Archives for the Month of February 2006 on Chris E. Carson's Blog
Addendum: Crash Course in Macroeconomics
Here's another one.One other thing about politics in general: the only things Presidents have (marginal) control over is the tax rate and the chairman of the Fed, who controls the interest rate; it's called fiscal and monetary policy, respectively. To better understand what hand politics has in the economy, here's a crash course in macroeconomics:
It's been known since the 30s as a macroeconomic principle that lowering taxes stimulates the economy. The other way the government can do this is by increasing its expenditures. The idea is that the government will buy a nuclear missile, and the workers at the missile factory will take home extra profits and buy cars, and the workers at the car company will buy beer, etc., etc., etc. According to macroeconomics this kind of policy of increasing expenditures is supposed to be slightly more effective than lowering taxes because of a technicality where people save a little bit of their income, but now that US citizens spend almost 100% of their income on average this is becoming a moot point. These two methods of economic stimulus are where the economically-minded Democrats and Republicans are divided. Your policial belief on this policy depends on how effectively you think the government spends money (and how much of it ends up in senators' offshore accounts) and how equitably you think the stimulus should be distributed (should a check be sent to all citizens or to a bridge building company in Arkansas?)
Now, about monetary policy, it's basically at the core of what you would pay to finance a car or a mortgage. It has to do with how much the Federal Reserve charges to loan to banks and hold its' money; it's basically the banks' cost of holding money and doing business. That rate gets passed on to you with a couple points tacked on for the bank's profits. The general idea is that lower interest rates will encourage people to borrow and buy more things, build more factories, etc., while higher rates discourage this and encourage people to save money rather than spend it. It's often been argued that monetary policy is much more effective than fiscal because the government can much more easily control how investors use the money they already have than it has power to directly spend large chunks of money on the economy itself. Strength-in-numbers, essentially.
Again, the general mantra of macroeconomics is that large economic expansions usually cause inflation, at least when they run out of steam. The economy starts running out of resources, like workers, and the investors doing the expanding start offering higher prices and wages, causing prices overall to rise. If the Fed raises the inflation rate, investors stop demanding more resources and the demand for them starts to slacken, lowering prices.The Fed's goal has always been to keep inflation low, which usually doesn't mean that we'll see any large economic growth if they have their way. With this new chairman that just got appointed, inflation will be very low if he does things right. It's not much of a political tool rather than an economic stabilization device, and the Fed's decisions have been attributed to a lot of expansions rather than the actions of the President.
Chris
Explaining the Tech Bubble in 10,000 words or less
So, someone ask me to explain why the Clinton Administration was such a great time for the economy and why the "Bush Economy" has floundered. I ended up typing way too much, but I figured I'd post it for no one to read anyway. I'm copying it to this page because I figure it might be more interesting for students of higher education to read.
I'm an economics student, so maybe I can shed some light on this matter.
You may all have heard of the "tech bubble" that happened in the mid-to-late 90s; this is where computing technology was improving at breakneck speed and people were making a killing on the stock market. Just as an example of what the stock market was doing in this time: between 1995 and 2000, the S&P 500 index (a good benchmark of how the market is doing) just about tripled, and the Dow Jones doubled. A lot of this growth happened between 1997 and 2000, when a "dot-com" with no earnings and no profit was IPOing every day and people would make a killing because everyone was being so optimistic that it was sending the share prices of these worthless companies through the roof.
Right around this time, economists were sitting around trying to figure out if we should redefine how we look at a good economy - the definition of full employment has traditionally been 5% unemployment , and it's always been thought that there was a tradeoff between low inflation and high growth. In the 90s, we saw things that didn't make sense (and still don't) - like 3% and 4% unemployment which was traditionally though to cause high inflation, but it didn't. We were experiencing huge growth, without the inflation that was supposed to accompany it.
Well, what ended up happening is that in the spring of 2000, people finally thought they were paying high enough prices for companies with no earnings. Right then and there, people saw the markets turning, and decided to start taking their profits. This quickly turned into a panic as people tried to unload those companies on paper for which they had paid $600 a share. Pessimism is dominant in the stock market; people will panic sell much more quickly than they will ever buy. This has led us to the kind of economy that permeated Bush's presidency up until about 2004. A lot of companies declared bankruptcy; this collapse of the speculative tech sector sent us straight into a recession.
Why did this boom happen? Well, in the mid-90s, more and more people were acquiring personal computers and dialing up to this new "Internet." Additionally, microprocessor companies had finally cracked the code and were accelerating their research and development - and it was working. At some point, some expert claimed that computing power would double every 18 months indefinitely. This kind of expansion in the Internet and computing led investors and venture capitalists to think that this international networking idea was going to grow indefinitely, and if they got a piece of the infrastructure, they would be insanely rich. It was going to lower production costs so much that there seemed to be unlimited profitability in this 'internet.' Incidentally, most of the infrastructure investment occurred in companies that served other businesses; the home broadband revolution would not occur until after the tech bubble burst. (Incidentally, all this infrastructure that these now bankrupt companies laid, undersea fiber-optic cable and such, was sold off for pennies on the dollar, and new companies can now operate these cables at much lower cost. This has led to the rise of India and China as a major outsourcing environment for computing power just because international networking has become so incredibly cheap.)
Now, to tie this all back into politics. The fact that Clinton was in office while this all happened was little more than pure coincidence; his economic policies really did little to set off the bubble. In terms of economic stimulus, he did almost nothing to pull us out of the Persian Gulf recession of 90-92. He raised the marginal tax rate a little (that is, rich people paid out 40% of their income above about $150k: before, Reagan had lowered the rate from 75% to 28%; this was the tax cut that is largely blamed for the large economic recovery and expansion we saw in the mid-80s) and created that nasty contraption NAFTA that sent our trade dollars to Mexican drug barons.
It could be argued that Clinton's presidency simply coincided with an upturn of the business cycle, but I'd equate it more with a technological revolution. Some unheard of opportunities such as the internet was discovered by investors who proceeded to overinvest the hell out of the industry as smaller investors on the stockmarket who were in the right place at the right time got rich along the way. Employment went down because of the incredible demand of computer technicians and scientists who previously had a harder time finding employment in the 80s; additionally, it did not take too much training to get one of these jobs. Wages went through the roof in this job market and Clinton sat around enjoying greatly increased income tax revenue.
Hope I shed some light on the issue.
Chris