prefer the 1st world information economy. Higher pay, less pollution =)

 

[JerichoHill]

Put it this way, in 150 years, what broad trends do you think will have happened in economics (I'm not asking you to say specifics, but just, lets say, ownership of capital will be concentrated in more/fewer hands etc)?

Let's not say "economics" but of economies.

We'll see the 2nd world developing countries converge with first world developed countries in terms of standards of living. There will be differences still, but they'll all be teams in the same league (Okay, maybe there will be a country acting like the Detroit Lions of 2008...maybe)

Looking at European and now US developments, it would not suprise me to see higher redistribution and more regulation. We can argue whether the effects are overall more beneficial or less, but I think we'll see these rise as, for reasons I've cited before, it will be in the politicial best interests of those parties in power.

And yes, the USA will still exist and still be an economic powerhouse...

(Please note that my prediction of the future does not imply that my personal beliefs are in agreement with what I expect to happen)

 

[alcal]

How can asian Stock exchange influence European ones?

 

[El_Machinae]

What journals do you have a subsciption to, and actually read most of the articles? What are the 'big two' journals in the field of Economics?

 

[theskald]

I'm not an economist, but I do have an interest in the history of economics, and expect to start a thread about classical economics soon. I can offer some brief ideas about Adam Smith now.

Smith didn't care very much about how money was represented, we was only against the idea that value was somehow embodied in money (which at the time he wrote was basically gold). His two great ideas were:
1) that specialization leads to increased productivity (and obviously specialization requires trade);
2) that value was measured by the labor expended to produce a commodity or service (this would later lead to the labor theory of value, one of the cornerstones of classical economics, which got hastily discarded in the late 19th century after a certain economist/political thinker publiched some unwelcome conclusions drawn from it, and managed to make them popular).

Thanks, this makes the whole thing much clearer for me. So his apparent dislike of using gold bullion to measure wealth was really more of a circumstantial thing?

Be afraid. One of the "tools" I use to evaluate the likelihood of a long period of economic trouble for industrial companies is their participation in research projects. I'm seeing projects already approved and underway getting its financing cut, and the companies (multinational corporations) don't even hide why they're cutting: economic trouble ahead!
The financial crisis still, not solved (and it won't be), was just the beginning.

I AM afraid! But I'm responding by freezing, so that's not really helping me. I'm not sure how what you said affects the credit market, though. It sounds like you and JerichoHill are both advising caution, though, so I think I'll follow his advice and work on saving and wisely budgeting my income.

 

[Whomp]

Trade figures are antiquated so like Jericho I wouldn't put too much stock in them. For example, when a US company manufactures a product in Canada it counts towards Canada's exports.

JH--it appears to me that both candidates view their tax policy as benefits from the current baseline (which would change in 2010 regardless of who wins). What neither address is actual deficit reduction.

The Tax Policy Center estimates that in 2013, Obama would collect revenues of 18.2% of GDP. McCain would bring in about 17.8%. However according to the CBO (and assuming the Iraq war will be winding down) spending that year would be about 19.5%,.

Thus, Obama would have to cut spending by 1.3% of GDP or $230 billion, to balance the budget in 2013. McCain must find 1.7% of GDP, roughly $300 billion.

I'm trying to figure out how Obama would accomplish this when currently we can't even do a 1/10th of that? Add to that, there's still no permanent solution to AMT which needs to be revenue neutral to really be fixed and all we're doing is patching which doesn't help the revenue side at all.

Does a democratic congress and President have it in them to make "real change"?

 

[Cutlass]

I don't know that any group of elected officials can find it worth their while to really go through the budget and make cuts. It's a lot of work and hassle for them, with little "political gain".

Trade figures are antiquated so like Jericho I wouldn't put too much stock in them. For example, when a US company manufactures a product in Canada it counts towards Canada's exports.

How does this benefit the US? Are the profits repatriated?

 

[Whomp]

I don't know that any group of elected officials can find it worth their while to really go through the budget and make cuts. It's a lot of work and hassle for them, with little "political gain".

Maybe a mandate to increase spending at a rate that's less than inflation? That way revenue can catch up?

How does this benefit the US? Are the profits repatriated?

Yep. Right back to the companies that generated the earnings. Think of it this way. Coca Cola can be produced cheaper in every country that it's sold in rather than shipping it from the US. Like most multinationals, they generate the majority of their income outside the US. That's not the case when it's a natural resource that can only be produced in specific places.

 

[Cutlass]

Maybe a mandate to increase spending at a rate that's less than inflation? That way revenue can catch up?

Eventually every deal that has called for cuts or paygo has been violated. So it's a matter of picking the right politicians.

And yet the Federal Government has been staying under 20% of GDP for the past few decades, hasn't it?

 

[El_Machinae]

Maybe a mandate to increase spending at a rate that's less than inflation? That way revenue can catch up?

Less than inflation & growth, maybe? That's all that's really required. If Americans spent their money more wisely, the growth could go faster than it is.

 

[Cutlass]

Budgeting really doesn't work staying below inflation. Not unless the services are cut. There are programs that about anyone would be willing to cut, but few that most of the people are willing to cut. It's really a political, rather than economic, question.

 

[Cutlass]

Well Obama just said on TV he would go through the budget line by line and eliminate useless programs.

 

[JerichoHill]

What journals do you have a subsciption to, and actually read most of the articles? What are the 'big two' journals in the field of Economics?

JEL

AER


10 char

 

[Integral]

JEL

AER


10 char

To expand a bit...

AER and JEL are published by the American Economic Association. Three other flagship, first-tier journals are:
QJE (Quarterly Journal of Economics, MIT Press)
JPE (Journal of Political Economy, Univ. of Chicago Press)
Econometrica

Those are the "big five"; AER, QJE, and JPE are general-interest journals for both empirical and theoretical papers; JEL focuses on literature reviews, economic history, and things of that nature; and Econometrica focuses on econometrics and game theory.

The second tier includes basically all of the disciple-specific flagship journals, such as the Journal of Monetary Economics, Journal of Development Economics, Journal of Public Economics, and the like.


--


Regarding deficits, my personal view is that the best way forward isn't to cut programs directly, but to shape policy so that revenue growth outpaces expenditure growth. In practice, that may include such policies as keeping the total growth of government spending below a certain cap (inflation? GDP growth?). I'm not sure if there's a sure-fire method of reliably increasing the growth rate of receipts. Better to focus on the things Washington actually controls - the growth rate of Federal expenditures.

Given the current deficit we're in and the likely trajectory of spending, it will be necessary to have at least 6.2% growth per year in receipts to achieve a balanced budget by 2013. If we keep an expenditure path that approximates that under the Bush administration, receipts will need to grow by 9.9% per year to achieve a balanced budget in the same time frame. To put that in perspective, Clinton had the highest recent medium-run average in recent history at 6.6% growth in receipts per year from 1992-2000. The Bush administration has seen revenue growth of about 4.6% per year, on average, over the past eight years.

It's also possible to go forward by actually slashing spending in certain areas, but that's politically infeasable for most programs.

 

[Snorrius]

Trade figures are antiquated so like Jericho I wouldn't put too much stock in them. For example, when a US company manufactures a product in Canada it counts towards Canada's exports.

Well, it is logical, because most of the earned money are spent within the country where good is produced: salaries, raws (if imported it is the same as local company buys it) and there are also different taxes which are going to government of the country, so what multinational is a net profit which is not that high for most sectors (and also locals are also free what to do with their net profit, they can move it outside of a country, so both ways are more or less equal in my opinion).

 

[alcal]

Yep. Right back to the companies that generated the earnings. Think of it this way. Coca Cola can be produced cheaper in every country that it's sold in rather than shipping it from the US. Like most multinationals, they generate the majority of their income outside the US. That's not the case when it's a natural resource that can only be produced in specific places.

Which country could coca-cola be produced in? Brazil? India? Germany?

 

[Ordyner]

Hello. I just started my (401 k) 2 years ago. Last January 2008; I had $18,000 invested on MFS International fund (MIDAX), By June 16 I peaked at $27,000 (employer match contributions included) Today I am down 59.5 % at only $13,200... What options do i have, i believe it is too late to change it into a more conservative fund. Is there a chance that i might lose all of it?

My company's 401 K program is very good; matching 50 % of the first 6 % we save, plus giving us a bonus contribution a little bit larger than the employer match. Nearly $8,000 dollars came from my employer contributions in the last 2 years.

Thanks in advance.