Tag Archives: u.s. economy

Why The Middle Class Is So Important

Most economists do not think about the middle class when asked how do you make the economy grow? Although economists differ in their specific answer to this question, Heather Boushey and Adam Hersh point to five central ideas included in each answer: the level of human capital, cost of and access to financial capital, strong and stable demand, the quality of political and economic institutions, and investment in public goods, education, health and infrastructure. The middle class plays a central role in each of these categories. First, a strong middle class promotes the development of human capital through a well-educated population. Next, a strong middle class creates a stable source for demand and supports political and economic institutions. Lastly, a strong middle class creates and fosters the next generation of entrepreneurs. The Kauffman Foundation conducted a study on the demographics of entrepreneurs and found that only 1% come from extremely poor or extremely rich backgrounds, which leaves 99% coming from the middle class.

President Obama reiterated this idea in his State of the Union speech when he said that the middle class is the foundation of our economy. However, the issue lives in the declining number of households that are still considered middle class. Since 1967 the percent of households in the middle-income classification, defined as a cumulative household income between $35,000-$100,000, decreased from 53% to 43%. The decline of the middle class is not a homogenous trend, it is further divided when considering age and demographic. Younger households are facing the largest decline and therefore are more likely to fall into the lower income category, whereas households with people in their late 60s are more likely to remain in the middle class or move up to the upper class. Many of these changes are centered on income levels. For younger households, incomes are falling and for older households their wages continue to rise after a certain number of years in their career. In addition, geography of the household matters. The Northeast was hit the hardest in terms of job security during the Great Recession, where the economy relied on industry. These industrial economies turned into suburbanization and increased wealth for some and difficult times for others, therefore further increasing the inequality.

In order to preserve the middle class and further stimulate the economy, President Obama is focusing on offering raft proposals to help pay for a college education, taking parental leave, childcare, and buying a home in order to make working class families feel more secure. After the Great Recession the majority of lost jobs came from the middle class and as jobs started to come back most of them were from a lower income sector. If these programs work the direction of the economy will change, as more and more jobs will be created. Therefore, when considering how to stimulate or grow the economy taking into consideration the state of the middle class is necessary and vital for a full recovery of the economy.

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.

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.

CAN COMPUTER SCIENCE SAVE THE UNITED STATES ECONOMY?

“Last week, the Obama administration announced an initiative, in conjunction with philanthropic supporters, to expand computer science education in 60 school districts, primarily at the high school level” (Litan, 2014).

 

I remember hearing this on the news near the end of December and thinking, finally. I am not a huge fan of politics, the seemingly endless debates and back and forth banter, while glossing over the important issues has always turned me off. This, however, is something from Washington that I finally can agree with.

 

I feel that there is a preconceived notion that computer science is an innate ability, that requires a certain type of brain in order to learn, similar to the stigma mentioned by Miles Kimball, and Noah Smith on their Quartz article where they mention “the myth of inborn genetic math ability” (Kimball, Smith, 2013).

 

Well I can say, from personal experience, computer science ability is learnable. My relationship with computer science began the second semester of my sophomore year at the University of Michigan. I had never seen a line of code in my life, but I always liked computers and I was curious to learn more about how they work. I immediately loved it, and now I am finishing up my minor in Computer Science this semester.

 

Before enrolling in EECS 183 (the first programming class I took, and the one I mentioned above), I had multiple people discouraging me. They would tell me that it is too difficult and that everyone else enrolled in the class already knows how to code. Contrary to popular belief, I was able to learn programming, and excel at it.

 

Although I am just one person, I am certain with dedication and hard work anyone can learn to program. This is why I am so glad that Obama is pushing computer science education.

 

“… Our nation has a chronic shortage of good computer programmers. Established companies and start-ups are starving for talent” (Litan, 2014).

 

“The U.S. concluded its best year of job growth in 15 years last month, with employers adding 2.95 million jobs for all of 2014 and the unemployment rate falling to a postrecession low of 5.6% nationwide” (Sparshott, 2015).

 

Things seem to be looking up for the United States economy, based on the increasing job growth and lower unemployment mentioned in the quotation above. My worry, however, similar to the worry of Robert Litan mentioned above, is that these new jobs will not be able to find the talent necessary to fill roles that require computer science knowledge. Meaning they will have to either increase on the job training, which would be costly, or outsource to a nation that already has a strong computer science base. Something we certainly do not want.

 

I am optimistic about the future of the United States economy, but I believe dramatic changes to the education system must be made in order to compete in the global economy.

Sources

Litan, Robert. “A ‘Moon Shot’ Goal for Computer Programming.” Washington Wire RSS. The Wall Street Journal, 17 Dec. 2014. Web. 21 Jan. 2015.

http://blogs.wsj.com/washwire/2014/12/17/a-moon-shot-goal-for-computer-programming/?KEYWORDS=computer+science

Kimball, Miles, and Noah Smith. “There’s One Key Difference between Kids Who Excel at Math and Those Who Don’t.” Quartz. Quartz, 27 Oct. 2013. Web. 21 Jan. 2015.

http://qz.com/139453/theres-one-key-difference-between-kids-who-excel-at-math-and-those-who-dont/

Sparshott, Jeffrey. “Is 2015 the Year Every U.S. City Adds Jobs?” Real Time Economics RSS. The Wall Street Journal, 21 Jan. 2015. Web. 21 Jan. 2015.

http://blogs.wsj.com/economics/2015/01/21/is-2015-the-year-every-u-s-city-adds-jobs/

Link

The Impact of Illegal Immigrants on the U.S Economy.

Almost every developed country in the world keeps on an eye on the number of illegal immigrants for various reasons. In the U.S., there are many illegal immigrants mainly coming from Mexico, China, and other developing countries. According to the Pew Hispanic Center’s estimation, the size of unauthorized immigrants increased from 3.5 to 11.7 million between 1990 and 2012. As the number of illegal immigrants have been significantly growing over time, it is important to understand its effect on the economy.

Immigration

Before we go any further, it is crucial to know why it is important for economists to know the composition of skills of immigrants in order to examine the effect of illegal immigrants on the labor market. This is because illegal immigrants may affect relative wages for the entire workforce. For instance, wages of unskilled native workers would decrease if the supply of unskilled migrants increases dramatically. Many research papers about unauthorized immigrants in the U.S. show that illegal immigrants are mostly less educated people than native people. However, does it necessarily mean that illegal immigrants always exacerbate the U.S. economy?

Let’s begin with the negative economic effects that are occurred by illegal immigrants. We can start examining this question by assuming that most illegal immigrants are low-skilled workers. This is because it is unlikely that high skilled immigrants are undocumented workers since it is much easier for them to get working visas. Thus, increase in the supply of migrants mostly undercut wages and take jobs from low-skilled natives. In this case, low-skilled native-born workers only have two options, which are accepting lower pay or looking for other jobs. According to labor economists, their finding suggests that illegal immigrants have lowered the wages of native born workers without high school diploma by anywhere between 0.4 to 7.4 percent. In addition, the fiscal effect of a migrant is initially negative because most illegal immigrants work in low-pay jobs, hence pay little income tax and send their children to school. Thus, undocumented workers pay a little tax but receive great benefits from the welfare including education and other government services.

Illegal immigration, however, also has a positive impact on the U.S. economy. Some economists claim that illegal immigrants lower the wage of low-skilled natives born workers but Ottaviano and Peri’s findings suggest that the effect of the immigration on wages are as following:

  1. Wages of native high school dropouts decrease only by 1.1%
  2. On average the US born wages increase by 1.8%
  3. Foreign-born wages drop by 19.8%

These findings show that the effect of illegal immigrants on the native workers’ wage is not significantly negative but only lowers the wages of foreign-born workers. This implies that manufacturing companies can make their products at cheaper prices since their hiring costs decrease as well, meaning that the price of normal goods that are consumed by average U.S. citizens also go down. In addition, the fiscal effect of a migrant becomes positive as their earnings increase. Although the fiscal impact is initially negative, it becomes greater as their children become more educated, hence earning goes up. George Mason University economist Bryan Caplan writes, “Contrary to popular stereotypes, welfare states focus on the old, not the poor. Social Security and Medicare dwarf means-tested programs. Since immigrants tend to be young, they often end up supporting elderly natives rather than ‘milking the system.’ Illegal immigrants who pay taxes on fake Social Security numbers are pure profit for the Treasury. In 2005, Social Security’s chief actuary estimated that without all the taxes paid on invalid Social Security numbers, ‘the system’s long-term funding hole over 75 years would be 10 percent deeper”, claiming that illegal immigrants are not the economic burden to the U.S.