econsalon: Last Macro Question (CSUSB) 3/16

econsalon: Last Macro Question (CSUSB) 3/16: "President Obama has selected you to advise him on the economic policies he should adopt and promote while he runs for re-election. What THR..."

What THREE ideas do you have advise him to focus on? Why?

If President Obama where to select me to advise him on three economic policies to promote his re-election, then it must truly be a situation where all economists or anyone with such knowledge have disappeared from this planet. Regardless, thanks to Dr. Harris class, I may have some ideas.

First, a rapid but well-planned move to green sources of energy. Obama's current office probably has done the most for that cause than others lately. But all infrastructure in our country is aging, and with a push to improve infrastructure through new, green, rising technology, a new, 21st century nation will replace the old. To set this up, new construction techniques, materials (environment friendly for example), and organization would have to be created. This would open new employment, new industries, and focusing capital stock toward all these new industries. Hopefully that will create an increase in spending growth and money velocity to combat our current liquidity trap and crowding out effect that is tying the Fed's ability to infuse money into the economy. Plus, its the way to go if we want to be competitive NOW. Oil will be a minimal source of energy within this half century, I believe, and we MUST be the first to introduce, manufacture, and develop green sources of energy.

Second, triple the pay of all active duty military service members. Why? And for what cause? Simple. Anyone who knows, or is, or has been in the military, knows how the life style of the majority of young service members (and many of older range, too). Work hard, play hard. Weather people like to believe that or not it is a basic truth in the military. The portion of 'play hard' is what might send a spending shock (positive) and increase spending growth and push that AD curve to the right! Spending 3/4 of a paycheck or all (or direct deposit as today) on a whirlwind spending spree is a common practice for service members. It is not just that the economy would experience a positive effect by tripling (or more) their pay, but imagine the flood of new recruits! As long as they remember that it's their lives (and more importantly other's lives) they are potentially signing away. Unless they join the Air Force. A joke, I love the Air Force, they most likely saved my boys' and my life once upon a time. If this would bring an uproar of a spending issue, a good remedy would be to just give the Marines all huge raises. That money would be infused into the economy in 24 hours. It's a win-win situation; Americans love their service members and Americans love their economy.

Third, a long shot, but would generate a huge increase in spending growth. Cuba. Fidel Castro is going to drop dead any day now, and trying to reconcile differences with Raul Castro would be a good move. Without bending to any sort of communist or socialist ideals (hope for a democracy), we could join with Cuba to re-build their infrastructure (green of course) and specifically the coastal areas. The coastal and marine environment circumference of Cuba are enormous. Imagine a developed (environmentally friendly of course) Cuban coastline of resorts and vacation spots, only 90 miles from Florida. The amount of US dollars that would flow in there from tourism would be very large. And if some contract or deal, including the US receiving a cut from the resort/vacation boom, it could be a solid source of spending growth. This truly might seem a long shot, but it could work. Cuba, a GIANT Caribbean island, with some of the most beautiful coastlines, beaches, waters, and geography in the Western Hemisphere (many might not know this, Cuba being a closed communist dictatorship), is a treasure chest of riches. And that is not meant to place Cuba as a place for plunder, but our neighbor and hopefully one day our business partner.

econsalon: Macro Question 3/9/11

econsalon: Macro Question 3/9/11: "If there is a recessionary gap between actual GDP growth and potential GDP growth, should the government 'intervene' to close the gap? Why?..."

A government should intervene to close a gap between actual GPD growth and potential GDP growth in a recessionary gap. A recessionary gap is caused by negative spending shocks and/or a decrease in the velocity of money spent that pushes the AD curve down and to the left. With a recession, along with fear in investments, and cut-backs in consumer spending, a needed increase in spending growth is not likely to occur (unless a positive spending shock miraculously manifests itself or a real shock pushes the Solowe curve to the right) without money being injected into the economy to increase the spending growth. With Keynesian prescriptions for recessionary gaps, the Federal Reserve applies powerful expansionary policies to inject money into the economy. Such policies are monetary policy tools that stimulate the FED's FOMC, such as an increase in buying securities from banks (thus causing banks to increase loans), lowering the required reserve rate (creating excess reserves for banks to lend), and decreasing the fed funds rate or decreasing the discount rate. These actions can only be taken by the the Federal Reserve (government), and without an intervention a recession can last much longer or worsen as consumer confidence plummets causing even more money to be pulled out of the system, pushing the AD curve even farther down and to the left. Without a governments intervention during a recessionary gap (like President Obama's "bail out" and "stimulus plans" following the 2007 credit/home crash), a recession may turn out to be potentially catastrophic and long lasting.

econsalon: Macro Question 3/2/11

econsalon: Macro Question 3/2/11: "Consider the most recent recession which authorities say began in December 2007. Review the list of real shocks and spending shocks reviewe..."

The most recent recession begun in December of 2007 most certainly can be blamed on a shift (negative) in the rate of spending. Lower spending, consumer fear, and reduced wealth, all results from the ripple effects of the housing/credit market crash, which literally froze the nation's financial system. These negative spending shocks affect the dynamic aggregate demand curve in the RBC, pushing it down and to the left. This negative shift of the AD curve will cause a gap in real GDP growth to potential GDP growth, causing the recession and unemployment. Though some real shocks (productivity shocks that can shift the Solow curve) can be a source of argument for the downturn of the economy, these shocks do not compare to the damage the housing crisis did to the rate of spending. Examples are the wars in Iraq and Afghanistan, and the shift from Iraq to Afghanistan in 2008-2010. But the pull-out (not complete) from Iraq cannot be seen as "less" war, since actual operations in Afghanistan ramped and increased. Also, government spending in war actually increases spending growth, so that argument has some problems in justifying the cause for economic down- turn. So, the quick and negative shift in the AD curve from a shift in lower spending growth (caused by housing crash) is the main reason for the economic downturn in 2007.