Tuesday, May 5, 2009

Does Stimulus Spending Mean Unserviceable Debt for Posterity?

Critics of the American government's stimulus package call it "irresponsible" because they believe that by borrowing to spend, the American government will accumulate an unserviceable amount of debt in the long run. They speculate that our children will be buried in debt created by spending money we don't currently have.

Whether America will accumulate an unserviceable amount of debt depends on how wisely the stimulus is spent by our government and by the people who receive the stimulus.

Rationale Behind Tax Breaks
Let's first discuss one rationale behind stimulus spending such as tax breaks. There are two ways we all participate in our economy. First, we act as consumers by spending money on goods and services. Second, we act as earners by working in an organization that supplies those goods and services. Spending supports jobs. If the stimulus package helps consumers spend, then the package ultimately supports jobs.

This is why the stimulus package includes tax breaks. Giving more money to consumers increases the likelihood that they will spend. Spending can preserve jobs in already existing businesses.

Rationale Behind Investing in New Industries
Not only can stimulus spending be tax breaks, but it can also be investments in businesses. Giving money to businesses to pay their workers prevents job loss. Jobs support spending.

Ideally, the government should invest in businesses that produce new goods or services for which demand will grow. This kind of investment supports jobs in the short and long term. In the short run, the investment pays wages of people who are developing new technologies; in the long run, people can earn money by selling these technologies.

One can argue that clean energy businesses is an "ideal" investment. Clean energy is likely to grow in demand. The world needs new clean energy technologies if it wants to reduce consumption of fossil fuels. Investing in clean energy now creates jobs that support the development of new technologies. If these technologies are commercially viable in the long run, they will create jobs that are necessary to market and sell these technologies. An "unideal" investment is an investment a dying or mature industry that is unlikely to produce new jobs in the short and long runs.

If people are earning wages, then the government receives tax revenue on those wages. Large tax revenues increases the chances of repaying the money that we spent to stimulate the economy.

Worst Case Scenario - What Might Happen Without Stimulus Spending
The risk of not stimulating the economy is that reduced consumer spending will increase unemployment; increased unemployment will even further reduce spending. The economy will be in a downward spiral of reduced spending and job loss.

Our chances of creating jobs in the long run are reduced if the government makes no investments in new industries. We can leave it up to private investors and existing corporations to make the right investments, but who will have the appetite to invest during this economic downturn? Most investors are risk averse now and are not willing to lend. Many corporations are cutting jobs to survive the downturn; most likely corporations will not have the capacity or appetite for investing in new lines of businesses.

Fixing our financial system and waiting for our economy to recover may be a high risk route. Are we willing to wait and see what happens? Without stimulus spending, we increase our chances of increasing job loss in both short and long term.

This means less jobs for our children, less tax revenue for our government, and less government programs in healthcare and education to secure the well-being of Americans.

Summary Table of Scenarios and Results
The table below summarizes three scenarios and potential results. By no means am I asserting that these are the only possible scenarios. Each column represents a scenario and corresponding results.

The cells highlighted in green present more favorable results than the unhighlighted cells. The scenario that appears to best secure the well-being of Americans is spending stimulus the right way. Without stimulus spending, the probability of an economic recovery is low. Spending will increase debt; however, if our government does a good job of allocating the spending and Americans use the government's investments in the right way, we have a better chance of securing the well-being of Americans.

Critics label the stimulus spending plan as "irresponsible." However, it may be even more "irresponsible" to not do enough now to secure the well-being of our children. For America to emerge out of this economic downturn, concerted effort by both government and individuals will be necessary.

Friday, April 17, 2009

Public Debt as Percentage of GDP

Public Debt as % of GDP
source: https://www.cia.gov/library/publications/the-world-factbook/docs/notesanddefs.html

Public Debt: This entry records the cumulative total of all government borrowings less repayments that are denominated in a country's home currency. Public debt should not be confused with external debt, which reflects the foreign currency liabilities of both the private and public sector and must be financed out of foreign exchange earnings.

source: https://www.cia.gov/library/publications/the-world-factbook/docs/notesanddefs.html

The leadership of many of the top economies of the world objected Obama's suggestion that other countries should parallel the US stimulus package.

Some have reasoned that their current debt levels are too high to support stimulus spending of the magnitude that the US is executing. This data provides some rough relative measure of the ability of the top 10 economies to accrue more debt.

US Imports and Exports, and Why All Economies Should Spend to Revive the World Economy

2007 US Imports Exports
source: http://www.export.gov/tradedata/exp_market_destination.asp

In 2007, the US imported over $1 trillion and exported about half that amount. Let's compare the size of imports and exports to the US GDP.

GDP = $13.8 trillion
US Imports = $1.0 trillion
US Exports = $0.6 trillion

If we use GDP as a rough measure of the size of an economy, then we can say that trade with the other top 9 economies is not an insignificant part of how the US spends and earns its money. Given the size of our imports and exports, we can imagine that the top 10 economies are interlinked. This comparison is "apples and oranges", but the comparison should be enough to illustrate a point that all leading economies should encourage spending with stimulus packages that parallel the US package.

A portion of the US government stimulus package goes to US consumers. US consumers can choose to spend the money on imported goods. This spending supports foreign companies and foreign workers.

Conversely, if foreign governments offer a similar kind of stimulus, then foreign consumers can choose to spend that money on US goods; this supports US companies and US workers.

If the other economies don't offer a similar a stimulus package, then US stimulus spending supports other economies, but the US does not have the benefit of foreign spending. Parallel stimulus spending by the other economies would stimulate the US economy and other interlinked economies. For instance, German stimulus spending can support $50 billion of US exports to Germany as noted in the above table, and other economies from which Germany imports goods.

People promote protectionism because they perceive the asymmetry of stimulus spending unfair and want US government to support US jobs. But as discussed in the article "How Protectionism Can Hurt Us" published April 1, 2009, protectionism is not the best idea.

Given that the US economy generates only 30% of the top 20 world economies' goods and services, the world should not count on the US to bear the burden of stimulating the world economy. The best chance of the world economy revive itself is for all economies to spend in parallel.

Spending leads to job creation. The more jobs there are, the more people can spend. The more we spend, the more jobs we can potentially create.

Thursday, April 2, 2009

Gross Domestic Product of Top 20 Economies By World Bank

GDP of Top 20 Economies
source: http://siteresources.worldbank.org/DATASTATISTICS/Resources/GDP.pdf

As of 2007, the United States' GDP is almost $14 trillion.

This is one piece that will help us understand why stimulus spending worldwide is important.

More Information:
GDP, Gross Domestic Product: http://en.wikipedia.org/wiki/Gross_domestic_product

Wednesday, April 1, 2009

How Protectionism Can Hurt Us

"Protectionism" refers to policy that encourages the consumption of domestics goods over that of imported foreign goods. Recently, protectionism was on the news because some American political leaders were promoting "spending American money to help America." Their position can mean lots of things - one of which can be replacing foreign goods with American substitutes.

At first thought, this position appears to make sense because buying American goods means money flowing to American companies that employ Americans. However, thinking of the consequences of this policy in further detail will reveal how it can actually hurt us.

Let's walk through a hypothetical example of a cell phone. The phone's plastic shell and keyboard are manufactured in China, the computer chips are made in America, and the screen is made in Japan. The phone is assembled in Korea and sold to consumers by an American cellphone carrier. The cell phone manufacturer sources these components from different countries because doing so makes the best product for the cellphone carrier's customers in terms of cost and quality.

Substituting foreign suppliers with American suppliers can raise costs or lower quality. Remember, the American cell phone carrier selected the Korean cell phone manufacturer and its component suppliers because they supplied phones with the optimal balance of cost and quality. Shifting to American suppliers may result in more expensive and lower quality phones. This means the American cell phone carrier delivers less to its customers and the carrier is now less competitive. If all American cell phone carriers deliver lower quality products for more money, American consumers lose.

We can imagine other examples where American manufacturers have to compete against global competitors. A laptop computer that is manufactured with the benefit of a global selection of suppliers will probably have higher quality and lower cost than one that is manufactured with a restricted set of suppliers from only America. This makes the America-only laptop manufacturer less likely to succeed in the marketplace. This manufacturer will lose to competitors and fail to make money. Its employees will not have jobs.

In order to succeed in the global marketplace, businesses must not be restricted to a narrow set of suppliers; they must be allowed to select the best from a global pool. American businesses will be at a disadvantage if they are restricted to American suppliers while other nations provide their businesses with the freedom of selecting from a global pool. With protectionism, America can end up producing products that people don't want to buy and undermine America's ability to employ its people.

More Information:
Protectionism: http://en.wikipedia.org/wiki/Protectionism
Competitiveness of Nations - Michael Porter: http://www.hbs.edu/news/releases/111406_porter.html

Voice of America

I plan to post issues facing Americans and post questions I think that Americans would be thankful for the global press to investigate and answer.