Tag Archives: economy

Wal-Mart Raises Wages

Wal-Mart recently announced that it plans on raising the wage it pays it employees further above the minimum wage.  This move demonstrates how strong the economy has been lately that wages are finally starting to rise.  As Paul Ziobro and Eric Morath write in their Wall Street Journal article, Wal-Mart Raising Wages as Market Gets Tighter, “Wal-Mart Stores Inc. plans to boost pay for its U.S. employees to at least $10 an hour by next year, well above the minimum wage, signaling a tightening labor market and rising competition for lower-paid workers.”  This demonstrates that the market for low paid workers is increasing as there is less available workers.  The unemployment rate has been decreasing which has made it harder for these companies to find and keep a workforce.  Wal-Mart is making this move in hopes of retaining their current workers and luring other good workers to Wal-Mart.

This is putting pressure on other companies to match these wage gains, or fear losing their workforce.  The market for lower-paid workers is becoming increasingly competitive forcing Wal-Mart to raise its wages.  As Lisa Baertlein says in her article, McDonald’s pressured to hike pay as Wal-Mart raises, economy improves, “McDonald’s Corp and its franchisees may have few options but to begin raising hourly wages as an improving U.S. economy creates competition for good workers and as mega-employer Wal-Mart Stores Inc sets a higher bar on pay, according to labor experts.”  In order to attract the right kind of workers, these companies must set a competitive wage rate.  If McDonalds (or practically any other company) were to leave their wage rate at the minimum wage, or hypothetically speaking, pay people less than minimum wage, then they will slowly lose their current workforce as the workers start leaving to take higher paying jobs at other companies.  They also will find it hard to replace them with competent workers because unless someone was truly passionate about their work as a cashier, they wouldn’t work very hard for such a paltry wage.  This is why Wal-Mart is finally raising its pay that will cost an estimated $1 billion.  Having unhappy workers is a recipe for losing business, so these companies have to take the necessary steps to keep their employees happy and working hard.

This also is a positive sign that the wage rate is starting to grow again as the economy is finally coming alive.  While this might cost companies a lot more money, this will help the economy continue to grow as wages begin to rise.  This announcement most likely confirms what Janet Yellen and the Fed already knew and reinforces their plans to start raising interest rates as the economy continually improves.  Lets hope other companies make similar moves to raise their wage rates as well.

The Potential Impact of Low Birth Rate on our Future.

Low birth rate is an issue of concern for most countries, especially for developed countries. Developing countries used to have higher birth rate compared to rich countries, but the birthrates are dropping rapidly almost everywhere around the world except for a very few countries in Africa. In some countries, such as China and India, have been trying to decrease the birth rate by improving women’s rights, sexual and reproductive health. However, this is a very rare case and most developed countries have been focusing on increasing the birth rate for their future economies.

Then why do most countries suffer from low fertility rates? The biggest reason is probably because of the struggling economy. According to Pew Research Center, the U.S. birth rate peaked in 1957, when the economy was booming and unemployment rate was below 5 percent. However, when inflation and other problems worsened the U.S. economy, the population growth had decreased. The graph below shows that the United States has been experiencing a sharp decline in fertility rates since 2008. In 2007, the birth rate of the U.S. was high but since that time, the population of the United States also continues to decline as most European countries and East Asian countries.

2006-fewer-births-01a

Then why do we have to care about our fertility rate? Stanford geographer Martin Lewis said, “”I find it extraordinary that the massive global drop in human fertility has been so little noticed by the media” His statement suggests that we should not treat his matter lightly. There are many crucial factors that impact our economies but the birth rate is one of the most important elements that has immediate connection or relation with economies.

 

 

Most people would wonder what the effects of low birth rate are since people are not directly experiencing the impacts in short run. Of course, low fertility rate does not affect people directly and immediately but its impact becomes powerful in the long-term. Some people claim that declining population is a good sign for the economy in a sense that resources are not enough for everyone in the world. This, however, is not necessarily true when we think of the power of technologies that lower the dependence on limited resources. Therefore, a growing population is not a barrier for the economy due to the advancement of technologies that reduce the amount of resources required to produce outputs. More importantly, however, if the population growth continues to decline, the nation’s workforce will decrease, which will undermine economies. Although majority of people expect that new technologies will replace human intelligence, we cannot deny the fact that we will not be able to rely everything on technologies. Therefore, our generation should try our best to have many babies as we can for the future and for our descendants.

Why Educational Investment is Non-Negotiable

When addressing current economic issues one cannot ignore human capital, specifically investment in education. Educational outcomes strongly affect the economic growth of a country. George P. Shultz and Eric A. Hanushek, contributors for The Wall Street Journal, compared the GDP-per-capita growth rates between the years 1960 and 2000 with achievement results as determined by an international math assessment test. The majority of countries followed a straight line that revealed that as the scores on the assessment test increased so did economic growth. Although the U.S. remained above the average, this position will not hold strong for long in the future. Students of today, the labor force of the future, are no longer competitive in comparison to other developed countries. The U.S. was ranked 31st in math according to the OECD’s Programme for International Student Assessment, an alarming statistic.

The importance of education on the economy cannot be understated. Better education leads to a faster growing economy. Over the next 80 years improvements in GDP could ultimately exceed $70 trillion, which plays out to be an average boost of 20% for every U.S. worker each year over the course of his or her career. In addition, education directly correlates to higher wages. The median weekly earnings in 2013 were $472 for someone with less than a high school diploma compared to $1,108 for individuals with a bachelor’s degree. Educational disparities lead to economic disparities that without new reform will maintain and foster the inequality problems that continue to hurt the economy for decades to come.

Noah Berger and Peter Fisher, researchers from the Economic Policy Institute, investigated how the state government can boost the economic well-being of their people. Berger and Fisher revealed that high-wage states are the same states with well-educated workforces, which reveals a strong correlation between educational attainment of a state’s workforce and median wages. Therefore, investing in state-wide education is necessary to build a strong foundation for economic prosperity. In addition to building a strong base, investing in education upfront will show a greater return in the long run in terms of state budgets. Since individuals with higher levels of educational attainment will ultimately have higher incomes, these individuals will therefore contribute more to the state’s taxes over the course of their lifetime.

The students of today are the laborers of the future. The need to invest in education is non-negotiable when considering the investment that is being made. Without an educated labor force our economy will suffer, but with an increased investment in education the possibilities look promising. Just imagine if our GDP could exceed $70 trillion and what that amount of money could do to help pay off the U.S. debt.

Short-Term Fiscal Policy: Copping Out or Stepping Up?

Are President Obama’s recent short-term fiscal proposals the brave radicalism this country needs?

Are austerity policies to address long-term debt and deficit problems the answer? Or should countries like the U.S. and Europe implement policies that provide solutions to fix problems that we face today like stagnant economic growth rates and chronic unemployment or, at least underemployment. And do short-term solutions address today’s problems in a significant way or do they only provide a Band-Aid and make it harder to fix longer term problems?

Paul Krugman says in his op-ed for The New York Times that U.S. economic policy should become much more near-sighted if we want to solve the most important problems we face. Especially in the face of “the aftermath of a once-in-three-generations financial crisis,” now is not the time to fret over long-term issues. He attributes this behavior to “intellectual laziness and lack of moral courage.” Krugman refers to John Maynard Keynes’ thoughts on the long run, particularly the context in which Keynes wanted us to consider his words. He compares long-run economists to meteorologists who tell us the water is calm long after everyone knows the storm has passed. In the end, Krugman applauds Obama’s courageous willingness to “break with the long-termers and focus on the here and now.”

Sheila Blair, past Chairman of the Federal Deposit Insurance Corporation, cautioned Americans of the other extreme in 2011. Blair calls short-term monetary policy response a Band-Aid on a bullet hole “that feels good for awhile but does nothing to enhance the long-term performance of our economy.” Blair calls for short-term sacrifices to support long-term reforms in social security and healthcare, exactly what Krugman laments has been ineffective as well as “craven and irresponsible”. Blair explains that (even back in 2011), “In a world obsessed with instant gratification and lightening-round debates, we are in dire need of leadership, both public and private, that will champion patience and sacrifice now in return for a brighter and more stable future for us and our progeny.”

Gilles Saint-Paul, program director for the Centre for Economic Policy Research in France, writes about the importance of long-term fiscal policy because “(i) deficits and surpluses are useful in stabilising macroeconomic activity and (ii) tax rates should be smoothed over time in order for the tax system to be efficient.”

Personally, I identify over-correction as one of the greatest risks of short-termism in economic policy. Because monetary policy and (especially) fiscal policy take time to implement and even more time to see the effects of. Controlling for what is best in the short-run may not always be the best solution because by the time the effects of policy changes can be observed we have overcorrected for the problem and then face the opposite setback.

Infrastructure Investments: The Road to China’s Future of Growth

In light of today’s budget announcement from the White House, I have decided to explore one of the main focuses of the $478 trillion spending plan that the President has come up with to revive the economy, infrastructure spending.

According to Mark Magnier’s article for the Wall Street Journal titled “Benefits of Infrastructure Spending Not So Clear-Cut, Economists Say,” “Washington-based Progressive Policy Institute concludes that every dollar spent on U.S. roads, bridges and public transport spurs $1.50 to $2 of growth.” According to research conducted by Oxford Economics for PWC’s study titled “Capital project and infrastructure spending Outlook to 2025,” “the Asia-Pacific market, driven by China’s growth, will represent nearly 60% of global infrastructure spending by 2025”

(www.pwc.com/cpi-outlook2025). The study also predicts that Western Europe infrastructure spending will not return to pre-crisis levels until 2018, as Asia’s has been growing this entire time.

“Developing economies, most notably China and other parts of Asia, account for nearly half of all infrastructure spending, up more than 10% from 2006” (www.pwc.com/cpi-outlook2025)

How will China’s success in the race for infrastructure growth will contribute to its economic growth compared to Europe’s?

While China’s economy had been growing in double digits over the last 20 years, growth has slowed recently. This growth is still at a respectable annual growth rate of 7%. China’s economy is maturing and beginning to lose its cost-competitive advantage to other lower cost countries. As this happens, China will need to make strategic investments to sustain its growth.  Investments in infrastructure can serve this growth need. Infrastructure investments immediately create jobs in construction and related industries. Infrastructure investments also provide opportunities for longer term, more sustainable growth and development.

China should continue to make SMART infrastructure investments, especially in high speed rail, ports and airports and wireless high-speed telecommunications to continue to open markets within China and to provide a better quality of life for its citizens.

Virginia Lau discusses Chinese high speed rail in her article “Record breaker: China’s incredible north-south high-speed train line plan” for CNN as the world’s longest high-speed rail line was just proposed to run from “Inner Mongolia’s Baotou city and running through southern Shaanxi, Hubei, Hunan, Guangxi and Guangdong, its final stop would be in Haikou city on Hainan Island, China’s southernmost province” (http://www.cnn.com/2015/01/08/travel/china-high-speed-north-south-rail/). Additionally, this project will connect rural provinces with urban areas such as Beijing. This will promote growth by providing sustainable job opportunities for those in rural areas, as discussed above.

The Fed’s Static January Press Release

The Federal Reserve Board’s January 28 press release released no concrete timeline for when they plan to begin raising rates. The statement has a positive economic outlook, claiming that the Fed’s data since December suggests that “economic activity has been expanding at a solid pace” (http://www.federalreserve.gov/newsevents/press/monetary/20150128a.htm). Investors are analyzing this announcement closely to determine what it might imply for rate raising. The announcement reads: “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy…  the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.”

According to Paul R. La Monica’s article for CNN Money titled “Fed stays ‘patient’ but rate hikes are coming,” economists such as Michael Gapen for Barclay’s believe the first rate hike will come in the summer (http://money.cnn.com/2015/01/28/investing/federal-reserve-statement-patient/). The announcement led to slips in the Dow Jones, the S&P 500, and the Nasdaq, with the latter falling almost 200 points.

The announcement explains that this expected stagnation is flexible to the natural timeline of recovery of the economy.

“However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated.  Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.”

The above sentence seems to me to have been included to give the OMC the leeway to keep decisions to raise rates flexible.Professor Kimball posted a guest blogger’s post on his blog Confessions of a Supply Side Liberal titled “Greg Shill: So What Are the Federal Reserve’s Legal Constraints, Anyway?” in which the flexibility of the Fed in making decisions on monetary policy are discussed. Shill believes “the bank has significantly more monetary policy discretion than is commonly assumed. I personally believe this expansive power is a good thing: the Fed is charged by statute with a dual mission of promoting full employment and “price stability” (http://blog.supplysideliberal.com/post/109369743080/greg-shill-so-what-are-the-federal-reserves).

All in all, this report seems to be one of unvarying progress. This could be because the Fed believes they are on the best possible trajectory or because they are confined by the Zero Lower Bound problem. Either way, I do not believe too much should be read into this announcement as I think it was meant to tell investors that the Fed will not be raising rates any time in the immediate future.

The Waiting Game

“The Federal Reserve signaled this past week that it is unlikely to raise short-term interest rates until at least June” (http://blogs.wsj.com/moneybeat/2015/01/30/fed-up-do-rising-rates-matter-after-all/).

This came as a surprise to most people, it seems, but I am not completely surprised based on the underlying motivation of the Fed.

“…The Fed will raise interest rates only when it is confident that the economic recovery is robust and companies have regained the ability to raise prices” (http://blogs.wsj.com/moneybeat/2015/01/30/fed-up-do-rising-rates-matter-after-all/).

Although it seems that the Fed is not in touch with everyday citizens, like you and I, I believe their decision to delay the rise of interest rates is in tune with the best interests of everyday citizens. Although we have been told for a while that the recession is over, it seems that from the perspective of everyday people that is not necessarily the case. It seems like the wealth of the upper class has been rising since post recession, but the middle class and below has not had the same fortune.

The Federal Reserve clearly believes that the economy is not in full rebound yet, hence the delay of raising rates until mid summer. I am happy with the decision the Federal Reserve made, their focus seems to be more on the well being of everyday Americans, rather than worrying about creating high returns for investors. This is not really the common perception of the Federal Reserve; most people seem to think they do not have to best interest of the people in mind. There seems to be this notion or belief that the Federal Reserve is just a group of wealthy bankers in an ivory tower playing with everyone’s money, acting according to the best interest of a few. Their recent decision, however, points to the opposite.

“…Investors seemed mildly disappointed when the Fed reiterated on Wednesday that it would remain “patient”” (http://blogs.wsj.com/moneybeat/2015/01/30/fed-up-do-rising-rates-matter-after-all/).

Although investors seem to be upset with the Federal Reserve’s decision. Most people are not investors so this decision by the Fed to not act does not affect them in the same way as those who speculate based on the Fed’s actions.

“More than three-quarters of Americans say the five-year bull market in U.S. stocks has had little or no effect on their financial well-being, according to a Bloomberg National Poll” (http://www.bloomberg.com/news/articles/2014-03-12/stock-market-surge-bypasses-most-americans-poll-shows).

Bull market is a term used to signal positive beliefs about the market, while bear market is used to signal the exact opposite, pessimism towards the market. Although the stock market, like explained above has been labeled a bull market for the past five years, this has not improved the financial well being of everyday Americans, most who do not own stocks, or at least not a significant amount anyways. With the lower and middle class of America still struggling, it seems that the fed made the appropriate decision to delay raising interest rates.

“Don’t worry about the Fed; be happy” (http://blogs.wsj.com/moneybeat/2015/01/30/fed-up-do-rising-rates-matter-after-all/).

You can be happy; the Fed seems to be thinking about you and I, not just the wealthy elite.

More harm than good? Are companies like Uber really a good thing

Transportation, cleaning services, and even data entry all at the touch of a finger. Welcome to the 21st century. At first glance this seems like a great thing. I mean who doesn’t enjoy having the ability to order a ride from anywhere to anywhere at just the touch of a finger. With the rise of these apps and services, the landscape for many historic industries, like taxi cabs, is drastically changing. This is not necessarily a bad thing, the market is suppose to force out businesses that are not able to innovate to keep up with the changing demands of the market place. Much of the American economy, and capitalism for that matter, is structured around who can do something the best for the cheapest. Those are the companies that are suppose to thrive. There is, however, a great deal of controversy surrounding these new app based on-demand services. The controversy is arising, primarily relates to the treatment of the employees that are fulfilling all of these new roles.

“Current and former workers for Uber, Amazon Inc.’s Mechanical Turk and Handybook, better known as Handy, say on-demand work platforms give them little control over the terms of their labor, and complain that the contracts they’re required to accept force them to shoulder personal and financial risk without the returns or advantages they’d hoped for” (Weber, Silverman, 2015).

One of the main purposes of having a job is to provide stability for the employee and their family. With consistent biweekly paychecks, employees are able to determine whether the job provides enough to support themselves, and their potential family. They are able to make sure that their paycheck covers the necessary expenses, like rent, groceries, and insurance costs. This is not the case anymore with these new app based services, hopefully with a little extra to be put in the bank. Work hours are always fluctuating, and people can be terminated at any point, with the companies knowing that the job will always be filled.

Another main issue with these services, aside from job security and loyalty, is that these companies do not face the same regulation that other companies face who have employees rather than contractors.

“App-enabled workers don’t fit neatly into a regulatory landscape that recognizes only two types of worker: employees in traditional work relationships and independent contractors. Employees are generally covered by protections such as minimum-wage and antidiscrimination statutes, workers’ compensation, and union-organizing rights, while the latter have no such protections” (Weber, Silverman, 2015).

Lack of minimum wage requirements present the possibility, although rare, of earning less than minimum wage. For one firm, employee pay dipped as low as two or three dollars an hour, and even included non-monetary payments like reward programs and credits (Weber, Silverman, 2015). In a nation where the minimum wage is under a great deal of controversy for being too low, working for a company without fixed pay and the possibility of earning less than minimum wage can be extremely frightening. Although the convenience levels associated with these services are extremely high, the lack of stability these organizations are creating in the job market seems to be creating a system that does more harm than good.

Source

http://www.wsj.com/articles/on-demand-workers-we-are-not-robots-1422406524?mod=WSJ_hpp_MIDDLENexttoWhatsNewsThird

Has no one told Russia the cold war ended?

If you have been paying attention to the news lately, or even if you haven’t, you have probably heard about plummeting oil prices worldwide. Crude oil, which reached $100 a barrel less than a year ago, has now dropped as low as roughly $45 a barrel (The Wall Street Journal, Market Data Center). Everyday Americans view this as a great thing. I mean who doesn’t like cheap gasoline at the pump. For countries whose economy largely depends on exporting oil, however, this is a very bad thing.

One nation that has been hit extremely hard by falling oil prices is Russia.

“Heavily dependent on oil exports that are priced in U.S. dollars, Russia faces mounting pressure from U.S. and European officials over the unrest in eastern Ukraine. On Saturday, U.S. and European leaders threatened new sanctions against Moscow” (Albanese, Armental, 2015).

Russia is learning that their economy may have one huge fatal flaw, if they already didn’t know. Depending too heavily on one single commodity, crude oil, opens up their economy to extreme volatility. If the value of crude oil falls significantly, which is happening currently primarily due to increased global supply, the value of their entire economy also falls significantly. This openness to extreme volatility is exactly what is crippling the Russian economy currently. This is reflected by the falling price of the Ruble, Russia’s currency. However, this is just one of the issues that Russia is facing.

“The ruble, which has been in a free fall amid slumping oil prices and geopolitical unrest in the region, was trading at about 68 rubles to the dollar Monday, compared with about 35 rubles a year ago” (Albanese, Armental, 2015).

This “geopolitical unrest” that the above quotation is referring to is the conflict in Ukraine that has been going on for some time now.

“A surge in fighting in eastern Ukraine, which killed about 30 civilians in the Kiev-controlled town of Mariupol over the weekend, prompted U.S. and European leaders to threaten new sanctions against Moscow” (Albanese, Ostroukh, Armental, 2015).

“The sanctions, which cut off Russian banks and companies from global capital markets, are widely expected to push the commodity-dependent economy into contraction for the first time since 2009” (Albanese, Ostroukh, Armental, 2015).

If the falling global price of crude oil is not enough to sink the oil dependent Russian economy, facing sanctions and being cut off from global markets should just about do it. Changes need to be made, if Russia wants to remain a global player long term. Now don’t get me wrong, Russia is still one of the world’s most powerful nations that cannot be ignored. However, it seems that all of Russia would benefit, if Putin and Medvedev took a step back and reevaluated their cold-war-esque foreign policy, and drastically restructured their economy to keep up with the changing times. No more, it seems, that a nation can rely on natural resources alone to create a prosperous economy. No more are the days that a nation can invade another nation, and not expect serious backlash from the global community.

Sources

http://online.wsj.com/mdc/public/page/mdc_commodities.html?refresh=on

http://www.wsj.com/articles/s-p-downgrades-russia-foreign-currency-rating-to-junk-1422297409?mod=WSJ_hp_LEFTWhatsNewsCollection

http://www.wsj.com/articles/fears-of-fresh-sanctions-hit-russian-ruble-1422268436

Economic Trends

Moving past the years of recession has been a large and relatively slow process. The shocks at the middle class and below hit hard and left many US citizens economically wounded. Moving beyond the adversities caused by recession, we try to find ways to quantify how far we have come. In the New York Times article “Five Economic Trends to Be Thankful For,” Neil Irwin examines five trends that he believes show that the United States is on an upward path.

Irwin’s list begins with having “Cheaper gasoline and other fuels.” I think that it is safe to say that everyone is happier with cheaper fuel costs. In comparison to where we were years ago when gas was over $4.00 a gallon, of course this is going to be great news to people. Is this necessarily a good trend though? The concern I have is based on the lack of sustainability. Will the cheaper fuels now deter people from seeking more fuel efficient and sustainable options? If that is the case, then in the future this could be causing more issues if gas prices starkly rise and little advancements have been made. For right now however, you could say it is a positive trend.

The next two on Irwin’s list relate to job improvements. He states that there is job growth and more people are quitting their jobs. With a growth in the job market, people are able to quit and find superior opportunities. I agree with him here in saying that this trend will have positive outcomes for our economy. This is a creation of options in the workforce. People can and have been going out to find a working niche in which they will be most productive. It allows Americans to be active participants in their own career paths without the incessant worry of job security.

Onto the last two on the list are how home prices are rising at a sustainable rate and how we may be done deleveraging. With the crash of the housing market, many homeowners faced foreclosure and devaluation of their homes. Once this was over, Irwin notes that home prices were rising at a double-digit rate. Having a smaller, steady rate after this proves a careful stability in American household purchases. It is not too rampant but just enough that pricing trend continues moving forward. In congruence with this house pricing stability, household incomes are also likely more stable as Fed realized that Americans appear to be no longer trying to rampantly decrease their debt. I once again agree with the author on this being a good sign. A comfortable level indicates that the middle class is regaining strength.

I believe that Neil Irwin does a nice job of explaining reasons why the economy is heading towards the right direction. His rationale is concise and in line with common metrics of an improving economy.

 

Source: http://www.nytimes.com/2014/11/28/upshot/five-economic-trends-to-be-thankful-for.html?ref=economy&abt=0002&abg=0