Wednesday, January 16, 2008
Stimulating What?
This is an interesting post about the goals of fiscal stimulus (i.e. tax cuts or more government spending). People generally feel that this kind of stimulus needs to take place soon, so that it can counteract the probably decline in GDP that is occurring right now. However, as the authors of the post point out, do we really care about GDP, or do we care about people losing jobs? If the stimulus package takes a long time to enact, maybe that is okay, because it will result in a stronger job market - which ultimately matters more directly to people.
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Response to posting “Stimulating What?”
This article focuses on the debate about an economic stimulus package and whether it is worth implementing. Since the economy is going through/entering a recession decisions on how to counteract its effects must be made. A stimulus package is designed to jump start the economy by decreasing unemployment therefore increasing GDP. The idea of a stimulus package is appealing to most, but some loose their desire for it unless it is implemented quickly. In this article Bernstein argues that the length of time it takes to deliver is not as important as the optimistic effects it will bring to the middle/working class of America. Economists calculate the length of a recession by looking at the real GDP. Since RGDP is 70% wages and 30% payment to capital (rent, dividends and interests, and profits) one would think that an increase in unemployment rate would decrease the amount to wages. Also, unemployment happens to individuals and the GDP is an average of the country as a whole. Even if the GDP is up and the country is technically out of a recession if you are financially struggling due to unemployment it does matter what the national average is. The only thing that matters is trying to provide for yourself and your family. Bernstein also mentions that many families took several years to begin recovering from the recession. If this is so, why does it matter how long it takes to provide people with an economic stimulus as long as they receive it? I agree fully with this article and its focus towards what will be best for the economy, but also for individuals effected during this uncertain time. If families were in an economic crisis any additional funding from the government would certainly be put right back into the economy. Because everyone’s marginal propensity to consume is different the risk of a portion of the money given to the public by the government may be saved instead of spent, but for the people who desperately need the it they will do their part by putting that money back into the economy.
The article “Better Late than Never” provides some important information on why stimulus package should be introduced into the economy heading toward the recession. Although taking into account the lengthy process some economists can assume that at the rate of recessions, which last “typically less than a year,” pursuing a stimulus package can do no good to the economy. Therefore, by making this false statement basing it entirely on GDP they are ignoring the real effects of recession, such as “insufficient job growth, rising unemployment and income losses for many families” (Bernstein). After looking at some statistics in this article, it becomes very clear that the general public is still vulnerable to all those issues even after recession is pronounced to be in the past. “The 1990-91 recession officially ended in March 1991, but unemployment kept rising for another fifteen months, until June 1992” (Bernstein). There are more factual examples like this one in the article, pointing out that even after recession people are still at risk of loosing their jobs. While GDP is important, it is only rational to assume that what matters the most to the people in the current society is whether or not they have their jobs to support themselves and their families. Therefore, “better late than never” stimulus package can still help many workers to stay employed.
Jared Bernstein makes a decline in a country’s gross domestic product a personal matter, illustrating the real struggle of average families that anyone can relate to. I agree with Bernstein about implementing “better late than never” stimulus, therefore trying to keep employed many individuals who depend on their paychecks. It is also important to mention that arguments about marginal propensity to consume effect fiscal stimulus. Marginal Propensity to Consume is a portion of an income spent (consumed) rather than saved. Therefore, I believe that families with declining wages or income losses will consume more rather than save, putting the money back into circulation.
“Better Late than Never” by: Jared Bernstein, and Larry Mishel, is really an argument for a “stimuli package” regardless of its timing. They explain that the reporting process on economic recession is to slow. As the numbers are becoming more apparent the push for fast action is unwarranted in their opinion. The GDP should not be the whole focus, but job growth, rising unemployment, and real incomes should be the focus. It really doesn’t matter when the equation looks like this: “GDP up, jobs/income-down”.
Bernstein and Mishel, note that the recessions of 1991 and 2001 that “real median family incomes fell not just in the recessions, but for the first three to four years of the recoveries”. Thus, any “package” to help stimulate the economy is helpful sooner, or later.
I agree with Bernstein and Mishel about focusing on the symptoms just as any physician, or leader in their right mind would do. The problem is that our leaders and not physicians and not all are in there right minds. The GDP, although not perfect, is good indicator of our overall quality of lives empirically speaking.
Keynes told us that we have two instruments of Policy in our arsenal to combat the economic downturns: Monetary and Fiscal. Empirically, the monetary means has been the quickest, and most effective; Fiscal just like everything else in our country moves way to slow. We may be the oldest republic, but that’s because we’re playing on slow motion.
I believe like Bernstein and Mishel that anything would be helpful. But, and there is a but; let’s hope that the lowering of the interest rates the same as increasing the money supply will spur investment in capital (K), because it has given a disincentive to save and an incentive to spend.
The last news that I heard was, the devaluation of the USD (Dollar), has spurred Volkswagen to begin considering moving their manufacturing to the U.S. While the British have begun building production facilities in Connecticut, which as you know is not a cheap place to buy land and operate in. Then again it’s not often that you hear the good news or see the silver lining.
BROOKS
The article "Better Late than Never" talks about the tax rebate package and whether or not it will have a real effect on the recession being that many think the recession is already here and the packages may be too late to have any real impact.
Most people would take a check even if it is late. But it seems that many are looking at the GDP only. "Our efforts should also target insufficient job growth, rising unemployment, and the resulting wage and income losses for many families, including those who don't lose their job," says Bernstein.
Bernstein also focuses on the last two recessions and how unemployment kept rising even after the recession was over.
Having a weak job market hurts the middle-class on down remarked Bernstien. With many Americans depending on the every single dollar they make a stimulas package would be very stimulating.
I think many middle-class and down would spend that money quickly and help out recession or not recession. Either way the economy is being helped and so are many families that are struggling.
Hopefully, the job market after this recession will not be as bad as before and the stimulas packages work the way the government anticipates.
In this article "Better Late than Never" Jared Bernstien, advocates the importance of an effective economic stimulus and its necessity, regardless of the time it takes to release the package. He addresses concerns in the press about the delay in the release of the package as people have said that the stimulus will only fulfill its purpose if it is released very soon, since recessions have a time limit and are short-run events. The author however disagrees with this statement as it narrows the scope of the package, restricting it to just act as a means to 'mitigate the fall in overall growth' or decline in GDP.
In actuality, Bernstein believes that an anti-recession package should also be focused on factors which matter most to people and directly affect them, such as low rates of job growth, unemployment on the rise, and the consequent wage and income losses for a large number of families, even those who remain employed. The decline in GDP comes and goes, and the recession is often dated in accordance with this indicator, but the resulting problems in the job market last for much longer. Hence, while the recession "officially" lasts for about a year, its ramifications on employment growth take longer to recover from, and to prove this the author quotes examples from the recessions of 1990-91, which officially ended in March 1991 but the fifteen months that followed saw significant increases in unemployment, and the 2001 recession, when about 3 million jobs were lost between the official end-date of the recession and August 2003.
Therefore, the point the author is trying to make is that families depend on their paychecks. The weak job market was very slow to recover: job growth, wages, and incomes all stagnated even well beyond the "official" end of the recession and led to income losses for many middle-class on down. So, while not undermining the importance of GDP growth, if the stimulus package can effectively target other important variables as well as to offset rising unemployment then any useful stimulus package should strengthen the recovery immediately and create more jobs in 2008.
The author concludes by saying that only time will tell if this "type of GDP up, jobs/incomes-down dynamic" from previous recessions will occur in the current recessionary phase. However, that being said, while some analysts are categorizing this recession as a 'mild' one, the author's calculations, derived from past indicators between unemployment and middle-class incomes, show that the forecasted unemployment rate for 2009 of 6.5% would cause a drop in real incomes of such families of $2,400 over the time span of 2008 and 2009. In such a scenario, any tool which provides some relief from the impact of recession is welcome, even if it arrives a little later than the most desired time.
A shrink in the economy can be defined as a recession and many economists believe that Americans will soon experience, or may already be experiencing a recession. Recently, discussions have begun amongst legislators to introduce a stimulus package to help aid American families during this period in the economy.
The article, “Better Late than Never”, by Jared Berstein and Larry Mishel, presents an argument against the comment that a stimulus package will only effectively aid the economy if it is done timely. Berstein says that a stimulus package would take time to implement, but is would still help middle class and low income families. He also reminds the reader that the length of a recession is difficult to measure but even if a recession last less than a year, a stimulus package would help families by boosting incomes. He says an effective stimulus package should focus on improving insufficient job growth, rising unemployment and income losses for families, including those affected who do not lose there jobs. An effective stimulus package will help boost jobs and incomes, even if it is late. According to Goldman Sachs analysts, unemployment is believed to climb though 2009 and may increase up to six and one half percent during the final quarter. Losses in jobs are predicted to lower the real income of families by approximately two thousand four hundred dollars. Though it is believed that this recession will be mild compared to previous recessions, we should not give up on a stimulus package if it cannot be produced within a few months.
Recessions have been described as a shrink in the economy, but Berstein and Mishel have taken a look beyond gross nation product, GDP, and focused on the effectiveness of adding income to American families by introducing a stimulus package whether timely or not.
This article is about a new economic stimulus package and it pros and cons. The
idea came about because the economy could be headed towards a recession and
provisions need to be made. The main objective of a stimulus package is to add
value to the economy by increasing the GDP. The quicker this package is
implemented, the better. Jared Bernstein (the author) explains that the
reporting process on economic recession is slow. GDP isn’t the only factor to
take into account; we must also focus on unemployment, income, and job growth.
Supporting a family and making ends meet is far more important (to the
individual) than GDP. With that being said, many people are oblivious or have
no concept of issues pertaining to a recession. It is important to note that
even after a recession people are still at risk of losing their jobs. So any
kind of stimulus package would be beneficial to many workers. This goes along
with Bernstein’s idea of implementing a “better late than never” package to
help workers stay employed. I agree with this article and its ideas about what
will help our economy. While GDP is a good gauge of quality of life, it is more
important to focus on things that will help individuals and their families
immediately. If we focus on things such as increasing interest rates or
raising investment, our economy can thrive as well as our GDP. Hopefully, this
package will help the job market and ensure a better quality of life for
everyone.
Bernstein and Mishel’s article, “Better Late then Never,” advocates implementation of a stimulus package without immediate regard to the time frame that it would go in. The logic behind their proposal states that the indicators and subsequent reporting process of a recession are not fast enough to offer a means of combating a decline in the GDP. As such, it is unwise to hastily push through a solution for a problem that is outpacing you, suggesting that focus should shift from GDP indicators to fluctuations in job growth, unemployment and real incomes; this would avoid situations where increasing the GDP may lead to a net decrease in the number of jobs or real purchasing power.
To support their notion, Bernstein and Mishel offer the fact that prior to the recessions in 1991 and 2001, real median family income began three to four years before the decrease in GDP was noted as a recession.
While I agree with the article’s thesis that family incomes may make a better indicator of future recessions than Real GDP, I believe that their proposal is unlikely to take place or that it is necessarily better for the economy. That the focus is on GDP prevents most of the public from knowing that there is a recession coming too much before a recession, this causes the public to maintain more positive expectations of the future and maintain current consumption, perhaps preventing some recessions from occurring to begin with. Similarly, even if a recession occurs, if focus is simply on the GDP, it is relatively simple to increase the GDP which, while it may not help the health of the economy directly, will increase consumer confidence which WILL do just that.
There are two means by which a government can exert control over an economy in order to prevent recessions: fiscal policy and monetary policy. In a nation such as the US, where trade occurs with frequency and ease, fiscal policy will never result in much change in the GDP because it will be counteracted by a change in Net Exports. As such, monetary policy employed by the fed and regarding control of the money supply is the best way to affect an economic change.
Action to combat the recession in any form and on any timeframe is good, but only with moderation. People must not lose faith in the Fed defending interest rates, even at the expense of a recession (which seems inevitable), as this would cause an outward shift in the phillips curve, resulting in higher inflation and higher unemployment.
I found this article useful and interesting as it gave me a different perspective on the running and policy of the fed. It also caused me to consider the actions of a fed in a different light, even though I disagreed with the article in part, which is quite helpful to my understanding of economics.
In Jared Bernstein article, “Better Late Than Never,” he expressed how a stimulus package is still worth pursing even if it comes at a later time. Despite what other economist say about timing being important for a stimulus package, Bernstein feels that is not the case. The author explains that the reason timing is not important is based on the fact that recessions are based on GDP. Bernstein goes on to state that we should target other things that go along with recession like unemployment, insufficient job growth, and income and wage loss for those who still have jobs. He gives an example of how all those things were affected by the last two recessions the country has gone though even after it was out of it.
Timing can be important, while in class the topic was discussed on the country’s current economic situation. By the time this stimulus package gets out to consumers and producers, the economy may already be out of the recession. Another thing that was discussed in class was a situation in which the country was still in a recession when the stimulus package was dispersed. Our marginal propensity to consume may not be high which means people are saving more as opposed to spending. If that is the case then what ever amount of money that is given to people will go to savings instead of spending which was intended from the stimulus package. In other words the stimulus package would be useless. It would not have the intended effect on GDP like the government wants.
I also tend to only think about GDP when it comes to a recession. There are so many other factors that go on while the economy is in a recession and it is important to keep those factors in mind. The article was informative and helpful but still do not know if a stimulus package is the answer when it is too late.
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