A Theoretical View of U.S. Debt

(Note: there are opinions expressed in this post that belong to the author and may not necessarily reflect the view of the Global Economics Team as a whole.)

When I get asked what I am studying in college and I reply economics, the conversation will go one of two ways. Either they say "oh so you want to work on Wall Street, eh?" To which the answer is "no, not at all." The second way the conversation may head is toward the evils of the U.S. government's spending habits. Many people are perturbed by the U.S. and our growing debt. It is true that we are spending more money than we have each year, and as many victims of the housing market crash can attest, this is not sustainable. How can we continue to grow our economy if we keep financing our debt with money foreign countries that we have to pay back with interest? Well, I wish I had answers to people's economics questions more often (maybe I should carry around a bag full of economics text books everywhere I go) but this particular question regarding our outflow of money had me stumped. I do not have all the information on this subject, but can shed light on a few interesting relevant points.

First of all, there is no problem with going into debt if the money borrowed goes to a more productive economy. It is similar to any logical investment; you have to spend money to make money! And if there is a lack of funds flowing in to the U.S. economy, then the interest rate will increase and investment will consequently decrease. Since investment is linked to higher economic growth, which for all intents and purposes can be seen a good thing, then borrowing should occur if the money is directed toward economy enhancing programs. Another problem people have with our debt is the fact that the burden of repaying it rests on the shoulders of future generations. This may seem unfair, but not if you take in to consideration that the money borrowed helped create a higher standard of living for that generation, and they may therefore be better equipped to repay.
Second, it is important to keep in mind that our debt may not be a perpetual spiral that will only get bigger and bigger until we collapse and become a third world country. In the 1980s the U.S. dollar was appreciating and interest rates were coaxing foreign investors over. This created a current account deficit and a capital account surplus. This surplus/deficit tango we found ourselves in has persisted and attributes to our "debtor" status. However, if foreign investors no longer find U.S. financial securities desirable, current account will increase, capital account will decrease and our debt will shrink. We will find ourselves debt free and even lending money to other debtor nations, however we will have weak currency and low economic growth. Which situation is more desirable? That is not for me to say, it is up to our ignorant politicians to decide.

Reference:
Steven Husted and Michael Melvin (2004): International Economics sixth edition.

(This was posted by Trevor Murphy-Mannix)

French Senate Pass Pension Reform Bill

                This weekend started out with controversy in France, as the French senate approved President Sarkozy’s pension plan, BBC news reported.  The plan is to change the minimum retirement age from 60 to 62, and the full state pension age from 65 to 67.  Sarkozy’s plan is said to avoid the collapse of the current pension plan. 

                Though the new bill was just approved by the senate this Friday, the protests and strikes by union workers have been ongoing for weeks.  Unions have stated that it is a hard earned right to be able to retire at the age of 60.  Unef, a union that represents students, are encouraging students to hold a sit-in this upcoming Tuesday, but may be struck by the half term holiday which began Friday and will run until November 4^th.

                With strikes seen amongst the fuel industry, many of filling stations have been left empty, with reports by Prime Minister Francois Fillon stating it may take several days before the fuel supplies rise to normal levels.

                Unions are meant to protect the rights of the employees from unfair laws and orders put in place by their employers; however, it can seem at times when the government or any business are put in tough economic situations, that they may stand in the way of what is best for the people themselves.  When a current pension plan will not be sustainable in the upcoming years, it would seem obvious that change must be put in places where there is room for it to be made. 

                Though at sudden changes unionists may look at it as two years they are being cheated out of retirement to earn their pension, the next generation of employees will be able to fund for those currently retired and onward.  The good of the citizens of France relies on rebuilding a broken system, and to improve the situation, sacrifices will always have to be made for the greater good of the country.  Let’s see if it all ends up working out.  For the full article, follow here.

Currency War?....Probably Not.

There was an article posted to the online version of The Economist earlier today called "How to stop a currency war." Apparently Guido Mantega, Brazil's finance minister declared in late september that an "international currency war" had broken out. There has been a lot of discussion about China's undervalued yuan and the implications it bears on international trade, but there is by no means a "currency war" afoot. Now that being said, precautions do need to be made so that one does not start. The House of Representatives passed a law that allows firms to seek tariff protection against countries with undervalued currencies. However, this law has yet to be signed by the senate or the President. I do not know a lot about it, but it seems to me like the president needs to be careful when implementing regulations like this. Obviously this new law is targeted at China. Even though the law states that firms have tariff protection from ANY country with undervalued currency, they mean China. China is a huge trading partner of ours and we need to keep our relations in high standing. Passing a law like this could be construed as a slap in the face. Of course this does not mean nothing should be done. The undervalued yuan is having a serious affect on our economy. If we take no action, it may send a message to China that says they can abuse our strong trade relationship. I also wonder if it would send the message to other countries to try the same tactics. If other trade partners realize the U.S.' s reluctancy to take action they may undervalue their currency as well in order to strengthen their economy.
One thing that I liked about the article was how they mentioned the effects the weak yuan has on other countries. In most U.S. publications they only mention China and the U.S. while the rest of the world sort of gets swept under the rug as though we are the only country who does business with China.
Interesting stuff to think about though. I think it very important to avoid a currency war and keep a good relationship with China.

I liked how in the article the author referred to quantitative easing as a weapon. I had not thought of it that way before.

The link to the article is here

(This was posted by Trevor Murphy-Mannix)

India's Wage-Gender Gap

There is considerable research and debate addressing the wage-gender gap in America. Men tend to make more than women on average as most people know, and economists have set out to busy themselves with answering the question 'why?' There are many reasons that have been looked at, some more significant than others, but that is beside the point here. What are the income gaps between women and men in other countries? Are there any? How big are the gaps? Are the reasons the same or different from the U.S.?
It is safe to say that the answers to these questions will differ from country to country and it would be illogical to aggregate the world. After all a positive coefficient on a variable in one country may have a negative coefficient in another!(http://en.wikipedia.org/wiki/Linear_regression)
Luckily there are a great deal of studies done on this subject. One such study done by Nidhiya Menon et al. from Brandeis University analyzed the wage gap in India in the face of increased competitive forces resulting from India's trade liberalization. Intuitively, we can assume that as the market becomes more competitive, there will be a decrease in costly exclusion of capable women in the workforce. However, this study shows that as India becomes more willing to trade, the wage gap has actually widened!

The Paper is here:
http://people.brandeis.edu/~nmenon/Menon_Rodgers_India_WDResubmission_091608.pdf

Note: This is an economic research paper and is not exactly a light read. It uses econometric procedures to procure statistics from data. These statistics may have serious implications, but like every economics research paper, can never be perfect.