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Confronting the Realities of our National Debt

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Everyone in Washington seems to be proposing their own solution to solve the nation’s crippling budgetary woes.  The big issue: many of these so called solutions don’t actually solve our debt problems, and their math just doesn’t add up.  Few politicians are willing to address the numbers head on, but it’s important for Americans to realize the exact predicament our nation is in.  So let’s do something that politicians won’t, and examine the underlying numbers behind our nation’s fiscal failures.

Our fiscal year 2013 deficit is projected to come in at 901 billion dollars(1).  But that’s just a one year budget shortfall.  Our total national debt is around 16.4 trillion dollars and rising fast.  Clearly, monumental steps need to be taken in order to stabilize our budgetary failings.  Unfortunately, politicians are only focusing on the small solutions, and this shortsightedness is evident from both major parties.

Republicans have clamored that a smaller government is the right path to a balanced budget.  It’s a good argument on the surface, but dive further into the math and Republican proposals seem far from a panacea.  The reason for this is that Republicans are targeting too small of programs.  Take food stamps, a federal program Republicans have lambasted.  But when Republican backed legislation to curb spending on food stamps surfaced in the House last year, it was only able to trim about $16 billion of the $80 billion food stamp budget.  Simply put, proposed Republican budget cuts don’t have the ability to solve our nation’s fiscal woes.  Bigger reforms are needed.

That all being said, Democratic proposals for tax hikes have been far from a panacea as well.  While tax hikes can certainly ameliorate our budget woes, they are far from actually fixing the problem by themselves. On the surface, tax hikes also seems like a good idea- raise revenue while possibly lowering the income inequality gap. Yet, upon further examination, this plan runs into some problems. First and foremost is the breadth of tax hikes needed. Currently, federal taxes are about 18% of the United States’ GDP. In order to balance the budget, these rates would have to be hiked by about 10% over the next ten years. Not only is this a huge hike which could slow down economic growth all around, this only takes care of the deficit in 2023. By then, the United States will have picked up as much as 26 trillion dollars of debt.

Neither the Republicans nor the Democrats can stick to the hard line on this issue. Simply spending cuts or simply tax hikes will make a little dent in the deficit, a smaller dent in the debt, and overall get nothing done. If Congress is serious about cutting our deficit and eventually lowering our debt, a comprehensive approach must be taken. Taxes must be raised, this much is evident. The Bush Tax Cuts have run their course and should expire entirely, perhaps even raising taxes across the board on this issue. Republicans will first have to break free from their Norquist-ian chains, reach across the aisle and admit it has to be done. Yet Democrats also have to give in some too. Programs like Social Security, Medicare and even defense spending have become wildly inefficient and are doomed to bring failure to the budget of the United States. An all-encompassing reform of revenue and spending must occur if Republicans and Democrats alike want to hold on to hope to truly ridding the United States of the shackles of debt.

 

(1) – White House Office of Management and Budget – http://www.whitehouse.gov/omb/overview

Feb 5, 2013

Greek Grievances

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Greece”s Parliament Building in Athens has been the site of both political and economic turmoil.
Source: CIA World Factbook

Americans had much to be thankful for this Thanksgiving. Our economy, arguably, isn’t terrible, and we have a democracy. Greece, on the other hand, cannot say the same. Entering a sixth year of recession with an unemployment rate of 25%, things do not look so good. Its high unemployment rate endangers social unity, because people who are out of jobs begin to lose faith in their political parties. Therefore, the party in power stays in power, and is able to manipulate the government as they please without any form of cohesive opposition.

Powerful party leaders appear to be doing what’s best for Greece, especially economically. As a result, most of the common people are deceived. They fail to realize that their representatives’ means of seeming like a just leader does not reflect the people’s best interest at all. In truth, those in power often abuse their rights of decision-making. For example, on November 1st, Greece”s ruling parties decided that financial aid was so crucial that they removed seven representatives from their government positions after those representatives failed to back an austerity law. Decisions that appear to benefit the general public in reality only bolster individual authority. At the same time, while Greeks endure endless austerity along with an ever-shrinking GDP, there are indicators that suggest that the well-connected government executives were circumventing theses fiscal burdens. Dominant beneficiaries force the masses to do the heavy economic lifting. A corrupt group governs the citizens, not the citizens themselves.

Police brutality intended to cover up the actual lack of freedom exemplifies press censorship. In an effort to hide repeated oppression, the police restricts the media, usually with further oppression. Aspiring journalists find this tight cycle hard to break. Even foreign sources have difficulty finding their way in communicating to the Greek population. The popular London newspaper, The Guardian, was met with threats after publishing allegations of police mistreatment and torture of anti-fascist protesters. Instead of undertaking investigation to make sure this was not happening, threatening to sue the newspaper makes the police seem even more suspicious, and proves that the government has become increasingly authoritarian.

Without outside news sources, the people in Greece would not have any reliable forms of media, as there is virtually no freedom of press anymore. Greek media is owned by magnates or financed by banks, allowing politicians, businessmen, and journalists rule the country. They essentially have the power to manipulate media and change laws to justify illegal actions. Members of Golden Dawn, an increasingly popular Neo-Nazi and anti-immigrant party, corrupt the official police force and the judiciary. The party runs the slogan “Get the stench out of Greece”, referring to unwanted immigrants. Even more worrying is the fact that, ever since Golden Dawn won eighteen seats in parliament back in June, violence against immigrants and leftists has increased. Police even participate in it occasionally.

All of this suppression cannot be the fault of Greece’s government alone. Other countries in the Eurozone are also partially responsible for the lack of democracy. Fiscal tightening has imposed a great deal of austerity onto Greece, which already has a hard time simultaneously trying claw itself out of debt and making reforms. Heavy austerity distracts leaders from what is really important: their people. It’s kind of funny how the European Union was awarded with the Nobel Peace Prize for their democracy and human rights, considering all they have done is foster corruption. A more suitable candidate for that prize would have been the US!

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Filed under Economy, International
Nov 26, 2012

Opinion: Why Can’t the Eurozone Be Friends?

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This summer, news over the Eurozone debt crisis has been fairly quiet, primarily because the Eurozone leaders have been on summer vacations. Yet they are starting to return, and work is beginning again. After replacing Lucas Papademos in June, Antonis Samaras, current Prime Minister of Greece, will face his first big challenge in drumming up international support. He will visit Angela Merkel, Chancellor of Germany and Francois Holllande, President of France. Samaras’ primary goal will be an extension on debt owed and loosened impositions of austerity. Basically, Samaras will go begging to the two biggest leaders in the Eurozone to try to get them to loosen the shackles they have put on Greece. But with Greece once again asking for relief, the Eurozone leaders are no doubt questioning what to do for Greece. After many negotiations have ended with nothing, simply in-fighting, the next few months for the debt crisis will be as vital as ever.

Many are no doubt looking at some form of Eurozone breakup, ranging from Greece being the sole exiting country (being called “Grexit”), the fringe countries all exiting or simply the Eurozone not existing anymore. However, when looking at the collateral damage caused to everyone, both the creditors (Germany and France primarily) and debtors (Greece, Spain, Portugal, Italy, Ireland etc.), any sort of breakup does not seem possible. For the creditors, it leaves them with huge sums of unpaid debt, and for the debtors, they have no help from outside forces to get their economies back on track. While many within the creditors, especially Germany, are pressuring their leaders for a breakup, they do not realize just how disastrous this could be.

The other option, and the one that seems to make the most sense, is a further mutualization of economic burden. Basically, the Eurozone needs to create a Eurobond, which essentially equalizes all debt in the Eurozone. This would require debtors and creditors to get along better, but doing so may work. Creditors would suffer a minor blow from this, but not as large as could be imposed with any sort of break up. Debtors meanwhile, would feel much of the burdens of their debt lifted, and in turn would be able to focus on getting their economies back on track. Additionally, inflation needs to be introduced to further ease economic burden. It would only minorly affect the creditors, while greatly helping the debtors. Together, however, these approaches would only somewhat ease the debtors, bringing them back slightly from the verge of collapse. Once this equalization of the burden is done, the debtors still will find themselves dealing with struggling economies. While no longer bridled with debt, they will need to cut down unemployment and get their various sectors producing again. In order to do so, stimulus must be introduced. The idea that austerity will help economic growth is faulty once the issue of large debts is mostly dealt with. This stimulus should be primarily a plan resembling the New Deal, one of government spending in infrastructure and such that will benefit everyone. Greece, in their recession, has revealed several infrastructure problems, including electricity, and government induced stimulus could help to fix them. With this stimulus, there must also be a focus on youth unemployment, as it is one of the primary ailments of Greece and other debtors. If they can get the young, motivated workforce back to work, this will be an important catalyst in economic growth. Debt mutualization, coupled with inflation and direct government stimulus will allow debtors to see necessary short term outcomes, while creditors will see long term growth.

Europeans are suffering debt crisis fatigue. Those in the creditor countries feel like their money is being drained into the debtors. The debtors meanwhile are feeling fatigue over the stringent austerity that has been imposed. Yet by mutualizing debt, and creating system-wide growth, both sides will begin to see each other in a new light. Fatigue will be lifted.

So as the leaders get back to work, if the creditors can agree to take a bit of the fall for the debtors, and help the debtors grow, stability and growth can be restored to the Eurozone. Because of the bickering that has been experienced in all negotiations, this may be a stretch, but working together will work better.

Filed under Economy, International
Aug 19, 2012

Olympic Medals vs. GDP: An Intriguing Inspection

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The size of a nation’s economy naturally affects how well that country will do in the Olympics.  After all, larger and richer nations should generally be able to field bigger and stronger teams.  This explains why, as the world’s largest economy, the United States was able to win the most medals.  Second in the medal standings was China, the world’s second largest economy.

To truly analyze how well a country preformed in the Olympics, it is thus necessary to examine its medal count relative to the size of its economy.  Determining the size of a nation’s economy is simple: this analysis used 2011 estimates of gross domestic product from the CIA World Factbook¹.  Examining the medal count, however, forces a decision on how to weigh the differences between gold, silver and bronze.

It is fairly safe to say that all Olympic medals should not be counted equally.  Winning a gold carries more prestige than a silver, and silver carries more prestige than a bronze.  But how should we measure this?

Upon noticing that the United States Olympic Committee pays athletes $25,000 for a gold, $15,000 for a silver and $10,000 for a bronze, I decided to use these payouts as a weighing system for the medals.  A bronze medal is then 1 ‘medal point’, a silver 1.5, and a gold will be worth 2.5.  (It should be noted that Russia also awards payouts at similar ratios, another reason this weighing was chosen.)

Here are the results: calculated medal points vs. GDP for economies larger than $1 trillion.

 

Notice that even though the United States and China have the most medal points, their results are nothing special due to the extreme size of their economies.  The United States, in fact, is actually below the line of best fit.  More impressive are the feats of Russia and the United Kingdom.  Despite their much smaller economies, they are able to post impressive numbers of medal points.  On the other hand, even though Brazil and India are rapidly developing economies, their medal points are unimpressive, and they fall well under the line of best fit.

The three unlabeled countries above the line of best fit are France, Italy and South Korea, who join already labeled Germany as nations that slightly over-performed.  The six unlabeled (and thus under-performing) countries underneath the line are Mexico, Spain, Indonesia, Canada, Turkey and Iran.  Most surprising is Indonesia.  Even with one of the largest economies in the world, Indonesia only managed to win one silver and one bronze, worth a mere 2.5 medal points.  However, this can be explained by noticing that Indonesia only sent 22 athletes to the Olympics.  When compared to other nations of similar economic clout, Indonesia chose to send a tiny representation.

The case of Indonesia demonstrates that factors other than GDP affect Olympic results.  After all, some countries simply choose to become more competitive than others.  As the host nation, the U.K. was more driven towards success.  Thus, they significantly outperformed most of their peers.

Take this data with a grain of salt, as GDP is not alone in predicting Olympic success or failure.  However, also consider this data to be a new alternative to the more traditional and basic medal count.  After all, when it comes to the Olympics, athletics are important, but money plays a crucial role as well.

 

1 – CIA World Factbook – https://www.cia.gov/library/publications/the-world-factbook/fields/2001.html

(A note – these GDP estimates incorporate Purchasing Power Parity)

Aug 12, 2012

The Untold Story of High Unemployment

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When July jobs numbers were published, the report was far from straightforward.  163,000 jobs were added, a number far better than any other monthly gain this summer.  However, the unemployment rate increased to 8.3%.

The numbers underline the fact that even with increased hiring, America’s unemployment crisis is far from resolution.  Even though the unemployment rate has fallen from a high of 10% in 2009, much of the drop can be attributed to discouraged workers giving up on their job search as well as workers accepting part time jobs when they want full time work.  The commonly cited unemployment rate does not include these categories, but with their inclusion, the unemployment rate would jump to 15%.

Stubbornly high unemployment creates a search for solutions.  Naturally, politicians have jumped on the issue, citing various reasons for America’s employment woes and presenting voters with the corresponding solutions.  The big accomplishment by Congress so far has been the passage of the Jumpstart Our Business Startups (JOBS) Act, which was designed to ease regulations on small but growing businesses.

The JOBS Act is a good start, but a mere easing of regulations is not a panacea.  Unfortunately, more powerful bills that deserved bipartisan support have instead been ripped apart by partisan gridlock.  Congress has the small solutions down, but fails to agree on the big ones.

The best example to explain this deals with outsourcing, which has caused millions of American jobs to be sent overseas.  Democrats proposed a bill that would give tax cuts to companies that brought these foreign jobs back to America.  This ‘insourcing’ bill utilized tax cuts as an incentive, a strategy Republicans have touted as a strong solution to unemployment woes.  The bill seemed ready to receive bipartisan support and easy passage.

However, any hopes for bipartisan approval quickly came crashing down.  Spurred by Republican attempts to amend the bill with a repeal of Obamacare, Democrats decided to block all Republican amendments.  Angered that Democrats were refusing any amendments whatsoever from the minority party, Republicans refused to pass the bill.

But outsourcing is not the only issue Congress has failed to adequately address.  Another large-scale problem known as ‘hollowing out’ remains mostly unchecked.  ‘Hollowing out’ occurs when companies, faced with economic difficulties, lay off mid-income workers.  High-income workers in crucial management positions in addition to low-income workers who provide cheaper labor are excepted to assume the responsibilities of the fired workers.  Even when the economy picks back up and hiring resumes, these middle class workers find that the nature of their old positions have changed to the point where there is no longer a need for their skills.

The current recovery has demonstrated that companies can return to former profits without rehiring fired workers.  While this means that overall economic growth has continued, this growth is not coupled with a drastic reduction in unemployment.

Fixing this problem of a hollowed out job market is not easy, as there is no simple solution to making middle class jobs crucial to businesses.  Tax cuts may persuade companies to hire, but a true fix to hollowing out would also require a difficult restructuring of positions within these hiring companies.  While politicians have often lamented this shrinking of the middle class, their attempts to solve the underlying problems have been inefficient or nonexistent.

Many employment problems have not yet been adequately addressed.  However, for a true economic recovery, government should do more to solve the big problems, and finally get people back to work.

 

Unemployment Data From Bureau of Labor Statistics – http://www.bls.gov/news.release/empsit.t15.htm/

Filed under Domestic, Economy
Aug 6, 2012

Argentina’s Inflationary Boogeyman

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In 2001, the world experienced its largest ever sovereign debt default. After a long, 2-year downward spiral, Argentina finally decided they could no longer afford to pay off their debt. Yet, after several years of recovery under Nestor Kirchner, and after his passing, Cristina Fernandez de Kirchner, Argentina has started to get back on its feet. Yet, recently the International Monetary Fund cut predicted growth in Argentina from 8.9% last year to 4.2%, a huge drop. Clearly, Argentina’s economy is beginning to suffer. Given that many were thinking Argentina might soon become an economic powerhouse and could rival Brazil if it continued its growth, this is a significant drop. And with it, many are wondering what is the boogeyman responsible for economic slowdown. Most signs point to inflation.

In a healthy economy, 4-6% inflation is good, it means the money supply is expanding fast enough that the economy as a whole can expand. Yet Argentina is dealing with inflation on a massive scale. Currently, inflation on the peso is at about 9.9%, something incredibly devastating for its economy. This high inflation is creating a number of ripples throughout the Argentinian economy. The most important is Argentina’s inability to establish a domestic market. While exports in any economy are good, a domestic market creates a stable economy, one which can continue its growth and development. However, in Argentina, because of their high inflation, Argentinian citizens have trouble buying goods, foreign or domestically produced. Their money is simply losing value at a rate that makes it almost impossible for Argentinians to truly consume. Additionally, Fernandez is doing nothing to alleviate this. Fernandez has continually levied barriers to trade in Argentina in an attempt to make Argentinian goods more competitive on the domestic market. This has had some positive benefits, as many corporations, which already invested in Argentina, have built factories and tried to produce more goods in Argentina. Yet, in doing so, Fernandez has also made goods more expensive, simply because there is less competition on the market.

But poor policy does not stop there. Recently, Argentina passed legislation which expands powers of the central bank. Yet the expansion of these powers is primarily to help fund the treasury, which is greatly in debt. But in funding the treasury’s debt, the central bank is also pumping even more money into the economy, thus creating even more inflation. Because of poor policy choices, coupled with already high inflation, a domestic market in Argentina has greatly suffered and has therefore stagnated its economy.

Clearly, Argentina is in a bad position economically. High inflation destroys the possibility of establishing a solid domestic market. And because the rest of the world economy is still trying to recover, with even leading developing nations beginning to slow, Argentina cannot depend on any one else to buy Argentinian goods and revive its economy. In order to continue Argentina’s path toward an established economy, Fernandez must stop making the kinds of monetary and trade decisions she has, and tackle the issue of inflation. Tackling the inflationary boogeyman is the only way that Argentina can ensure not to head down the same path as in 2001.

Filed under Economy, International
Aug 2, 2012

Keeping Afghanistan Stable, After NATO

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After ten years, billions of dollars and around two thousand lives have been spent on the Iraq war, NATO forces plan to leave the country by the end of 2014.  It is imperative that the U.S. and other NATO countries, even without troops on the ground, provide some assistance to Afghanistan in order to continue combating terrorism within the country.  Mutual fears of a Taliban resurgence necessitate both goodwill and cooperation.

Perhaps the largest problem Afghanistan faces after the NATO withdrawal is economic.  Nearly the entirety of the nation’s economy is built on providing goods and services for foreign soldiers.  With the imminent removal of these soldiers, many have begun to fear the destabilization that would come from severe economic setbacks.  To combat this, a group of countries, including the United States, have pledged $16 billion in aid over 4 years.

Unfortunately, aid is not a permanent solution for supporting and maintaining a healthy economy.  The United States has already expressed support for Afghanistan to develop strong trading ties.  By trying to stimulate trade, the United States is working to prevent an economic collapse that could weaken the government and strengthen the Taliban.  With hope, this move will help establish a healthy economy for a more stable Afghanistan.

But war is not only fought on the economic front.  The Afghan army has received criticisms for being corrupt and ineffective against the Taliban.  Without NATO troops, however, the Afghan army is entrusted with unilaterally combating the Taliban’s insurgency.  To provide some assistance, U.S. support may still be needed.

Even though American troops will soon be leaving, the U.S. has demonstrated its continued support by declaring Afghanistan to be a major non-NATO ally.  It seems likely for the U.S. to strengthen their words with actions by continuing to train Afghan soldiers even after the 2014 deadline.  This way, even though America would be forced to use their military as a consultant, it would combat any attempts by the Taliban to increase their control at the expense of the Afghan forces.  Simply put, America’s duty to combat terrorism does not end after 2014.

America must also avoid the trap of considering Afghanistan while forgetting Pakistan.  Since the two countries share a border that is often used by terrorists as a refuge, any discussion of terrorism in Afghanistan should also bring Pakistan into the picture.  Even though U.S. relations with Pakistan were tense for the first half of 2012, the recent deal to reopen supply lines demonstrates a push for detente by both nations.  A deeper alliance with Pakistan could help Afghanistan better combat terrorism.  And while past relations between the two countries may lead to doubts about such an alliance, United States interests would be well served by looking for better cooperation between Afghan and Pakistani governments.  The U.S. may need to proceed cautiously at first, but it seems likely that some push for this will occur.  After many Middle Eastern stumbles, the U.S. should know to focus on regional trends and not just the struggles of individual countries.

In order to successfully prevent a Taliban resurgence after the Afghan pullout, the U.S. must continue cooperation.  Leaving Afghanistan to fend for itself is not sound foreign policy.  The country is, at present, too weak to be trusted with the full prevention of terrorism within its borders.  However, America is setting up a policy of teamwork that will hopefully provide stability, even after 2014.

Filed under International
Jul 24, 2012

Bush Tax Cut Extensions: Round Two

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Back in 2010, Republicans and Democrats battled over the extent to which the Bush Tax Cuts needed to be extended.  Democrats were in favor of extending the cuts, but only for income under $250,000.  They argued that Americans making over $250,000 did not need the tax break.  Republicans, on the other hand, felt that it was unfair to raise taxes on anyone in a poor economy, and that doing so would hurt growth.

Democratic hopes quickly faded after they came up short of the 60 votes needed to break a Republican filibuster in the Senate.  Just weeks before the cuts were due to expire and still without an extension, lawmakers were afraid that nothing would be done and no extension would occur.  Fearing voter anger that would come along with a tax hike, enough bipartisan support emerged for the Republican plan, allowing it to be passed and eventually signed by President Obama.

The current problem?  The extension agreed to in 2010 was only for two years, meaning the tax cuts are set to expire at the end of 2012.  Obama has recently voiced support for the original Democratic plan, saying that the extension should continue only for incomes under $250,000.  G.O.P presidential candidate Romney, on the other hand, wants to extend the cuts for all income levels.

It sounds like the same battle as before, but one key component of the debate has changed: timing.  Since the cuts will not expire until after the election, Obama has the advantage of making tax policy an issue leading up to the election while not having to make any controversial decisions until afterwards.  And even if Romney wins, Obama will still hold office until January 20th, which is 20 days after the cuts expire.  Win or lose, Obama will have the last say on the cuts.

Politically, this puts Obama in a better situation than before.  Back in 2010 and after the Republicans effectively killed the Democratic plan, Obama had two options.  The first was backing the Republican plan and allowing an extension he only partially agreed with.  The second was creating a stalemate that could potentially result in an across-the-board tax increase.  Obama avoided the latter because it was politically dangerous.  After the election, whether he wins or loses, Obama will not have to worry as much about voter retaliation and will likely not give in to the opposition as easily.

Still, Obama failed to pass the Democratic plan in 2010 when Democrats controlled both houses.  This time around, Republicans control the House of Representatives.  Since the Constitution mandates that “all bills for raising Revenue shall originate in the House of Representatives”, Republicans will have significant control over any bill that is proposed.

Obama will be in a more powerful position to deal with this controversial issue after the election.   However, the Republicans will have a more profound say on any proposed tax bill than they did in 2010, when they controlled neither house and had to use filibuster power to prevent Obama’s proposal from passing.  Both sides are stronger, meaning the nation should be ready for a more hard-fought and deeper discussion over the extensions when compared to 2010.  American voters shouldn’t expect this issue to disappear anytime soon, as a long political battle seems sure to come.

 

Jul 10, 2012

Opinion: Multiple Paths and Apparent Paradoxes

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German Chancellor Angela Merkel has advocated the use of cost-cutting austerity measures to solve economic woes in countries like Greece.  The measures, she argues, will create more fiscally prudent countries.  French President Francois Hollande has been a vocal critic of Angela Merkel’s policies.  Instead, he wants to use additional government spending to stimulate troubled economies, allowing Europe to grow out of its problems.

Germany wants governments to save.  France wants them to spend.  While embracing both philosophies simultaneously creates an apparent paradox, Europe has committed to both austerity and stimulus in combating the debt crisis.

Critics abound, arguing that austerity will undermine attempts at stimulus and vice-versa.  Instead of two different plans muddling the way forward for troubled countries, these critics believe a direct solution will provide a more feasible route to economic security.

By railing against the complexity of the currently proposed solutions, thees critics demonstrate their own lack of foresight.  If Europe’s problems only required a simple solution, the problem would already be solved.  In reality, the debt crisis is a complicated problem that will likely require a multi-faceted solution.  Suggesting a solution is invalid because of its complexity is a flawed argument.

Critics may still latch to the fact that as an apparent paradox, the two-pronged solution to the debt crisis is doomed to failure.  But this argument is, once again, too simple.  Upon further inspection, a solution to what is only a surface-level paradox can be discovered.  Austerity and stimulus can coexist because they can be applied to different sectors of the economy.  Beleaguered sectors such as banking and finance may need extra capital, but that does not ruin attempts at austerity.

Bickering and disagreements lead to polarization, and polarization usually translates to a one-sided approach when dealing with large-scale affairs. Europe can not afford to let that happen.  If a mixture of austerity and stimulus sounds like a feasible plan to help save beleaguered nations within the Eurozone, then this plan should not be criticized based on faulty logic.

Jun 27, 2012

The Export Buffer: Why the Chinese and Indian Economies Have Slowed

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In the past few months, the inevitable happened. After the economies of China and India had mostly survived the recession, new numbers came out and both economies have slowed down. Considered to be the two largest developing economies, China and India were expected to be the two big economic engines to pull us out of the worldwide economic slump. However now it is clear that with Chinese growth in the first quarter of this year down and Indian growth over the past year down, things are not looking up for these two developing countries. So why has this economic downturn took so long to hit India and China?

It is my thesis that this delay is caused primarily by a sort of “export buffer.” China is the world’s largest exporter of goods, and India is arguably the largest exporter of services. China’s economy is entirely dependent on exporting cheap goods. Because of cheap, readily available labor, China is able to produce goods cheaper and quicker than anyone else. What this means is that when the world took an economic downturn, we still needed to buy our goods somewhere. And because they were cheaper, though lower quality, in China, the world bought more goods from China. In turn, China solidified a position as an economic player and as he world’s largest exporter of goods. This allowed China to continue to grow and create more and more goods. However, now China has reached a saturation point. Enough of the goods that we all have come from China, and the amount of goods we are buying has remained fairly steady. In fact, as many people are suffering from “recession fatigue” we have habitually become more frugal. This means that Chinese growth is starting to slow because most of our purchasing is already transferred to China.

The same idea can be applied to India, except mainly with services. Despite the fact that most of the work force is in agriculture, the primary economic mover is in services. And many of these services are exported. One of the primary service industries in India is the information technology services industry. Making up much of our customer support these days, India has capitalized on the large educated, English-speaking population. But again, a saturation point has been reached. We have already outsourced many of our information technology services, leaving little more that can be outsourced. This has left India with a slowed economic growth and arguably its biggest economic problem: poverty. In the past decade, many people have been able to move out of poverty and find work in services, therein stimulating the economy. But with an unemployment rate near 10% and and over 20% of the population below the poverty line, India has run out of international sources of economic stimulation and has a population which cannot afford to provide a domestic boost. And with rampant government corruption interfering with getting aid to the destitute, it does not appear as if more people will come out of poverty anytime soon. This leaves Indian growth slowing, with no international help and no domestic help.

India and China clearly demonstrate the validity of this “export buffer.” Economic catastrophe has a delayed reach to countries which can cheaply export goods and services. So while India and China long looked as if they would be the drivers to get the rest of the world out of its economic doldrums, alas it is clear that the recession has hit them at long last. To be clear though, China and India are still growing at a very fast rate, but it seems as if this growth will slow. With the situation in the Eurozone getting worse and worse and our own domestic situation worsening, the decline of growth in China and India is potentially detrimental to the world economy as a whole. At the advent of the recession, many predicted that with it, China and India would indisputably come out on top, and a new world economic order would be established. While this certainly still can happen, China and India will need to get their acts together in order to carry through. They both need to find a way to establish their domestic markets as economic drivers and both need to work out the issue of rampant poverty. If they can do so, and become planted as not just economies which can grow, but ones that can remain stable, then they will come out on top.

Filed under Economy, International
Jun 26, 2012

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