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    Fiscal Insight

    Jun 16 • Government, International Trade and Finance • 326 Views

    Picture this political cartoon: In some unknown ocean, a Chinese submarine confronts a U.S. navy vessel with the Chinese submarine captain saying, “Turn around or we sell all your T-bills.” The caption says, “Chinese sub threatens U.S. Navy.”

    As expressed by Harvard Professor Niall Ferguson in a recent talk, the People’s Republic of China holds “a substantial chunk” of the U.S. federal debt. Professor Ferguson referred to China because he was discussing the connection between massive debt and global power. First though, through three questions, he presented a primer on debt:

    1. How can we identify a debt crisis? We can look at the ratio between the GDP and the debt; we can compare interest payments to tax revenue; we can look at dependency on foreign funding.

    2. Why have debt crises been tough to eliminate? They are difficult problems because they are political phenomena, cutting spending and raising taxes are unpopular, and irrational exuberance can be uncontrollable.

    3. How can countries exit a debt crisis? They can grow their economy, lower interest rates, get a bailout, create fiscal pain, print money, or default.

    Because the world’s advanced economies share a debt crisis (except for Norway and Canada), Professor Ferguson concluded his talk with, “It’s not a thousand years that separates imperial zenith from imperial oblivion. It’s really a very, very short ride from the top to the bottom.”

    And that returns us to U.S. global power, the U.S. debt, and to our political cartoon (which you can see in Dr. Ferguson’s slide show, slide #32.)

    The Economic Lesson

    Perhaps our fiscal challenges remind us that there is no free lunch. Beyond the money that was spent, the stimulus program can be very costly.


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    Is Fannie Mae Your Friend?

    Jun 15 • Economic Thinkers, Financial Markets, Households • 295 Views

    I was surprised to hear that when Fannie Mae was created in 1938 as a federal agency, a part of her mission was to move money. At the time, because of the 1927 McFadden Act, interstate banking was prohibited. As a result, there could be (and was) insufficient money for mortgages in California and too much unused mortgage money on the East Coast. By buying mortgages from banks and brokers, Fannie Mae was able to move money to areas that needed it. Meanwhile, by selling the mortgages she purchased, she could attract funding from the areas that had it to lend.

    Fundamentally, Fannie Mae was supposed to help people buy homes. During the 1930s, she made 30 year mortgages more common when 5 year mortgages were the norm. Yes, she typically required a 20% deposit and strict credit guidelines but she guaranteed the mortgages that she purchased. She let people live the American Dream.

    30 years later, everything changed. In 1968, under President Johnson, Fannie Mae became a private corporation but retained a connection with government as a GSE (government sponsored enterprise). No longer a federal agency, she was a profit seeking business with stockholders. Still though, the federal government implicitly guaranteed the mortgages she purchased.

    As a result, especially since 2003, when Congress asked her to assist the effort to extend home ownership, Fannie Mae reduced her credit requirements. Initially, profits and home ownership soared but both depended on home prices rising. When prices started to fall, recipients of NINJA mortgages (No Income, No Job or Assets) and 3% down payment mortgages defaulted. The result? The government’s implicit guarantee has become an $84 billion dollar bailout reality.

    The Economic Lesson

    Arthur Okun’s Equality and Efficiency:The Big Tradeoff (Brookings, 1975) discusses the tension between our democratic heritage and our economic aspirations. Equality implies a smaller economic pie while with efficiency we get a bigger pie and more individual wealth and power. 

    Do you support the smaller pie that would accompany a government that facilitates widespread home ownership?



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    Is the Stimulus Package Working?

    Jun 14 • Economic Debates, Economic Thinkers, Government • 323 Views

    We will never know for sure whether the $787 billion stimulus package really made a difference. According to NY Times columnist David Brooks, President Obama’s economists predicted 3 million jobs would be created or saved while others suggest the impact will be much smaller.

    How are we doing so far? Is the U.S. economy faring much better than it would have without massive spending? 

    Looking at research by Harvard professor Edward Glaeser, we see the data from individual states provides no definitive answers. We cannot say for sure that unemployment numbers and the change in government spending are related. Also, even with the Recovery Act, we still have a 9.7% unemployment rate and I wonder how you can prove that government “saved” a private sector job. As Dr. Glaeser points out, because “there are too many moving parts,” we cannot identify definitive empirical evidence supporting or refuting a Keynesian approach. 

    Even for the Great Depression, economists disagree. Some say FDR’s spending was crucial. Others believe that World War II was the answer. Meanwhile a third group asks us to focus on monetary policy problems. 

    The Economic Lesson

    British economist John Maynard Keynes (1883-1946) said that government economic intervention could be beneficial during a recession. “Prime the pump” through government deficit spending. Then, when the private sector regains its strength, government can reduce its spending.

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    More Than a Mango

    Jun 13 • Developing Economies, International Trade and Finance, Thinking Economically • 309 Views

    This story is about a canal and a plastic milk crate. It takes place on a mango farm in Haiti. The farmer has 2 mango trees. The trees produce her entire crop and her income of approximately $2 a day. As described by NPR’s This American Life, to double production, this farmer just needs water from a nearby river that a short canal would deliver. For Americans to buy more of her crop, she just needs a crate to minimize bruising. To get the crate, she needs aid from an NGO. For the NGO to provide the crate, she has to participate in a farmers’ cooperative. For the cooperative to get the crate, they need property on which to store crates. To get the property, the farmers have to be willing to give it to the coop.

    I think you see where this is going. It is complicated. And, to make matters worse, Haiti is listed by the World Bank as one of the toughest places in Latin America to do business. Ranking close to last (#32) in such categories as “ease of starting a business” and “construction permits,” Haiti’s bureaucracy presents formidable business obstacles.

    The Economic Lesson

    Countless economic issues relate to Haiti’s canal and crates story. Technology (a canal), tools (crates), and transport (roads) are only several challenges facing a mango farmer who wants to double her production. Add huge transaction costs (“red tape”) to the tale and you wind up, so far, with a sad ending. You also have a production possibilities curve that will not increase.

    To hear a surprising solution, you might want to listen to the econtalk podcast on charter cities from Stanford’s Paul Romer.

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    Debating the Inheritance Tax

    Jun 12 • Economic History, Government • 345 Views

    Death usually means some money for Uncle Sam and the rest for the real relatives (and unrelated heirs). As a result, when John D. Rockefeller died in 1937, his heirs received 30% of his fortune and the U.S. government got the rest. During March, 2010, however, Dan Duncan, the 74th richest man in the world died and his family inherited everything because the estate tax had lapsed for just one year.

    Rewind to 1889.

    Supporting an inheritance tax, Andrew Carnegie said, “I would as soon leave to my son a curse as the almighty dollar…” Bequeath great wealth to charity? “No,” because a disappointed family will probably contest the decision. Instead, according to Carnegie, a man of wealth should, …”set an example of modest…living…, provide moderately [for] those dependent upon him…” and then use the money for the good of the people. How? Invest in universities, free libraries, hospitals, parks, meeting halls, and church buildings. Saying that it created liars, Carnegie opposed an income tax.

    Do you agree with Andrew Carnegie?

    The Economic Lesson

    In descending order, the individual income tax, the payroll tax (social security/Medicare), and the corporate income generate most of the U.S. government’s revenue. Typically, even though rates fluctuate with new legislation, still, revenue tends not to exceed 19% of GDP.


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