Economics (U.S. and abroad)

Discussion in 'Archive: The Senate Floor' started by PRENNTACULAR, Jul 9, 2011.

Thread Status:
Not open for further replies.
  1. PRENNTACULAR VIP

    Member Since:
    Dec 21, 2005
    star 6
    I do not know if this is the right place for this thread, but I think it could prove beneficial to the Senate community.

    I do not understand economics. I am reading a Noam Choamsky book about Neo-liberalism and the global order, but my Christian friends say he is a heretic and not to be trusted.

    Anyway, my point is this: can we have a conversation/debate about the basics of economic theory, and how it pertains to current events?

    Here's where we can start: The U.S. economy. I hear we have some problems. These are the problems I have heard the most about:

    I. We have a big national debt.
    Why is this a problem? Who do we owe money to? Why did this happen?

    II. We are in a recession.
    What does this mean? Why did it happen? How can we fix it?

    III. There are some crazy guys saying we should go back to the Gold standard, inflation is evil, and free market ra ra ra.
    Are these guys actually crazy? Why? What is the gold standard?

    What are some questions you have about economics or current events? Or what are your answers to these questions?


  2. Ghost Chosen One

    Member Since:
    Oct 13, 2003
    star 6
    I took a few economics courses in college, so I know a little, but I'm no expert.

    The foundation of economics is this: we have unlimited desires (demand), but limited resources (supply). Economics is the study of how we make choices under these conditions.

    A few other basics: the smaller the supply of something, the more scarce something is, and that usually makes it more valuable.

    Economic policy is divided into 3 parts
    1. Fiscal policy (the budget, controlled by Congress)
    2. Monetary policy (the currency, controlled by the Federal Reserve)
    3. Trade policy (controlled by Congress, free trade versus tariffs)




    I. We have a big national debt.
    Why is this a problem? Who do we owe money to? Why did this happen?



    First, the difference between the federal deficit and the national debt. We take in revenue (mostly from taxes), and spend it through government programs. When we take in more than we spend, we have a budget surplus. When we spend more than we take in, we have a budget deficit. To have a budget deficit, we need to borrow money. All of those IOU's keep adding up, that's the national debt, it's all our deficits added up. When we have a deficit (which we have now of over $1 trillion, meaning we take in trillions of dollars through taxes, but spend even more, so we have to borrow about $1 trillion a year to make up for that difference) that deficit spending only adds to the national debt (and we're at the current limit). So with our $1 trillion deficit, that means our debt increases by $1 trillion every year.

    Besides having a huge national debt, which will eventually need to be paid back, every annual budget has to pay Interest on that Debt. That's the big thing. The larger our Debt gets, the more interest we have to pay... which makes our deficit even bigger, making our Debt even bigger, etc. If kept on the current track, in just a few decades nearly all our revenue will be used just to afford our entitlment programs and pay off the interest. In other words, our entire national defense will be dependent on the money we borrow from other countries, like China.

    Also, the United States has a AAA rating, which means we're the safest bet, that there's no doubt we'll eventually pay back all our debt. It gives others confidence to lend money to us. As our debt gets bigger, we may lose that rating, making it harder for other countries to lend to us, meaning very painful cuts at home (like what's happening with Greece). Also, if we fail to raise the Debt Ceiling in time, our rating will drop automatically from AAA to D. And we will simply not be able to borrow money anymore, not without absolutely huge interest rates.

    Our current budget deficit can be traced back to the aging of the Baby Boomers and their new dependence on Social Security and Medicare, which will get worse in upcoming years as more and more retire. But also to the Bush Tax Cuts (which weren't met with equal cuts in spending), the Wars (which weren't meant with equal increases in Revenue), the Economic Downturn (more spending in welfare, less taxes coming in), the Medicare Part D (not paid for), and a few other smaller things. The Obama Stimulus and Bush Bank Bailout increased our National Debt, but they were one-time things, they're not part of the Deficit that keeps adding to the Debt.





    II. We are in a recession.
    What does this mean? Why did it happen? How can we fix it?



    We are NOT in a recession. The recession ended over a year ago. What we're in is a Jobs Crisis. They just keep calling it a recession.

    The recession started in December 2007, accelerated in September 2008, and ended by July 2009.

    A recession is when the GDP of a country shrinks for two or more "quarters" in a row. Quarter just means quarter of a year. GDP, or gross domestic product, is the sum total of all economic activity. So a recession is when the economy "shrinks" instead of grows. We're growing again, but the poor job creation numbers
  3. SithLordDarthRichie London CR

    Chapter Rep
    Member Since:
    Oct 3, 2003
    star 8
    What confuses me is that there seems to be various branches of economics and economists that subscribe to different theories. For example there were those that during the recession said countries should spend their way out of the debt and others that said they should make cuts in order to reduce spending and borrowing.

    I've talked to people who disagree with the economic views of Nobel Prize winners and claim they are wrong.
  4. Ghost Chosen One

    Member Since:
    Oct 13, 2003
    star 6
    Well, there are two main schools of economic thought in the United States:

    1. Classical economic theory

    2. Keynesian economic theory


    An understanding of history is very important to understanding these economic theories.

    Like Star Wars, it's best explained in six parts:

    I. Mercantilism (1492-1776)
    II. Classical Economic Theory (1776-1929)
    III. The Fall of Classical Economic Theory, the Rise of Communism, and the Rise of Keynesian Economic Theory to rescue Capitalism (1929-1971)
    IV. The Fall of the Keynesians (1971-1980)
    V. Supply-side Economics, aka the return of Classical Economic Theory (1980-2008)
    VI. The Present Crisis (2008-now)





    I. Mercantilism (1492-1776)

    In the time of the colonial empires, the economic theory everyone followed was Mercantilism... the idea that economic policies should benefit the homeland. For example, the idea that British colonies should only export their goods to Britain, and that British colonies should be taxed more to support Britain. Government should control foreign trade, there should be tariffs (taxes on trade with other countries) or outright bans on trading with other countries. It was a very protectionist and nationalist economic policy.




    II. Classical Economic Theory (1776-1929)

    In the late 18th, 19th, and early 20th centuries, we got economic philosophers like Adam Smith (who wrote The Wealth of Nations, published in 1776), David Ricardo, John Stuart Mill, and others. They built up a new economic theory, that eventually became dominant in Britain and the United States, called Classical economic theory. Back then, this was "liberal," and is still toward categorized as "economically liberal," but today the conservatives and libertarians of the Republican Party are its advocates (though they're not entirely faithful... see tax cuts). This is the "laissez-faire" attitude, that government should just "let it be." Do not intervene in the economy, leave it alone, it will take care of itself.

    When classical economic theory was dominant, there were a lot more extreme highs and extreme lows in the economy... big recessions, and big booms. They thought that every recession would eventually turn back into a boom, government shouldn't really regulate or tax anything.

    Classical economists assumed that currency would be tied to a gold standard (see my last post). And with that given, a balance of trade (exports = imports) and a stable currency would occur naturally, only a balanced budget (revenue = spending) needed to be maintained at all times.

    For an example of how the Balance of Trade was theorized to occur naturally under Classical Economics:
    If we had a trade surplus, with more exports than imports, that would mean more gold is flowing into the United States (since international buyers bought our products in gold), more gold in the U.S. would mean more money being printed (gold standard), more money being printed would mean inflation and higher prices... which would make our products more expensive overseas, then people overseas would buy less of our goods and even people here would buy more goods overseas, resulting in our trade surplus disappering and becoming either a balance or a trade deficit. If it was was a trade deficit then the opposite would happen: more gold would be leaving us, less gold would be here, less money would be in circulation, so goods here would be cheaper, we'd eventually start buying our products more, people overseas would start buying here again, and then that trade deficit would turn into a balance o
  5. DarthIktomi Jedi Master

    Member Since:
    May 11, 2009
    star 4
    Classical isn't supply-side; for one, supply-side is younger than Keynesian. And then you have the more extreme idea that laissez-faire capitalism will briing democracy.

    I don't know if we could say the Keynesians "fell" per se, just that the neoliberals made sure to make it seem like Keynesianism was discredited. And they, like fundamentalist Christians who are currently so interested in Uganda, took the strategy of exporting their ideology abroad, to South America, before it came home.

    Eh? Last I checked, classical economic theory was an explanation of how things worked, not how they should work.

    You forgot the most important part: Even Reagan's Treasury Secretary would later say it was all a scam to raid the treasury.

    Should be noted that supply-siders simply declared victory in the 80s, even as our deficit ballooned.
  6. Ghost Chosen One

    Member Since:
    Oct 13, 2003
    star 6
    Classical isn't supply-side; for one, supply-side is younger than Keynesian. And then you have the more extreme idea that laissez-faire capitalism will briing democracy.


    No, supply-side was basically just a reinvention of Classical economics... for both the attitude is laissez-faire, they just want to deregulate and cut spending and taxes, saying that will increase supply.

    And that second thing is more a political belief that capitalism brings democracy, somewhat discredited by examples of authoritarian capitalism in China and Russia, and the opposite of democracies in Europe and India staying somewhat more socialist.



    I don't know if we could say the Keynesians "fell" per se, just that the neoliberals made sure to make it seem like Keynesianism was discredited. And they, like fundamentalist Christians who are currently so interested in Uganda, took the strategy of exporting their ideology abroad, to South America, before it came home.


    No, the Keynesian economic theory was largely abandoned from Reagan's election to Obama's election. Even the Democrat, Bill Clinton, took up free-trade, deregulation, welfare reform, etc. Clinton declared "the era of big government is over" back in the 1990's.



    Eh? Last I checked, classical economic theory was an explanation of how things worked, not how they should work.


    It's both, describing how things work and how things should political/economic work, like most theories. Parts of it have been proven wrong... government borrowing money doesn't result in higher interest rates and "crowding out" private spending/investment. The idea that we should let it be, take government out of it, then the economy will take care of itself.



    You forgot the most important part: Even Reagan's Treasury Secretary would later say it was all a scam to raid the treasury.

    Should be noted that supply-siders simply declared victory in the 80s, even as our deficit ballooned.


    I mentioned the results, in the paragraph right after that.

    Reagan did some things right. They did need to end the inflation and stop experimentation with monetary policies, and the best way to solve a recession sparked by a negative supply shock is probably to encourage a positive supply shock, and even Keynes said that once things returned to normal then the government should balance its budget. But Reagan overdid the deregulation and tax cutting, and like you said he actually increased the deficit.
  7. SithLordDarthRichie London CR

    Chapter Rep
    Member Since:
    Oct 3, 2003
    star 8
    So, there seem to be times to adopt Keynesian Economics & times not to. If the various theories have elements that work, why not mix the best bits from them all and create something that works for all situations?

    Otherwise you get some people adopting one system and others adopting another & people arguing about which should be used when. It seems to be rather like politics in that there are various forms of government (Capitalist, Communist, Socialist etc), but the best systems often integrate ideas from all of them.
  8. firesaber Jedi Master

    Member Since:
    Mar 5, 2006
    star 3
    How do you classify inflation? For instance the USDA's latest info shows an average of 10% increase across the board from last year with most of the commodities projected to rise the remainder of 2011.

    Tie this into unemployment and depending on the state you live in any new taxes or tax increases. Housing has not recovered. Jobs have not recovered, prices/taxes go up. This is a spin cycle here.
  9. DarthIktomi Jedi Master

    Member Since:
    May 11, 2009
    star 4
    I didn't say it didn't disappear, just that it was more in the world of politicians than the world of facts. Facts are funny things, politicians hate hate hate hate HATE facts.
  10. New_York_Jedi Force Ghost

    Member Since:
    Mar 16, 2002
    star 6

    There are several different measures of inflation. The government estimate of Core Inflation* excludes food and energy, and measures the rise in the prices of a basket of basic goods that a typical household would consume.**

    Food and Energy are excluded because they are so volatile, and economists are trying to measure monetary inflation, which is when prices rise solely due to excess money in the system ("Inflation is always and everywhere a monetary phenomenon"- Milton Friedman). Commodity prices are generally trending up for demand based reasons, not due to excess money in the system.

    Because Macroeconomics is a mess, and more art than science*88. All the models depend on certain assumptions...which can drastically change outcomes, or prove wrong. Keynesian economics did reasonably well in the post world war II era...until the oil price shocks and stagflation in the 70s, which they have no answer, or explanation for. Stagflation wasn't even possible in the models used by Keynesians prior to that time. Neo-Keynesiasism adjusts for that, but it still far from perfect. The global economy is far too complex for any single model to get perfect all the time, no matter how elegant the equations.


    *There are also several different measures of inflation.


    **this, obviously, leads to problems as typical basket varies across both time, geography and income levels
Thread Status:
Not open for further replies.