Content Tagged: economic

Senator Demint Writes about U.S. Role in Global Economy

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December 9, 2011

Jim Demint, writing for The Wall Street Journal, recently posted an opinion article discussing the current debt crisis in Europe and America’s involvement in helping them solve the problem. According to Demint, America has spent billions of taxpayers’ dollars in order to pull countries out of their debt. For example, nearly $40 billion was sent by America to the International Monetary Fund (IMF) to prevent Greece from fiscally collapsing. This move, however, “only delayed” the economic fallout from occurring. In Demint’s opinion, the United States must not focus on bailing out European countries from their outstanding debts, but look to solve the problems at home: “The most dangerous threat to the U.S. economy is not across the pond. It’s in the swampland of Washington, D.C.”

Demint states that the United States is near its fiscal tipping point. Other countries like Ireland and Portugal were bailed out when their debt-to-GDP ratios were much lower than what the United States is currently experiencing (74% and 94% respectively). With the raising of the debt ceiling in August, the United States now faces the predicament of having a 100% debt-to-GDP ratio. According to Demint, President Obama has built his political policies around European foundations, but if “the U.S. continues to mimic our European allies we’ll fall to pieces, too.”

As more European countries are reaching their fiscal tipping point, certain countries in the European Union (EU) are demanding stricter laws in order for bailouts to occur. However, the United States contributes the largest percentage to the IMF, yet has no voice in the EU. The United States has sent nearly $67 billion to the IMF this year according to Demint. In Demint’s opinion, America must end its era of sending billions of taxpayer’s money to the IMF and must focus on the economy at home. According to the article:

 

Members of the Obama administration must focus all of their efforts on strengthening the U.S. economy and balancing our budget, rather than on continuing to borrow from China to pay for Europe’s out-of-control debts.

Teachers can use this article to discuss the current financial crisis European countries are facing and how they are impacting the United States’ economy. Should the United States get involved in providing funds to help the debts of other countries? How does Europe influence the United States federal deficit? Do you agree with Demint’s opinion? Why or why not?

Teachers could also use this article to discuss perspective/bias within the piece. In what was does Demint express his political views? What are his goals and how does he present them? What might be some counterpoints to his arguments? How do his arguments address the issue of the deficit? These discussions could help students better understand the fiscal issues in Europe, how those issues influence the United States and the deficit, and the perspectives/biases found within media outlets.

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The Atlantic’s Guide to the U.S. Debt Crisis: Part 1 of 3

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December 6, 2011

In less than a year, citizens of this country will vote for the next President of the United States.  While there are many issues that this country faces, no issue is larger than the national debt.  Literally.  With these two ideas in mind, Charles Davi, writing for the Atlantic, created a “Glossary and Guide to the Key Issues in 2012” pertaining to the U.S. debt crisis.

In this guide, Davi has provided a number of terms and explanations that often come up in discussions and debates on this country’s economic future.  The upcoming Presidential debates only will magnify the amount the debt crisis will come up in the news.  Below, I have provided a summary of the main points of the first half of his glossary and guide.  I will cover the rest of his glossary over the next two weeks:

The Budget

In this section, Davi first explains how the United States budget works, a yearly undertaking around the beginning of every calendar year.  First, the President creates a budget plan and submits it to Congress. Congress then debates (and frequently modifies or changes) the plan and sends it back to the President once the plan has passed through both chambers of Congress.  The President then has the power to sign or veto it.

Davi then explains how the U.S. Treasury works and defines the terms “appropriations” and “outlays.” The main idea he emphasizes is that while Congress and the President create the budget, the Treasury enacts it by borrowing, spending, and collecting money.  After, he provides a comprehensive explanation for the government’s yearly cash flow – whether the government is running a deficit or a surplus in a given year and why that happens according to basic economics theory.

The explanations begin to get more complicated when Davi describes the way in which the government borrows money in order to spend beyond what it collects.  He explains that when the government plans to spend more than it has, it borrows money from the public by issuing debt securities, most of which are treasuries.  With this point, Davi provides a graphic definitely worth including in any lesson on this point in order to differentiate for visual learners.

These treasuries, whose aggregate value roughly equals the Government’s budget deficit for that year, are then sold through auctions conducted by the Treasury and the Federal Reserve Bank of New York.  Rather than bidding their cost, however, investors bid through interest rates – whoever bids the lowest owns the treasury.  The cost of these treasuries for the Government (which is the interest paid on each treasury) thus depends on how competitive the bids are.

From here, Davi now has a comprehensive explanation for the national debt: an aggregate of all of the money the government spends beyond what it collects.  The debt, unlike the deficit, is not calculated yearly. Rather, it is a sum of every year’s deficit.  Davi provides another graphic to demonstrate this idea, which again gives teachers an opportunity to differentiate instruction on this point.

Bringing this Article into Your Classroom

This article provides a comprehensive explanation for how the government’s budget works.  One math and economics activity you could do with students is to create a fictional country for which the students will need to create a budget.  Give them a fixed amount of money to spend as well as fixed amount they may collect from taxpayers (an amount much less than the money they must spend).  Give them a list of things on which they must spend (health care, defense, education, etc.), so that they may decide what percent of the budget will go to which sector.

Then ask them to finance their budget. Will they issue treasuries? How will they do that? Are there any other ways to collect money?

An alternative to this activity if your classroom has access to computers for the students is to play the game Budget Hero.  This game gives students the opportunity to determine on which sectors the government should spend money, and how much.

As a follow-up and an introduction to the second half of the article, ask the students what they would do if, on top of the budget deficit they are facing, they also have debt from the previous year’s treasuries. How will they pay back those treasuries with their interest?

Next week’s post will discuss the national debt in more depth, including what it means for the Government to refinance its treasuries each year, on what the Government is spending, and where Davi thinks the country is heading.

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Economic Theory in the Real World

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December 27, 2010

Robert Shiller, professor of economics and finance at Yale, recently wrote an article in the New York Times discussing the possibility of stimulating the economy without adding to the national debt.  Citing the “balanced-budget multiplier theorem,” Shiller argues that “national income is raised, dollar for dollar, with any increase in government expenditure on goods and services that is matched by a tax increase.”  From the article:

The reasoning is very simple: On average, people’s pretax incomes rise because of the business directly generated by the new government expenditures. If the income increase is equal to the tax increase, people have the same disposable income before and after. So there is no reason for people, taken as a group, to change their economic behavior. But the national income has increased by the amount of government expenditure, and job opportunities have increased in proportion.

Shiller notes, however, that the “balanced-budget theorem is only as good as its assumptions.”  In particular, he points out that if consumption is reduced because of citizens’ negative reactions to tax increases, the desired effect of economic stimulus may not occur.  Additionally, citizens may not be willing to accept the fact that while the benefits go to those who are unemployed, those who are working that pay the costs.  That said, Shiller contends that “it would be a mistake to consider the present atmosphere unchangeable” and that “voters are like to accept higher taxes eventually, as the they have done repeatedly in the past.”


Image: David G. Klein

Teachers could use this article to demonstrate that something ostensibly academic and theoretical like the “balanced-budget multiplier theorem” has visible implications in the real world.  Students could be encouraged to look for other examples of economic theory that underlies opinions about the federal budget deficit and national debt.  As students find these examples, they could create posters noting which politicians support different theories (even though the politicians may not specifically reference the theories by name).  This activity would help students better appreciate the link between economic theory and real-world application concerning the reduction of the deficit and debt.

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Congressional Budget Office

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The Congressional Budget Office’s mandate is to provide the Congress with objective, nonpartisan, and timely analyses to aid in economic and budgetary decisions on the wide array of programs covered by the federal budget.  It also provides the information and estimates required for the Congressional budget process. (From About CBO)

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American Enterprise Institute for Public Policy Research

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From the AEI Research Area on Economic Policy Studies:  “Understanding the functioning of free economies–how to preserve them, how to solve the problems that arise in them, and how to capitalize on their strengths–is one of AEI’s primary goals. This section of the website is home to AEI research, books, and events focused on the basic facts and underlying trends that define the outlook for the U.S. and global economies.”

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Council for Economic Education

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The Council for Economic Education offers comprehensive K-12 economic and personal finance education programs, and envisions a world where people are empowered through economic and financial literacy and make informed and responsible choices in their daily lives.

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