Very good article about the "axis of diesel."
http://www.economist.com/world/international/displayStory.cfm?source=hptextfeature&story_id=12480942
Friday, October 24, 2008
I'm a Slacker
Work has been crazy - and that was where I was doing my research/writing. With so many interesting things going on in the world, I'll be back next week. The promised India-Pakistan post is in the works. Thanks for your patience!
Tuesday, October 7, 2008
Political Economy for Dummies
First of all, I apologize for the delay in this post. Political Economy is one topic I feel ill-prepared to thoroughly discuss off the top of my head. I know the basics, but I am no expert. I did my research, went through several drafts, and it just took a little longer to put together something I feel confident enough to share. As always, if you have questions or comments, please let me know. Thanks for reading.
Economics can be confusing. Inflation, recession, devaluation, government debt, government bail-outs, currency exchange rates; these are all terms we hear tossed around with rarely an explanation of what they really mean. The intersection of politics and economics can be especially confusing once you understand that markets and governments are inherently intertwined.
In the United States, most of us live under the impression that this is a free-market system with little government manipulation of the economy. However, the New Deal ushered in a practice of government intervention. Ever since, Americans have relied on the government more and more to manage their money, their income, and their savings.
Fiscal Conservatives argue that the laws of supply and demand, when left alone, will create a natural balance in the economy. They rely on the understanding that humans are selfishly motivated and will act rationally to profit, observing market activity and taking advantage of opportunities to maximize their benefit while minimizing cost (a "rational" action is simply one that maximizes benefit while reducing cost - it does not mean sensible or reasonable in this context).
Fiscal Liberals argue that the free market system creates an imbalance in the economy. Those who start off with more are better placed to improve their situation than those who start off with less. In order to "level the playing field," some authority (government) must intervene. This stems from the Liberal ideal of human nature; perceiving people as more communally motivated and inherently generous than the Realist adherence to humans as rational actors.
Most political economists fall loosely into one of these camps. How the market is organized and how the government interacts with the economy is directed by these ideals. For example, a Realist/Conservative would argue for deregulation of the market - allowing business and industry, trade and commerce, to operate with little to no government oversight or manipulation. Taxation is, of course, a government right, but that should be the extent of government interaction with the market. An Idealist/Liberal, on the other hand, would prefer to see the government set rules for industry in how they should behave, perhaps set salary caps, oversee the risk investment companies are taking, determining the price of health insurance, just to give a few examples. Of course to a Liberal wealth should be more evenly distributed throughout all sectors of society; requiring businesses to pay a minimum wage to employees, provide some sort of savings plan for retirement, and hiring Union workers on their terms, etc. Again, I'm generalizing here to clarify the differences between the two ideologies - in reality the lines are never this cut and dry.
It is no surprise that one of the primary points of discussion in the Vice Presidential Debate last week is the economy. The entire world is facing a major recession. Governments are doing everything they can to manage the potential crisis. Before we get into this, there are a couple points to be made. First of all, it cannot go unacknowledged that there are cycles in the market. There is both growth and recession, some fluctuations more pronounced than others. Second of all, it must also be noted that economic policies take about 8-10 years to have an effect on the actual market. The specific crisis facing the US now is a result of countless decisions made and policies implemented since 1998. It’s impossible to pinpoint any one event as the cause of this mess because all the politics in the meantime can either over-correct or under-correct according to how we perceive the market at the moment. It’s easy to blame corporate greed and Wall Street’s irresponsibility for all our problems; and it’s just as easy to point fingers at lawmakers and report voting behavior on specific policies to demonstrate how a candidate helped or hurt the economy.
Let’s look at some of these economic concepts though and, hopefully, understand a little better how the market operates.
First of all, what is inflation? We hear this term tossed around a lot without a clear explanation of what it really means. Inflation occurs when a unit of currency has less purchasing power than it did previously because the real cost of goods increases. Thus the value of a unit of currency is decreased and you must use more currency to purchase the same goods.
Devaluation, similarly, refers to when the real value of a unit of currency is reduced. This may occur when a government prints more currency or puts more currency into the market, reducing the value of the currency. The interesting (confusing) thing about currency is that since the U.S. abolished the Gold Standard in 1971 and currencies once again became "floating" (as prior to WWII), the worth of a currency is based on it's trade value on the global market (for a more sophisticated explanation see: http://en.wikipedia.org/wiki/Bretton_Woods_system). Money is only worth what someone is willing to pay for it, to put it crudely.
Recession occurs when markets slow and goods, services, currencies are not trading at a high rate. The pertinent question, though, is how do the problems on Wall Street affect the life of the average American, who may not have huge investments in the stock market? Retirement accounts like 401(k)'s have been hit very hard (a 20% loss since mid-2007). People who were planning on retiring, may feel like they can no longer afford to stop working at this point. The other, more complex, problem is in the "credit crunch." When banks lend money to other banks, they earn an interest rate - this is how they turn a profit. When lending money becomes too volatile and the risk that loans will not be paid off as agreed becomes too high, banks lend more cautiously, or stop lending altogether. If banks can't borrow money, you and I can't borrow money. So available credit for things like mortgages, car loans, college loans, etc. becomes scarce. Higher interest rates for banks equal higher interest rates for the consumer. If loans continue to go unpaid, banks become more risk adverse and lending slows even more. While Wall Street and the Stock Markets have headlined in this crisis, it is really grounded in money markets and lending practices among banks.
Companies don't have to borrow money from banks. They have been able to raise money by selling commercial papers - short term debt. Similar to when a government prints too much currency and it loses its value, companies can also over-distribute commercial papers and when it is no longer perceived to be a sound investment, it pays a higher rate on that debt (http://www.economist.com/displaystory.cfm?story_id=12342237).
So what about the bailout? Where is the $700 billion going? Hank Paulson's (Secretary of the Treasury) plan provides for the government purchase of "toxic debt" from financial institutions - debt that is not likely to be paid off. This debt is mostly tied up in the housing market. The losses have made capital scarce for banks. It has been nearly impossible to liquidate this debt and the money markets are mired down (http://www.economist.com/opinion/displaystory.cfm?story_id=12305249). The Bail-out purchases delinquent mortgages from financial institutions at a higher rate than they are worth in order to provide capital and stimulate new lending. Paulson argues (based on his own studies of the Great Depression) that injecting capital into the banking system is really the only way to solve the "insolvency" (http://www.economist.com/opinion/displaystory.cfm?story_id=12305746).
By intervening the government hopes to quell the panic and ease the risk of lending. When the House failed to pass the original Bail-out plan last week, it created more fear in the market and the Dow tumbled nearly 800 points. After Ben Bernanke (Chairman of the Federal Reserve) used $85 billion to bail-out AIG, he was criticized by Nancy Pelosi for the lack of oversight "the American people deserve" before spending tax dollars. Five weeks from election day, Representatives balked at the idea of sending more money to the institutions that are perceived to have gotten us into this mess in the first place. Crisis managment is all about timing though, and acting too slowly may create more problems than acting too quickly.
That said, I have to conclude by putting in my two-cents. I am beginning to believe that limiting government involvement in the economy to crisis management is really the problem here. While we all like to believe in the free-market and a laissez-faire approach to the economy, it seems to make sense to develop a more comprehensive economic strategy rather than scrambling around every time the market dips to recover and minimize losses. Sure theory is great, but let's be pragmatic. By no means am I advocating a government-run economy. I just think that if the Chairman of the Federal Reserve and the Secretary of the Treasury have so much power, why not let them put together an overarching plan for how the government will interact with the economy?
Next week: The Pakistan Factor and a Nuclear India
Economics can be confusing. Inflation, recession, devaluation, government debt, government bail-outs, currency exchange rates; these are all terms we hear tossed around with rarely an explanation of what they really mean. The intersection of politics and economics can be especially confusing once you understand that markets and governments are inherently intertwined.
In the United States, most of us live under the impression that this is a free-market system with little government manipulation of the economy. However, the New Deal ushered in a practice of government intervention. Ever since, Americans have relied on the government more and more to manage their money, their income, and their savings.
Fiscal Conservatives argue that the laws of supply and demand, when left alone, will create a natural balance in the economy. They rely on the understanding that humans are selfishly motivated and will act rationally to profit, observing market activity and taking advantage of opportunities to maximize their benefit while minimizing cost (a "rational" action is simply one that maximizes benefit while reducing cost - it does not mean sensible or reasonable in this context).
Fiscal Liberals argue that the free market system creates an imbalance in the economy. Those who start off with more are better placed to improve their situation than those who start off with less. In order to "level the playing field," some authority (government) must intervene. This stems from the Liberal ideal of human nature; perceiving people as more communally motivated and inherently generous than the Realist adherence to humans as rational actors.
Most political economists fall loosely into one of these camps. How the market is organized and how the government interacts with the economy is directed by these ideals. For example, a Realist/Conservative would argue for deregulation of the market - allowing business and industry, trade and commerce, to operate with little to no government oversight or manipulation. Taxation is, of course, a government right, but that should be the extent of government interaction with the market. An Idealist/Liberal, on the other hand, would prefer to see the government set rules for industry in how they should behave, perhaps set salary caps, oversee the risk investment companies are taking, determining the price of health insurance, just to give a few examples. Of course to a Liberal wealth should be more evenly distributed throughout all sectors of society; requiring businesses to pay a minimum wage to employees, provide some sort of savings plan for retirement, and hiring Union workers on their terms, etc. Again, I'm generalizing here to clarify the differences between the two ideologies - in reality the lines are never this cut and dry.
It is no surprise that one of the primary points of discussion in the Vice Presidential Debate last week is the economy. The entire world is facing a major recession. Governments are doing everything they can to manage the potential crisis. Before we get into this, there are a couple points to be made. First of all, it cannot go unacknowledged that there are cycles in the market. There is both growth and recession, some fluctuations more pronounced than others. Second of all, it must also be noted that economic policies take about 8-10 years to have an effect on the actual market. The specific crisis facing the US now is a result of countless decisions made and policies implemented since 1998. It’s impossible to pinpoint any one event as the cause of this mess because all the politics in the meantime can either over-correct or under-correct according to how we perceive the market at the moment. It’s easy to blame corporate greed and Wall Street’s irresponsibility for all our problems; and it’s just as easy to point fingers at lawmakers and report voting behavior on specific policies to demonstrate how a candidate helped or hurt the economy.
Let’s look at some of these economic concepts though and, hopefully, understand a little better how the market operates.
First of all, what is inflation? We hear this term tossed around a lot without a clear explanation of what it really means. Inflation occurs when a unit of currency has less purchasing power than it did previously because the real cost of goods increases. Thus the value of a unit of currency is decreased and you must use more currency to purchase the same goods.
Devaluation, similarly, refers to when the real value of a unit of currency is reduced. This may occur when a government prints more currency or puts more currency into the market, reducing the value of the currency. The interesting (confusing) thing about currency is that since the U.S. abolished the Gold Standard in 1971 and currencies once again became "floating" (as prior to WWII), the worth of a currency is based on it's trade value on the global market (for a more sophisticated explanation see: http://en.wikipedia.org/wiki/Bretton_Woods_system). Money is only worth what someone is willing to pay for it, to put it crudely.
Recession occurs when markets slow and goods, services, currencies are not trading at a high rate. The pertinent question, though, is how do the problems on Wall Street affect the life of the average American, who may not have huge investments in the stock market? Retirement accounts like 401(k)'s have been hit very hard (a 20% loss since mid-2007). People who were planning on retiring, may feel like they can no longer afford to stop working at this point. The other, more complex, problem is in the "credit crunch." When banks lend money to other banks, they earn an interest rate - this is how they turn a profit. When lending money becomes too volatile and the risk that loans will not be paid off as agreed becomes too high, banks lend more cautiously, or stop lending altogether. If banks can't borrow money, you and I can't borrow money. So available credit for things like mortgages, car loans, college loans, etc. becomes scarce. Higher interest rates for banks equal higher interest rates for the consumer. If loans continue to go unpaid, banks become more risk adverse and lending slows even more. While Wall Street and the Stock Markets have headlined in this crisis, it is really grounded in money markets and lending practices among banks.
Companies don't have to borrow money from banks. They have been able to raise money by selling commercial papers - short term debt. Similar to when a government prints too much currency and it loses its value, companies can also over-distribute commercial papers and when it is no longer perceived to be a sound investment, it pays a higher rate on that debt (http://www.economist.com/displaystory.cfm?story_id=12342237).
So what about the bailout? Where is the $700 billion going? Hank Paulson's (Secretary of the Treasury) plan provides for the government purchase of "toxic debt" from financial institutions - debt that is not likely to be paid off. This debt is mostly tied up in the housing market. The losses have made capital scarce for banks. It has been nearly impossible to liquidate this debt and the money markets are mired down (http://www.economist.com/opinion/displaystory.cfm?story_id=12305249). The Bail-out purchases delinquent mortgages from financial institutions at a higher rate than they are worth in order to provide capital and stimulate new lending. Paulson argues (based on his own studies of the Great Depression) that injecting capital into the banking system is really the only way to solve the "insolvency" (http://www.economist.com/opinion/displaystory.cfm?story_id=12305746).
By intervening the government hopes to quell the panic and ease the risk of lending. When the House failed to pass the original Bail-out plan last week, it created more fear in the market and the Dow tumbled nearly 800 points. After Ben Bernanke (Chairman of the Federal Reserve) used $85 billion to bail-out AIG, he was criticized by Nancy Pelosi for the lack of oversight "the American people deserve" before spending tax dollars. Five weeks from election day, Representatives balked at the idea of sending more money to the institutions that are perceived to have gotten us into this mess in the first place. Crisis managment is all about timing though, and acting too slowly may create more problems than acting too quickly.
That said, I have to conclude by putting in my two-cents. I am beginning to believe that limiting government involvement in the economy to crisis management is really the problem here. While we all like to believe in the free-market and a laissez-faire approach to the economy, it seems to make sense to develop a more comprehensive economic strategy rather than scrambling around every time the market dips to recover and minimize losses. Sure theory is great, but let's be pragmatic. By no means am I advocating a government-run economy. I just think that if the Chairman of the Federal Reserve and the Secretary of the Treasury have so much power, why not let them put together an overarching plan for how the government will interact with the economy?
Next week: The Pakistan Factor and a Nuclear India
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