Final Extra Credit: Topic III

International Business

European Central Bank on Inflation Fight

They are taking a wide-ranging set of measures aimed at the slow growth and super-low inflation. The economic situation has gotten really bad in Europe so these measures are meant to send a big message to investors, businesses and the public. The negative interest rate is “meant to encourage banks to put their money to work to rebuild the battered euro zone.” It is also meant to weaken the euro to make exports more competitive. However it is unclear that these efforts will have long-term effects. The central bank is not purchasing large-scale bonds and other financial assets. Quantitative easing is a tricky proposition. Unlike the Federal Reserve the bank would have to make political decisions of what assets to buy among the euro zone members. The problem with the euro zone lending is that it is unclear whether they will respond to the central bank’s action.

Draghi Pessimism on European Recovery Stirs Expectation of Stimulus

The reasons for the new set of actions in Europe is because apparently the numbers over the summer which led to Mr. Draghi’s pessimism. They wanted to take more steps in order to better the economy. Central bank started to offer cheap four-year loans as a way of restoring the flow of credit but not many banks took advantage of it. Analysts believe that the central bank needs to make large-scale bond purchases to meet its goal. Mr. Draghi intends to stimulate growth in the euro zone with a combination of cheap loans, asset purchases and really low interest rates. He criticized the governments because he believes that they have not used their savings from the interest payments wisely. He questioned where the savings have gone.

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Extra Credit for the Final: Topic I

Inequality and Macroeconomics

Neil Irwin argues that economic expansions are supposed to be the better times which incomes and living standards improve. However he states that, who benefits from these rising incomes has changed drastically in the last 60 years. In the 1940s, ’50s and ’60s, most of the income gains during expansions benefited the majority of the people. The bottom 90% of earners captured a majority of the rise in income. However the bottom 90% kept getting smaller and smaller income gains with each expansion in sequence and the top 10% got more. From 2001 to 2007, 98% of income gains benefited the top 10% of workers. That was a new trend that emerged in the 1990s and early 2000s. An optimist could believe that since 2012 things have gotten better since Ms. Tcherneva’s records only through 2012, but in the first three years of the current expansion, incomes fell for the bottom 90% of earners, and the top 10% captured a 116% of income gains. Ms. Tcherneva believes that this shift indicates a failure of the approach that governments take to stabilizing the economy; it should be tax and spending policies that boost the economy in the aggregate, such as cutting taxes. She also states this approach is not working because it is not targeted, that “when the government increases its total demand for goods and services, it first improves the conditions of the skilled, employable highly educated and highly paid wage and salary workers, it is hoped that after those workers increase their own demand for products and services the fiscal stimulus would trickle down to the less skilled and low wage workers.” I mostly agree with her points and understand her reasoning behind these patterns, however if there were enough jobs created for all individuals willing and able to work, that would cause overheating and inflation would rise. Topic of income inequality is talked more now than before; the idea is the poor get poorer as the rich gets richer. This is a realized issue, it is the governments responsibility to form policies to cure this pattern.

Keeping Up With the Slightly Richer Neighbors

Income inequality drives the 99% to consume more regardless of if we can afford to or not. Ben Bernanke calls this “expenditure cascades.” The problem is that we see friends and family who can afford to spend more which leads us to spend more as well. He believes that the we tend to stay local with who we envy. We don’t envy people who earn ridiculously more than we do. He gives the example of beggars who envy other beggars who have a few more coins than they do and not the millionaires. So we “imitate those near us.” He states that this leads to unaffordable consumption which means that we are spending the money that we don’t have in order to match the spending of our peers who earn more. He believes that we have seen some frugal fatigue which is when people want to just buy something nice and treat themselves and not worry about it. It was easier before 2008 when credit was a lot better than it is now so they don’t realize there are consequences. Mr. Kraus found that 60% of his affluent crowd were pro higher taxes for the rich and sympathized with Occupy Wall Street. The high end people however were less supportive and wanted to cut spending rather than raising taxes. I think the income inequality and consumption are closely related. Especially now attending a very financially diverse college, I see how they connect. We do like to think of ourselves equivalent to those who are around us.

Topic Three: Economic Policy

1) Fed has a more aggressive┬ámonetary policy that Christina D. Romer, believes can “be very helpful to the recovering economy.” What the Fed had done recently is replace the bond-buying program with and open-ended program “whose pace was to be determine by progress in healing the labor market.” Then they started replacing those predictions for interest rates with numerical guidelines. The Fed’s commitment to its new policies appears shaky because some members of the policy making committee spoke against it. Discouraging the “positive buzz” created by the policy statement. Romer acknowledges that none of the Fed’s actions are powerful on their own but when they together they become a “commitment to recovery.” The Fed made the policy mistake of doing too little during the Great Depression and the high inflation of the 1970s because they were convinced it would have been ineffective. Like she mentions later in the article, hypothetical fears stopped the evolution. To make the policy even more agressive they can “lower the 5.5 the employment level at which the Fed starts to consider raising interest rates.”

2) Three years ago, economists would have been talking about “how the great slump ended,” and not “why it still continues.” The reason for this, Krugman states is “the triumph of bad ideas.” Economic crisis of 2008 was a result of fall in private spending which led to a recession. A household differs from an economy in the sense that a family can decide how to go about their money; they can save it, spend it or try to earn some more whereas in an economy someone else’s loss is your gain, and your gain is someone else’s loss. The reason why popping the dot-com bubble worked back then was because it was much of a smaller financial shock, crisis of 2008 was bigger; “even cutting rates all the way to zero was not nearly enough.” Governments needed to step in and support their economies while the private sector regained control. In 2010, the crisis in Greece was taken as a sign that governments had better slash spending and deficits right away and experts cheered this on.The policy makers refuse to learn from experience because the British government refuses to even consider that there may be a possibility that they made a mistake by killing a promising recovery. And Republicans in America “insist that they’ll use a confrontation over the debt ceiling.”

Topic Two: Europe’s Economic Mess

1) Although some economists believe that euro zone is not yet in recession, Mr. Rupert, a professor of economics at the University of California states “There is a huge decline in human capital.” Most economist believe that recessions can also be defines by “unemployment, industrial production and investment.” Germany being an exception, the biggest economies of Europe such as France, Italy and Spain are declining. Both Spain and Italy are back to the “dark days of 2009. Both showed a little improvement in 2009 but started going back down in mid 2011. Although France is close to Germany as far as economic activities go, economists predict those two could be next. In Spain most teens and college graduates are having a hard time finding jobs. One of the members of the committee at the Center for European Policy Research stated “that would be a lost generation more than a lost decade.” Contrarily U.S. has shown improvement since 2008. Although it has been a slow growth in economy and has took more time than any other recession since WWII, it is still growing. Economists believe that breakup of the euro currency would have consequences and is a great risk to take. Mr. Weinberg of High Frequency Economics believes “even depression cannot be ruled out if poor policy leads to a string of bank failures.” Also the decline can last for years.

2) Conventional view of the “euromess” is the lack of fiscal discipline, in other words, the mess is the goverments’ fault. However Paul Krugman believes this is wrong and says the government is not to blame. He says that it is the arrogance of the elites that pushed Europe into this mess by adopting the singing currency of Euro. He compares Spain to Florida and calls it the “Florida of Europe” with its warm weather and beaches. People from all over Europe decided to purchase houses in Spain which led to “rapid growth with significant inflation.” According to Krugman, Spanish exports became uncompetitive, employment was high and the budget went into deficit. He believes that the core problem is the currency because if the currency was still the peseta, by devaluation, the problem would have gone away quicker. He states economists called this one as well, saying Europe was not ready for a single currency, but were ignored. The only thing Europe can do now is to act in union like the American states. Krugman believes that the fundamental problem was “hubris, the arrogant belief that Europe could make a single currency work.”