Possible Black Swan of the Stimulus Package

So the stimulus money has not really started finding its way to these so called shovels ready projects, but yet in just a few short weeks everything doesn’t seem so dire (at least in the immediate future, long term we are still SOL due to this high deficit that the president and congress has decided to go with).

I believe some of the unintended consequence of these big projects will be as follows:

As you heard time and time again (illegal labor does jobs that Americans don’t want to do). For the longest time those jobs that American didn’t want to do was supposed to include construction jobs. The picture is starting to form isn’t? What do we know about the border right now? Remittances are down; border crossings are down, and some people have started returning back to Mexico. This is not due to some new security policy enacted by the Border Patrol and Homeland Security, a very large part of it is due to the fact that the construction business here in the US has taken a nose dive. The source of income for many illegal persons has dried up.

So eventually when these projects take off, what do you think is going to happen? You will have private companies bidding for government contracts / at the least channeling campaign contribution monies and bribes, and they are going to be looking to make a profit. Do you think they are going to be hiring people with a college education or people with a little salt and pepper in their hair for $40k a year? The will operate just like any other business, they will find the lowest cost source of labor they can get their hands on. This won’t change the unemployment rate one red cent, because these people will be off the radar so to speak.

The other side effect, community and gov resources will get overrun again buy large influxes of people who don’t have insurance, and aren’t paying property taxes because they are renting. A good portion of the money earned will not be spent here in the USA; it will go back to Mexico. 

And the cycle beings again when you here the gov say “We need more $$$ for health care and education”. We are becoming a welfare state (as a union). Look at California, how could the once most prosperous state in the nation, now have the highest bu

Review of -The Blame Game: “Don’t Blame Me”

As I was organizing the files in my website I came across this review a article written by Justin Fox in Fortune magazine back 2002.  This was one of the earliest papers I wrote on economics. Funny how much of this paper is coming back into focus 7 years later.

By: Bryon Gaskin
For: Professor Steven Scheer
Class: Principles of Macroeconomics
Date: 1 November 2002

 

The Blame Game: “Don’t Blame Me”

INTRODUCTION

Boom! Boom! That was the sound of the economy of the 1990’s as it moved along like a marching band lead by Federal Reserve chairman Alan Greenspan.  Now one must use a stethoscope to hear the heartbeat of the economy.  Was Greenspan given too much credit for the economic expansion of the 1990s?  Maybe, but what is known is that the economy is in a recession, and people want answers as to why and more importantly who to blame.  Being the Fed Chairman is very similar to the pressures of a football coach. If a coach is always winning, and winning in times that he shouldn’t fans will look at the coach with great admiration and assign great value to his ability to make play calls.  However; when that same coach starts losing on a regular basis, then every call he makes that is not a touch down is looked upon as a poor play call..

Justin Fox, the author of “Don’t Blame Me” takes a deep look into Fed chairman Greenspan’s role in economic stability and compares his performance to that of the other economists who have held the position in the past.  More importantly he takes a look into what might be the possible outcome if Greenspan is not reappointed when his term expires in 2004.

THE ROLE OF THE CENTRAL BANKS

According to Fox, a lot of people judge the success of the central banks by whether or not investors lose money, businesses go under, or the economy finds itself in the middle of a recession (Fox 133). If those terms are used to determine success or failure, then the Federal Reserve lead by Greenspan has been a huge failure.  For the general public with limited knowledge of how the economy actually works, this may seem to be the prevailing attitude.

Most economists on the other hand, will say that the only thing that the central banks can control is the price level and that for the past decade the inflation rate has been in the narrow range of 1.5% to 3.5%.  If those terms are used to determine the success of the economy, then how the Greenspan has led the Federal Reserve has been a success hands down (Fox 133).

Who’s correct; has the Federal Reserve under Greenspan been a success or a failure, probably a little of both.  There are three sides to every story, version “A” of the facts, version “B” of the facts, and then the facts. Perspective plays a large role in deciding if the Federal Reserve has performed well under Greenspan.  Individuals and business feel the crunch of a recession very quickly in the short term, the effects of a recession are very visible, higher unemployment, lower sales, and portfolios that take a beating.  These are all, real, right now issues that the public at large feels the burn of.  An often quoted phrase that describes the subjectivity of the pain felt by unemployment is,"the rate of unemployment is 100 percent if it's you who is unemployed.”  

Economists on the other hand tend to focus on long-term aspects.  It is generally accepted by economists that a low inflation rate is more conducive to economic prosperity in the long run than high inflation.  Examine what happens when inflation is high as it was starting a little before the middle half of the 1970s and continued off and on again until it peaked around 1979. The results were very obvious, unemployment was constantly above 6% and real GDP was below potential GDP (Fox 134).  The economy was not in a complete recession all through the seventies and early eights, however it’s over performance was very poor.   According to a concept discussed in Principles of Macroeconomics by John Taylor, low inflation should make potential GDP grow faster.  The reason for this faster growth cannot be unilaterally decided but may be due to the idea that as uncertainty in the economy decreases productivity rises (Taylor 260).

A WORLD WITHOUT GREEN

People can comment in positive or negative light about what the Federal Reserve did or did not due in the bubble years of the 1990s, but for the most part Washington is not ready to see Greenspan go.  Quite the contrary is taking place.    For the Federal Reserve, the problem is not how its implementing the current monetary policy, but, how does it run a system, like the Federal Reserve, when it based on an individual who has such a knack for the job that the Federal Reserve itself has almost become an alter ego of the man himself (Fox 134). What the real question becomes is “how do we institutionalize the success of the Greenspan Fed?” (Fox 134)

When Greenspan leaves, who will be his successor?  Truth be told, there is no clear-cut favorite for the position.  Whoever takes the position, it will be unlikely that from the start this person will have the same level of clout that Greenspan has due to his mixture of “economic wonkery and political savvy” that he has constructed over the past 15 years (Fox 135).  The fact is that Federal Reserve has not faired well after a strong Fed chairman leaves his seat.  With that poor record in mind most monetary economists contend that the central banks should be guided by very well defined rule of thumb (Fox 135).  In the 1960’s the economist Milton Friedman pushed for a system in which the Fed should increase the money supply at steady gradual pace and avoid trying to fine-tune the ups and downs of the business cycle. Then in the 1990s John Taylor, a Stanford economists came up with a concept known as the “Taylor Rule” in which take into account the inflation rate and the difference between real GDP and potential GDP.  From this computation he proposes that the Federal Reserve could determine the optimal Federal funds rate (Fox 136).

At issue with the rules proposed by Taylor and Friedman is the fact that both rely on unreliable estimates of money supply and potential growth (Fox 135).    The prevailing thought of the day is to leave the judgments based on economic estimates to the central banks and instead mandate that they set a very definable inflation target (Fox 135).  Will the inflation target be zero?  No not likely, it is generally accepted that a little deflation is more of a problem than a little inflation.  The expected inflation target will probably end up being somewhere around 1% to 3% (Fox 136)

Greenspan himself disagrees with setting a specific target inflation rate.  In a speech in the fall of 2001 Greenspan said that the measures of price inflation also have flaws and that “a specific inflation target would represent an unhelpful and false precision” and what should targeted is “price stability” (Fox 136).   Greenspan explains what “price stability” is.  He defined price stability in 1996 as “ the state in which expected changes in the general price level do not effectively alter business or household decisions,” this is very similar to the famous decision given by supreme court justice Potter Stewart when he commented on the definition of pornography.  Stewart said “I know it when I see it” (Fox 136).

CONCLUSION

No one is perfect, Alan Greenspan, is no different.  Were all of the decisions that Greenspan made during his term the correct ones, probably not, however it does appear that is overall judgments were solid.  Which decisions were good and which ones were bad, depend a lot on what perspective one looks from.  Almost every economic decision will affect some parties in a positive manner and other parties in a negative manner.  What is not being disputed is the fact that the inflation is lower than it was when Greenspan took office, and as discussed earlier, in the long run, having low inflation places the US economy on fertile ground for continuing to have strong growth in potential GDP. The United States is a very big place and although it is possible for one person to make an economic decision that could send the economy into a recession or even a depression, it is highly unlikely that there ever was or ever will be a single person who could be completely responsible for the economic boom like the one in the in the 1990s.

The Fox article seemed to be a little pro Greenspan, but it is a little hard for it not to be, there is just limited data out there on what he has done wrong in the his term as Fed chairman.  The full success of failure of his reign over the Fed may not be know for many years.  Just as Greenspan’s predecessor Paul Volcker made some tough decisions, that in the short run, sent the economy into a recession, his actions may have laid the foundation of an economy in which created a perfect situation in which a man named Greenspan appears to have been born with “green thumbs”.

 

 

 

Works Cited

Fox, Justin “Don’t Blame Me.” Fortune 11 Nov. 2002: 133-136.    

Taylor, John B. Principles of Macroeconomics 3rd ed. Boston/New York: Houghton Mifflin Company, 2001.