Raising the Roof
Americans have a fairly good understanding of debt since most of us have incurred some during our lifetimes. When it comes to the National Debt, however, our knowledge about what it is and what it means is a bit less clear.
On a personal level, when we reach our debt limit, we usually quit spending. The US government does not operate quite so simply. When the nation’s expenditures reach a predetermined debt level or ceiling, our lawmakers just authorize the spending of more money.
This approach is not novel or new. Like the slogan often used to denote approaches to certain matters, “It’s the American way.” The statutory limit on the national debt started in 1917 with the passage of the Second Liberty Bond Act during World War I. During World War II, a period of notable deficit spending by the standards of the day, the amount was approximately $300 billion. Since then, Congress has altered the limit on federal debt some 70 times, usually upward, but there have been a few occasions when the amount was actually lowered.
National debt is divided into two areas: that held by the public and funds in intragovernmental holdings. The “public” is primarily individuals, corporations, state or local governments, and foreign governments. Of our current outstanding national debt, some 63.92% is in this category.
Most of the remainder is held by government trust funds, as well as revolving and special funds, and Federal Financing Bank (FFB) securities. The FFB was established in 1973 as a financing agent designed to consolidate and reduce the cost of federal borrowing.
The US has incurred debt since its founding. In the first annual report in 1791, the US owed about $75.46 million. Except for a brief time during President Andrew Jackson’s administration when it dropped to zero, the debt has been growing. The amount of the nation’s total gross domestic product represented by the debt has also been expanding through the years. Currently, it is the second highest in the nation’s history after the indebtedness caused by the massive expenditures caused by World War II.
In 1988, foreign governments held about 13% of our nation’s debt. By 2007, the amount had escalated to approximately 25%. As of September 2009, the US owed mainland China some $798.9 billion and was in debt to Japan by about $751.5 billion.
A recent Treasury Department calculation of the national debt indicated the government is practically overdrawn. A debt ceiling of $12.104 trillion was authorized in February 2009 by the American Recovery and Reinvestment Act, but expenditures now total nearly $12.135 trillion. Fortunately, the government has a bit of breathing room, somewhat akin to a personal bank account with an authorized limit for approving checks when funds are insufficient. The government’s overdraft limit is in the range of $150 billion, give or take a few billion. This procedure permits operations to continue at least temporarily. (All of this brouhaha is a convenient fiction in that the total debt including unfunded mandates and “off the books” items is several times larger than these numbers.)
This situation has caused a recent flurry in the halls of Congress and increased interest in legislation designed to raise the debt ceiling. Though the expenditures that created these circumstances were considered necessary by elected officials, recent surveys show that Americans are increasingly voicing their displeasure with seemingly unfettered government spending.
Those concerns were certainly evident last week. Many members of the House hoped to increase the debt ceiling by $1.8 trillion, but settled for a bump of just $290 billion because of so much opposition. The bill, which was approved by just four votes, has been sent to the Senate where it is expected to receive quick approval.
The hike, the fourth in the past two years, pushes the statutory debt limit to approximately $12.394 trillion, an amount that is expected to be eclipsed within the next few weeks and will, therefore, require Congress to reconsider the matter shortly after the Christmas recess, especially since the administration is predicting the nation will run a $1.5 trillion deficit next year. There has been a longstanding tradition that, because the bill has to pass, the minority party has always required the majority party to be the group to vote for the increases, then those in the minority can later campaign against them for it. They often waited until the last second and occasionally even “shut down” the government for a few hours. What was once pretty much a good-natured practice has become increasingly intense and contentious in the era of massive stimulus and bailout programs, TEA parties, and talk radio.
Throughout most of its existence, the US has been able to keep the amount of federal debt significantly below the country’s capacity to borrow. That pattern is unlikely to change in the foreseeable future. Higher deficits and the resulting debt service certainly limit flexibility in short-term decision making, as funds have to be allocated for interest payments rather than other priorities.
Interestingly, the credit-rating firm Moody’s has given a warning to the US (and Britain) that the nation’s fiscal house needs to be put in order to avoid questions about how long it can maintain its top credit rating (it’s a shame they weren’t so vigilant on exotic mortgage securities). As a practical matter, however, US government bonds remain the world’s security of choice in difficult financial times. Recall that interest rates of US debt fell dramatically around the world even as the reality of trillion dollar deficits became known.
In any case, our fearless leaders will continue to engage in the periodic and increasingly entertaining exercise of raising the ceiling to accommodate the growing debt and enable the nation to meet its ongoing obligations.
posted @ 07:56 AM CST [link]
Friday, December 18, 2009
A Special Impact
Paul Samuelson was 94 when he died early this week, and he touched almost all of our lives to some degree. Yet very few people knew of him (unless you happened to take your first economics course from his introductory textbook) or were aware of the way his ideas helped shaped national economic policy. He was a great theorist, a groundbreaking economist, and a keen observer of the real world. On a personal level, he was quite influential in my early studies of mathematics and economics, and I am saddened by his death. He was a somewhat quiet man, but I was the one who was speechless the first time I met him. His nephew, Larry Summers, is the head of the National Economic Council.
His contributions were multitudinous and varied and earned him the Nobel Memorial Prize in Economic Science in 1970, the first American to be so honored. He was specifically showcased because of his efforts to integrate mathematical analysis into economics, but that is but the tip of the iceberg of his accomplishments.
Born in Gary, Indiana, in May 1915, Paul Samuelson graduated from the University of Chicago in 1935. His interest in economics stemmed from a classroom lecture in 1932 that discussed the burgeoning concept relating to the utilization of mathematics in economics, both in theory and statistics. From that moment on, his future was mapped out with economics as the underlying force of his life.
US presidents since John F. Kennedy sought his advice, and his columns in Newsweek from 1966 to 1981 played a key role in shaping professional and popular attitudes toward economics. In 1996, President Clinton presented him the National Medal of Science, the nation’s top science award.
He also was an active consultant to numerous members of Congress, the Federal Reserve Board, the US Treasury, and a host of international organizations.
As noted, perhaps his most lasting accomplishment was the textbook, Economics, An Introductory Analysis, which he compiled from his lectures at the Massachusetts Institute of Technology (MIT) where he became a faculty member in 1940. Published in 1948, it is now in its 19th edition and has been translated into 40 languages. It has sold more than four million copies.
The best-selling book exposed students around the world to the ideas of British economist John Maynard Keynes, which promoted government intervention as a sometimes necessary way to stimulate an economy. In the current economic downturn, most industrialized nations are using Keynesian economics to some degree to solve their financial situations. (By the way, in his latest writings, he predicted the full global recovery from the recession would probably not occur before 2012.)
If you ever took Economics 101, there’s a good chance you used the book in class (or your professor used it in preparation), and practically every serious student of economics still has the book on his/her bookshelves. The volume has a special place in my library, and although I purchased it during my undergraduate studies, I still refer to it occasionally.
His 45 years at MIT enabled that school’s economics department to become a powerhouse and recognized around the world. During that period, he also became a world-renowned figure because of his unique ability to synthesize and provide coherency of varying economic views. Though he retired in 1985, he continued to be active in economic circles and frequently shared his views at national conferences.
While a Keynesian at heart, Samuelson recognized the value and practicality of other approaches. To give you some idea of his influence in the arcane academic world that most of you are spared, his first major book (based on his dissertation at Harvard) was called, simply, The Foundations of Economic Analysis. To the generations of economists who came after, it truly was. He gave us a mathematically rigorous, yet conceptually practical, framework for analysis. He was the one who integrated Keynesian theory with traditional approaches. He suggested the relevance of thermodynamics to economics in the 1940s, which has been a key factor in much of our work in recent years. He also taught us much about international trade, how to measure consumer behavior, how intergenerational factors can lead to the success (or failure) of a social security system, and why we tend to accelerate out of economic recessions. He was at times controversial. He and his good friend, Milton Friedman, clashed often on policy issues. But no one ever doubted his intellectual prowess or his pathbreaking contributions.
Believe me, I could go on and on about the myriad contributions he made to the field of economics over the past 70 or so years, but suffice it to say that, truly, he left his mark on all of us. Whether you recognized his name or not, he has impacted you, and you (as I) will miss him.
posted @ 08:10 AM CST [link]
Friday, December 11, 2009
Climate Change Conference
The eyes of the world are currently focused on Copenhagen, where representatives from over 100 nations are participating in the United Nations Climate Change Conference. This event marks the 15th such gathering over the past several years, and the one with unquestionably the most ambitious and far-reaching objectives.
Although the conclusions and agreements are still being negotiated (much was likely completed in the “meetings before the meeting”), the Danish capital is already benefiting from the influx of the more than 15,000 delegates and 5,000 journalists for the 12-day event. Hotels, restaurants, and various modes of transportation are bursting at the seams. The local airport has been so inundated by aircraft that the majority of the visiting planes were required to fly to regional airports across the country, as well as to Sweden, to park.
Two years ago, some 192 countries signed a mandate that made the Denmark meeting the turning point in the campaign to resolve global warming. At that time, the United Nations Intergovernmental Panel on Climate Change was unequivocally convinced that the globe was warming and that human activity was to blame for a vast majority of it.
Since then, numerous nations have considered emission targets. The most notable has been the US, which President Obama touts will incrementally reduce carbon levels so that by 2030 the nation’s emissions will be approximately 32% below the 1990 level. The Environmental Protection Agency is presently announcing significant plans for regulation, a move which could escalate the stakes in the upcoming congressional efforts. While this objective is laudable and reducing various emissions is important, some of the goals of current initiatives are unrealistic in light of known technologies and the practical realities of available fuel supplies and costs.
Recent revelations about possible improper behavior by some scientists and organizations has somewhat reduced the trust and confidence in the data being used to support the goals. Calls for investigations are being heard from various organizations and nations. While these allegations may or may not ultimately impact the validity of prior scientific evidence, they will affect the momentum of the policy process.
The Kyoto Protocol (which the US did not sign) instituted programs designed to prevent climate changes and global warming, but is scheduled to expire in 2012. Most major governments around the world believe there is a need to produce a new protocol intended to cut the emissions of greenhouse gases, as evidenced by the participation of about 110 heads of state in Copenhagen. A quest for something both meaningful and rationally feasible, however, may not be easy to achieve.
Apart from technology limitations, perhaps the foremost consideration is how much reducing carbon emissions will cost and who will pay for it. Poorer nations blame the industrialized countries for most of it, and therefore believe the burden of the expense should be borne by those who have profited the most. Deciding just how much “rich” nations should provide relative to their less fortunate neighbors is certainly going to be a sticky subject.
Perhaps an even more serious matter focuses on China, the world’s biggest emitter of greenhouse gases. Ongoing discussions between US and China officials may provide some insight and information that conference delegates can use for guidance in their deliberations.
Of course, the ultimate involvement of the US in whatever decision is reached more than likely hinges on congressional action, particularly the ratification of any major agreement that might surface in 2012. Certainly, most countries will be looking at which way the wind is blowing in the US before deciding on any key policies regarding their own emissions.
Many informed observers and participants do agree that the conference will at least produce an interim statement of intent and that it will be one most nations will willingly climb aboard. One question hovering over the proceedings relates to the amount of impact the controversy brought to light by previously unknown e-mails will make on deliberations. Another question pertains to how seriously world powers will take any accord that might limit their own economic opportunities.
Clearly, some mechanisms to reduce emissions which have been proposed involve substantial economic costs. At a time when nations around the world are just beginning to emerge from severe recessions, the pressure to carefully weigh economic harms will be high. This caution, together with growing doubts as to our true understanding of the nature of climate change given the ongoing scandals over data use, will make any substantive agreement even more difficult.
Whatever the outcome regarding the alleged chicanery, we need to work toward reduced emissions. On the other hand, it is equally imperative that we recognize technological and economic realties and not see binding standards that cannot be achieved without severe disruptions in economic activity. While impressive (but currently expensive) strides have been made in renewable approaches, it remains highly likely that the world’s energy supply will be hydrocarbon-based for quite some time. To the extent the Copenhagen conference leads to fruitful and meaningful dialog within this framework, it will be a notable success. If it leads in a direction of compelling the implementation of untested and uncertain approaches to strive toward unrealistic goals, it will be a setback to a productive solution. This issue will not be resolved this time, but it is likely that the tone and framework of the next round of discussions will be established.
posted @ 08:15 AM CST [link]
Friday, December 4, 2009
Christmas Shopping Prospects
The slumping economy in 2008 significantly dampened retail Christmas sales, which tallied about $245 billion, some 2.8% less than the previous year. With the economy on the mend, sales may be a bit better this time around.
Although the traditional starting date for holiday shopping is the Thanksgiving weekend, many people have been taking advantage of whatever bargains they have encountered over the past few months. Most shoppers begin serious browsing in October and start opening their wallets in early November.
Holiday sales, generally defined as purchases made in November and December, represent 25% to 30% of total yearly revenues for most retailers. The weekend that begins with Black Friday generates about 10% of holiday sales, with the weekend prior to Christmas accounting for some 30%.
While bad weather kept many shoppers home last weekend, expenditures and traffic totals were still up over 2008. For the first official 2009 Christmas shopping weekend (Thanksgiving through Sunday), spending amounted to around $41.2 billion, an increase of 0.5% above last year. During this period, a total of approximately 195 million people either visited stores or searched for their desired items online, an increase of 23 million over this timeframe last year. Also, gift cards may be on the way back as almost eight out of every ten people are planning to give them.
Although many retailers were hoping for more, the amount does indicate that American shoppers are becoming more willing to spend. With consumer spending typically responsible for some 70% of the economy, that is certainly a move in the right direction.
Another direction apparent in consumers’ shopping patterns is the drift toward thrift. Employment challenges are likely contributing to a drop in per person spending, which was down more than 8.0% from $373.00 last year to $343.00. Less expensive items were also highly favored by shoppers last weekend.
Bargains now seem to be the name of the game and retailers are resorting to myriad discounts to lure buyers. Early morning door-buster sales were a popular feature of the Thanksgiving weekend, and there are signs that the discount approach may become the blueprint for the future. Shoppers accustomed to reduced prices may become more hesitant in the future to pay full price. In fact, some analysts suggest that about 86% of consumers may refrain from making purchases unless tempted with a discount, and that a quarter of shoppers may demand steep price reductions before opening their wallets.
Yet another distinct and growing pattern is shopping via the Internet. Online retailers reported an 11% jump on Black Friday, and on Cyber Monday, the e-retailers’ version of Black Friday, sales were estimated to have risen by 14% over 2008. Additionally, e-shoppers typically bought 30% more items per order compared to last year. Moreover, consumers who plan to expend at least 30% of their holiday shopping budgets online are expected to buy twice as much as individuals who purchase primarily in brick-and-mortar sites.
According to Akamai, an Internet monitoring firm, an average of about 4.2 million consumers across North America visited shopping Web sites per minute on Monday. The National Retail Federation estimated that 96.5 million Americans anticipated shopping online that day compared with 85 million on Cyber Monday 2008.
Although it is difficult to predict the total dollars to be spent during the 2009 holiday, indications are that people are currently much more willing to fill their shopping carts, whether physical or virtual, compared to this time last year. A clearer picture will soon emerge as 69% of consumers say they plan to make the bulk of their purchases by December 7.
Fortunately, for busy folks and procrastinators (or worse, busy procrastinators) there are still three weeks before we have to make our final choices.
posted @ 08:11 AM CST [link]