It's been quite some time since my last post. All I can say is that it has been a very busy semester. However, I feel an economics post is always warranted. Obviously, the presidential election is on most people's minds as November 6th draws much closer. We've seen debates between the candidates and shifts in momentum on either side with the most concerning topic being the economy. As employment is still abnormally high and the national debt at over $16 trillion, the economy has shown only mild signs of improvement. Investment is still low(even with record low interest rates) mostly due to uncertainty in the future economy. Are there any signs of life? Some, but not much. The housing market has consistently shown gains in 2012 since the bubble burst back in 2007. However, it has yet to make a full recovery. This seems to coincide with the general theme of the recovery for the past two-three years that has been slower than expected.
In the beginning of October we saw the unemployment rate unexpectedly drop below 8% to 7.8%. This was the sharpest job-gain in over 30 years and for lack of a better word, it was well...weird. The unemployment rate is derived by two surveys that are sent out to both employers (business owners) and households. And while the employer survey sent back gains of a meek 140,000 jobs, the household survey showed gains of over 800,000 jobs in September. This is a staggering contrast and makes one understandably skeptical of the methods used while conducting this survey.
Perhaps part of the reason for the slow economic recovery is the fact that most of the job gains have been low-wage earning jobs which have effectively increased the ever-so-delicate wage gap. This has effectively shrank the middle class and forced many to pursue two jobs in order to make up for earnings from previous employment. Not only that, but another round of Quantitative Easing has hit the fore front with no deadline in sight. In effect, QE3 will inject currency into the economy in order to generate liquidity and create an incentive to invest or spend. While the FED pushes money into the economy, it walks a tough line with the declining dollar on the world market. The injection of currency also contributes to inflation and may lead to a decrease in REAL income, i.e. purchasing power.
The big question is: What will happen after the election? Does the country need another sales pitch to increase confidence in the economy, or a CEO that will substantively implement changes from what we've previously seen? Perhaps this uncertainty will lead us to make a substantive decision to make change, rather than JUST rely on hope.
Sunday, October 28, 2012
Sunday, August 19, 2012
100 Million now on Welfare
Recently, the number of Americans receiving welfare benefits exceeded 100 million. Now most, I'm sure, are not surprised by this fact given the state of the economy. With the unemployment rate steadily above 8% over the past 4 years it is easy to see why the number of welfare recipients has increased. However, this is a staggering 1/3 of the U.S. population. I'm sure after the 1996 welfare reform bill was signed into law in order to create work incentives for those on welfare would have never expected such a sharp increase only 16 years after the law was passed. Perhaps, there is more to the story.
One of the things the passage of the 1996 welfare reform act did was introduce the benefit-reduction rate. This rate worked by creating an optimal amount of hours per week the beneficiary should work in order to make the most money possible through welfare benefits and earned income. For example, someone on welfare has a benefit reduction rate of 50% then for every dollar earned there is a 50 cent reduction in welfare benefits. This creates an incentive to work because one could earn more through working and receiving welfare benefits at the same time. Now, each state can set the BR rate however they like. Something to note is the lower the BR rate, the higher the incentive to work because one could simply earn more by working more. It works the other way as well. If the BR rate is 100%, as it was before the 1996 bill, then the incentive is to not work at all and simply receive benefits because each dollar earned is a dollar lost in welfare benefits.
Texas has done well in this economy and perhaps the BR rate has something to do with it.
Take a look at the map below.
This map shows which states increased and which states decreased the BR rate from 2007 to 2009. As the map shows, most states increased their rate (incentivizing more leisure and less work) but Texas and a few others actually reduced their rate. This is not surprising because in Texas the policies and regulations are very business-friendly and this map may be just one of the many contributing factors for Texas' success during this "great recession".
One of the things the passage of the 1996 welfare reform act did was introduce the benefit-reduction rate. This rate worked by creating an optimal amount of hours per week the beneficiary should work in order to make the most money possible through welfare benefits and earned income. For example, someone on welfare has a benefit reduction rate of 50% then for every dollar earned there is a 50 cent reduction in welfare benefits. This creates an incentive to work because one could earn more through working and receiving welfare benefits at the same time. Now, each state can set the BR rate however they like. Something to note is the lower the BR rate, the higher the incentive to work because one could simply earn more by working more. It works the other way as well. If the BR rate is 100%, as it was before the 1996 bill, then the incentive is to not work at all and simply receive benefits because each dollar earned is a dollar lost in welfare benefits.
Texas has done well in this economy and perhaps the BR rate has something to do with it.
Take a look at the map below.
This map shows which states increased and which states decreased the BR rate from 2007 to 2009. As the map shows, most states increased their rate (incentivizing more leisure and less work) but Texas and a few others actually reduced their rate. This is not surprising because in Texas the policies and regulations are very business-friendly and this map may be just one of the many contributing factors for Texas' success during this "great recession".
Friday, August 10, 2012
Social Insurance Continued
In a previous post where I talked about social insurance I contended that there should be an opt-out age at 25 and because of this there would likely be an increase in federal funding for welfare programs. I say this because if most opt-out of social security payments, it might lead to an increase in taxes else-where since the government is no longer receiving the funds to support welfare programs. Yes, through social security taxes, government supports other programs. Now, the reason for this is because the social security trust fund isn't actually there. It is an IOU from the government to the government through bonds. This IOU is expected to be depleted in the next twenty years. And after the IOU is depleted then social security goes back to a pay as you go system. Did I just call a trust fund an IOU? I can't be making any sense. Well, nothing is really new here, as the government seems to mostly function on IOUs social security is no different. Except that instead of issuing an IOU to another country like China, it's actually an IOU to itself. We have truly come a long way.
The way I see it, government has crowded out the market for retirement insurance from those who could afford a small premium for retirement. Now I would assume, again, that those who go off of their social security plan will probably take that extra money and use it for themselves in day-to-day expenses as opposed to instantly investing in a retirement account. OR, they might now have an incentive to open a brand new retirement account since they will no longer have social security. I don't know for sure but my belief is the latter. If one opts our for social security they may be doing so in order to open their own retirement account because social security is so marginal in almost every way. 7.5% of your paycheck goes into the social security fund. If you make $50000 a year that is $3250. Now here's the catch; social security is not means-tested which means even if you have a 401k with your employer or you make over a million dollars a year, or both, you will still qualify for social security benefits, this is also what puts it in a separate category from welfare. Just think. If you were able to take that extra $3250 what would you do with it? If you only made $15000 a year that's $1125! I point this out because there is a market for these accounts! Why not allow the private sector to provide retirement insurance? If this were to happen, there would be an influx of jobs. Social security crowds out this market for low premium retirement insurance companies. This amount of money going towards social security could easily be transferred to low premium, private sector, retirement insurance for individuals. Now I'm well aware of the transition problem that always exists which is why I mentioned an opt-out age of 25 to help alleviate this issue. Those still relying on social security will still receive their benefits. And I'm aware that many individuals would likely keep the extra money for day-to-day expenses, but I also believe the extra jobs created by this seemingly massive market may help to alleviate the poverty as well. Retirement insurance is a large market, and in today's economy, we would do well by saving.
The way I see it, government has crowded out the market for retirement insurance from those who could afford a small premium for retirement. Now I would assume, again, that those who go off of their social security plan will probably take that extra money and use it for themselves in day-to-day expenses as opposed to instantly investing in a retirement account. OR, they might now have an incentive to open a brand new retirement account since they will no longer have social security. I don't know for sure but my belief is the latter. If one opts our for social security they may be doing so in order to open their own retirement account because social security is so marginal in almost every way. 7.5% of your paycheck goes into the social security fund. If you make $50000 a year that is $3250. Now here's the catch; social security is not means-tested which means even if you have a 401k with your employer or you make over a million dollars a year, or both, you will still qualify for social security benefits, this is also what puts it in a separate category from welfare. Just think. If you were able to take that extra $3250 what would you do with it? If you only made $15000 a year that's $1125! I point this out because there is a market for these accounts! Why not allow the private sector to provide retirement insurance? If this were to happen, there would be an influx of jobs. Social security crowds out this market for low premium retirement insurance companies. This amount of money going towards social security could easily be transferred to low premium, private sector, retirement insurance for individuals. Now I'm well aware of the transition problem that always exists which is why I mentioned an opt-out age of 25 to help alleviate this issue. Those still relying on social security will still receive their benefits. And I'm aware that many individuals would likely keep the extra money for day-to-day expenses, but I also believe the extra jobs created by this seemingly massive market may help to alleviate the poverty as well. Retirement insurance is a large market, and in today's economy, we would do well by saving.
Sunday, August 5, 2012
Gun Control
Recently, I read an article from The Economist on the subject of gun control. If you're interested in reading the article, here is the link http://www.economist.com/blogs/democracyinamerica/2012/07/gun-rights?spc=scode&spv=xm&ah=9d7f7ab945510a56fa6d37c30b6f1709
In this article the author refers to Justice Scalia's comments on the second amendment. As a Justice, Scalia interprets the amendment in a very literal sense calling "bear" the idea of being able to wield a gun with your "bear" hands, so to speak. This idea rules out the possession of say a tank or a fighter jet. The original intent of the second amendment is to allow the citizens to prevent a tyrannical governmental takeover. In today's world, the government military has possession of much better artillery than a handgun or even an AK-47. Scalia suggests that if the second amendment is to live up to its' original intent, citizens should be aloud to own a tank or a rocket launcher. I completely agree. Of course, the way to go about doing this would be to amend the second amendment (which of course is very unlikely to happen). Or, simply legalize the purchase of these military weapons! Yeah, I'm sure this will go over well in the media...the simple fact of the matter is that the more of those who own guns, the less likely it is we will kill each other.
The author goes on in this article and makes this point if we are to legalize all sorts of weaponry for purchase in the United States: "And should those citizens decide to fully exercise such rights, then their second-amendment freedom will become the freedom to be attacked and crushed by the police and the US military, on behalf of those of us who support the integrity of the American government we have elected and the enforcement of its laws." To which I say, very unlikely. It is the citizenry which enacts such laws and protections. It's an easy argument to make when you say everybody has a gun so we're all dead. It's much tougher to make the argument that if we all have guns then we're all protected. However, it is much easier for someone to attack an unarmed enemy than it is an armed one. This notion has been proven on numerous occasions. Namely, the cold war.
In this article the author refers to Justice Scalia's comments on the second amendment. As a Justice, Scalia interprets the amendment in a very literal sense calling "bear" the idea of being able to wield a gun with your "bear" hands, so to speak. This idea rules out the possession of say a tank or a fighter jet. The original intent of the second amendment is to allow the citizens to prevent a tyrannical governmental takeover. In today's world, the government military has possession of much better artillery than a handgun or even an AK-47. Scalia suggests that if the second amendment is to live up to its' original intent, citizens should be aloud to own a tank or a rocket launcher. I completely agree. Of course, the way to go about doing this would be to amend the second amendment (which of course is very unlikely to happen). Or, simply legalize the purchase of these military weapons! Yeah, I'm sure this will go over well in the media...the simple fact of the matter is that the more of those who own guns, the less likely it is we will kill each other.
The author goes on in this article and makes this point if we are to legalize all sorts of weaponry for purchase in the United States: "And should those citizens decide to fully exercise such rights, then their second-amendment freedom will become the freedom to be attacked and crushed by the police and the US military, on behalf of those of us who support the integrity of the American government we have elected and the enforcement of its laws." To which I say, very unlikely. It is the citizenry which enacts such laws and protections. It's an easy argument to make when you say everybody has a gun so we're all dead. It's much tougher to make the argument that if we all have guns then we're all protected. However, it is much easier for someone to attack an unarmed enemy than it is an armed one. This notion has been proven on numerous occasions. Namely, the cold war.
Monday, July 30, 2012
Social Insurance
Social insurance, the idea of government provided insurance, has its roots in the era of FDR and the New Deal of the 1930s where Social Security was developed. It has been a controversial topic in today's political field and probably always will be. One of the biggest debates is about the trust fund for the baby boomer generation. This fund is about $3 trillion and will disperse from 2011 to 2030. The idea behind it is to cover social security benefits for the generation born between 1946 and 1964 in which there was a substantial increase in births during that period. After that, it will go back to a pay-as-you-go system. The idea that social security is bankrupt is misleading. However, given the fact that people are working longer and are less likely to retire at age 65 presents a problem for future beneficiaries. This has led to the increase in "retirement age" to 67 for the generation of people in their early 20s. If social security isn't to change to adjust to the health of individuals then it will certainly go bankrupt as later generations are likely to outlive the funds paid into social security.
I think that social security should be gradually depleted OR an opt-out option should be available at some age. What age that should be could be up for debate, but, my initial thought is at age 25. At that age, I feel that an individual should be allowed to opt out of paying for social security. That age could help alleviate the transition problem as well. However, the counter-argument is that most would probably opt-out so they could keep the extra money and this won't create a strong enough incentive to open their own retirement account, especially those in poverty. So this could lead to an increase in funding for welfare expenditures.
I think that social security should be gradually depleted OR an opt-out option should be available at some age. What age that should be could be up for debate, but, my initial thought is at age 25. At that age, I feel that an individual should be allowed to opt out of paying for social security. That age could help alleviate the transition problem as well. However, the counter-argument is that most would probably opt-out so they could keep the extra money and this won't create a strong enough incentive to open their own retirement account, especially those in poverty. So this could lead to an increase in funding for welfare expenditures.
Sunday, July 22, 2012
Immigration 1
Immigration is a delicate topic is today's political spectrum. There is the Arizona law that was recently upheld in the U. S. Supreme Court which allows for officers who make a routine traffic stop to inquire about legal status in the United States. That, with many other steps taken by border states to contain illegal immigration, has fueled the immigration debate in the country. In order to become a citizen in the United States residents with a green card are eligible after 5 years of resident status to apply for U.S. citizenship; or, one can Mary and wait only three years or just go strait into the military during wartime. The only issue is the process can be very long after applying for citizenship and even though you are paying taxes because you are a resident, you can not vote or participate in the political process. However, you are welcome to go to our schools and even receive lower tuition rates because of your immigrant status.
Since Mexico's wage gap is so vast and inflation so large, the currency in Mexico is extremely weak in comparison to the United States. This creates a strong incentive to migrate and I can hardly blame those who have come to the United States for a better life. After all, we are the shining light on a hill for the rest of the world, at least for now. I want to know what the incentives are to actually migrate legally. The process of receiving your green card and then waiting to gain legal status can, in many cases, take years and sometimes decades. The incentive to migrate illegally is high, especially given the state of the economy of our southern border neighbor. Now, I don't think the Dream Act is the right solution. However, I do think that something must be done in order to fix this problem. There is nothing wrong with immigration, and it is done legally everyday. The incentives for immigration to the southern border states outweigh the incentives for legal immigration. There is what is known as the bottleneck in the southern border states. The system can't handle that many immigrants at one time, and so the incentive for illegal immigration is high.
Since Mexico's wage gap is so vast and inflation so large, the currency in Mexico is extremely weak in comparison to the United States. This creates a strong incentive to migrate and I can hardly blame those who have come to the United States for a better life. After all, we are the shining light on a hill for the rest of the world, at least for now. I want to know what the incentives are to actually migrate legally. The process of receiving your green card and then waiting to gain legal status can, in many cases, take years and sometimes decades. The incentive to migrate illegally is high, especially given the state of the economy of our southern border neighbor. Now, I don't think the Dream Act is the right solution. However, I do think that something must be done in order to fix this problem. There is nothing wrong with immigration, and it is done legally everyday. The incentives for immigration to the southern border states outweigh the incentives for legal immigration. There is what is known as the bottleneck in the southern border states. The system can't handle that many immigrants at one time, and so the incentive for illegal immigration is high.
Thursday, July 19, 2012
Wage Gap
The wage gap is something often talked about in today's economy. I would like to inquire about a theory I have of why the wage gap is so vast. I theorize the the idea of a minimum wage does not promote an equal share of the money supply. While that may seem counter-intuitive, I would argue that a minimum wage actually brings other wages in the market down as well. The reason being is that an employer will hire someone worth a few more dollars than the minimum wage for that minimum wage amount. This is possible because the wedge the government has created between the desired lower wage for some employees offsets the higher wage desired by others and in essence creates a lower wage for overall even though it is granting a higher wage for a few employees. The lower wage overall only increases the wage gap between the middle and lower classes and the upper class.
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