nationalization of bank

Tuesday, October 14, 2008 is a remarkable day. U.S. invested $259 billion to bolster bank industry. We an view it as a shift of economic power from Wall street to Washington. In fact, U.S. was not the first country who took this action, instead it was European countries that first took the step. I think this is typical crisis action in crisis time. Personally, I think it is a wise movement.

One of the important causes of this damaging crisis is the overestimation of self-correcting power of free markets. Strong government capital can effectively help banks to refinance debt and regain the ability of lending money to customers, esp. small business I think. Though government buying stock of banks goes against the small government or even capitalism, we shouldn't give up this method just because this. What the government need to do now is to take strong actions to stop the crisis from growing bigger and bigger, which is the priority. Also, quot Bold Action With Basis in History by Steve Lohr, "the package does call for the government investments to be in three-year securities that the banks can repay at any time, when markets settle and conditions improve." There is time limit for this government's investments.

Though not all the banks that received investments are in equal bad situation and are in need of government capital, to inject capitals into major banks at the same time enable government to make banks follow certain principal together for common good of the society.

Both candidates approved this action. For Obama, I cannot see any influence to his presidential campaign; while for McCain, bigger government can harm some of his republican voters emotionally.

The Future...do we still have a chance?

This year's budget deficit is really depressing. Growing budget deficits would result in increases in federal debt; consequently we would experience a slower economic growth and lower living standard. If current policies remain in place, in the next two years, budget deficit will exceed 3%GDP. The CBO's estimate for the cumulative deficit over the next 10 years is now $2.3 trillion.

On March 12, 2008, Congressional Budget Office released a Medicare funding warning which, by statute, is based on projections by the Medicare Trustees of when Medicare funding from general revenues(that is, spending not covered by dedicated sources, such as the Hospital Insurance payroll tax and Part B or Part D premiums) will exceed 45 percent. CBO estimates that,under S. 2662, the 45 percent threshold would first be crossed in fiscal year2014.

If the current trend continues, the fund is not sustainable for Social Security and Medicare program costs. As we approach 2011, which is the year the first wave of baby boomers reaches 65 and becomes eligible to Medicare(social security benefit is eligible at age 62), we can forecast a decline in surpluses of social security tax income over expenditures and turn into deficits. According to Trustees Report, "Growing annual deficits are projected to exhaust HI reserves in 2019 and Social Security reserves in 2041." Based on a poll "When do you plan to retire?" run by CNNMoney.com, 24% of people plan to retire around 65, 28% plan to retire as soon as humanly possible. Under current economic situation, the cost is growing way faster economy growth. This will lie huge burden on our generation. I don't want to be pessimistic, but if the government doesn't rearrange financing, the keep growing social insurance costs can lead to a bankrupt of the country.

When we begin to work after graduation, we may be faced with a very high social security tax rate, a more expensive Medicare plan, and a delayed retirement age and so do our parents.

Theory post

To cut federal deficit requires long-term effort. Besides improving domestic economic condition and carrying out all kinds of rescue plans, government will also work on cutting government expense. Expenditure on Iraq war can be reduced by retreating gradually and shifting responsibility back to local police force; spending on dealing Asian issues can be reduced by turning China a responsible stakeholder and enlisting Beijing's help; however, medicare and social security is pure consumption and cannot be cut. But there are ways to make relief the pressure on deficit.
1. Slightly raise the rate of social security and medicare taxes. Since we are going to face less working force supporting larger retirement population, each young people need to pay more in order to support more than one elder.
2. government should stop borrowing money from social security funds. This may sounds nonsense, but every year government does borrow money from itself. It should be that U.S. Treasury borrows the money from funds in short-term, and returns the money in several weeks, one month, etc. However, this is not always the case. As the first wave of baby boomers becomes eligible for social security early retirement benefits, government needs to accumulate funds to avoid future bankrupt, to take efforts to avoid a soar in following years' budget deficit.
3. Baby boomers are likely to delay their retirement ages. Though Obama's increase tax may not be a good reason for working longer, baby boomers' life expectation and the characteristic of being young mentally may drive them to work longer. According to GAO's research, the retirement security of boomers and others will likely depend more on individual savings and returns on such savings.
Also, if Obama's health care reform plan works well, the larger medicare program grows, the larger amount of money is to be saved. Hopefully, medicare and social security expense will have limit effect on the budget deficit.

Baby Boom of 1946-1964 vs. Deficit Pressure

"Young males returning to the United States, Canada, and Australia following tours of duty overseas during World War II began families, which brought about a significant number of new children into the world. This dramatic increase in the number of births from 1946 to 1964 (1947 to 1966 in Canada and 1946-1961 in Australia) is called the Baby Boom."

During baby boom, approximately 79 million baby were born and one can say that boomers represent the vast majority of work force in the United States. Correlated to the soar population, existing factories, stores, business, etc. were expanded; apartments, power system, water system and other government resources must be enlarged; urbanization and suburban development pace sped up. As stated in the article The Boomer Stats, "the huge growth in the economy since the 90s was due in no small part to 76 million of us working up to our peak earning and spending years." (This reminds me of the surplus during Clinton administration, maybe the deficit increments these years are not all due to the fail economy policy)

This year, however, the first wave of baby boomers are turning 62, which means they're eligible to Social Security retirement benefits. Though citizens are not eligible for Medicare until 65, new research from the National Association of Insurance Commissioners(NAIC) shows that many are confused about their post-retirement health insurance options assuming that Medicare coverage is available at age 62 too. Good news so far is that we don't need to deal with a huge growth in government expense on Medicare this year (hopefully this is the worst year and will not turn even worse). Bad news is that this will influence baby boomers retirement decision. Without noticing federal funds are not eligible for them, boomers choose to retire in their 62 and begin counting on the "kids" to pay for their social security. This will reduce the tax revenue and lead to a growth in budget deficit.

Since the financial crisis has shrunk their retirement funds, will the boomers be willing/forced to delay their retirement time? And will that help a little bit? What about reform?

The current situation is, quote Social Security, Medicare Panel Adjusts Forecast, "Social Security expenditures are expected to reach $594 billion this year. For Medicare, the figure is $438 billion. Over time, the programs are expected to consume a growing share of the federal budget. This year, about 7 percent of federal income tax revenue goes toward paying Social Security and Medicare benefits. The figure is projected to climb to more than 10 percent by 2012, and 26 percent by 2020, said economist Thomas R."

How does Medicare and War influence deficit?

As I mentioned in former post, the two candidates are deliberately trying to avoid the huge problem we are facing in deficit. It is understandable that they don’t want to threat their voters and there are indeed not much they can promise. Maybe some of you still remember what Bush promised during the 2004 presidential campaign. Bush promised to cut the deficit by half and consequently we can conclude that a promise on deficit is not that convincing. In fact, according to Congressional Budget Office, the federal government is going to run a deficit for the next ten years. They are expecting the deficit to become smaller in 2010 just because Bush’s tax cuts will expire on schedule. However, McCain wants to make the tax cuts permanent , while Obama says he’ll at least extend the cuts for middle-class taxpayers. Thus, we shouldn't put too much hope in increasing revenue to relieve the situation. With the passed bailout, no matter who win the election, the next president doesn’t have much money to spend in 2009 fiscal year.


Personally, I’m not too worry about the economy which influences the cyclical component of deficit since economy is always in cycle. As some Intellectuals point out, the biggest threat comes from expenditures on health care. Hence, I want to focus on the roles of health care and war play in future deficit. The large population of Baby Boomer born in 1946-1964, which used to bring market increased consumptions and work force, now brings a bomb of health care entitlements. Government has to spends large sum of money on social secure programs and Medicare. This piece of structural deficit will inevitably increase in the following fiscal year. As far as I’m concerned, maybe the government should seek expense cuts on the war which is estimated costing $11 billion per month.

By comparison between health care expense during Clinton administration and Bush administration, I want to explore how greatly did health care influenced government spends. What did we do financially to prepare for the bomb (which is quite predicable) and how can it relieve pressure on budget deficit. How much money can Obama/McCain’s plan on war can save that make the budget deficit available to deal the bomb.

References:
http://www.brookings.edu/opinions/2008/0525_deficit_rivlin.aspx
http://www.facingup.org/blog/scottbittle/2008/09/deficit-train-picks-steam
http://www.facingup.org/tags/federal-deficit
http://www.cbsnews.com/stories/2008/02/12/national/main3822385.shtml
http://www.foxnews.com/story/0,2933,392043,00.html
http://news.bbc.co.uk/2/hi/business/7529372.stm
http://www.pbs.org/newshour/bb/social_security/july-dec04/deficit_10-12.html#
Useful links:
http://www.economagic.com/em-cgi/data.exe/fedstl/fgdef
http://www.treasurydirect.gov/govt/govt.htm
http://www.oecdobserver.org/news/fullstory.php/aid/1896/US_current_account:_Dealing_with_the_deficit.html
http://www.oecd.org/home/0,2987,en_2649_201185_1_1_1_1_1,00.html
http://www.oecdobserver.org/

Unfamiliar with the deficit? Take a quick look!

---What is Deficit?
The annual federal budget deficit is the amount that our federal government borrows each year.
It's the difference between what the federal government spends and the revenue it receives during a particular year.

---Debt & Deficit
Dt is this year's debt; Dt-1 is last year's debt; Gt is government spending; Tt is tax revenue; r is the interest rate we need to pay for the existing debt;
Total deficit=Gt+rDt-1-Tt
Dt = (1 + r)Dt - 1 + Gt - Tt
=Dt-1+total deficit

---Structural vs. Cyclical Component of Deficit
Cyclical component is related to economics condition, driven by business cycle. When we are at the peak of business cycle, higher rate of employment generates higher tax revenue and our government spends less for unemployment compensates and other social programs, and vice versa.
Structural component is relative stable, for instance debt interest, expenditures on social security and national defense.

---Deficit & GDP
Typically, the deficit increases as a percent of GDP during business slumps

---fiscal year

Begins Oct 1, ends Sept. 30

---What's going on now?

$400 billion deficit for the 2008 fiscal year ending Sept. 30

The bailout increases the deficit by another $110 billion

Estimate for next year's deficit: $490 billion (in Feb. the extimate was still $407 billion)

---Our two candidates

later...(lol)

VP debate!

Palin did a much better job this time. She looked directly at the camera instead of Biden and this is definitely a better way to communicate with her important audience. However, she was trying to avoid the topics she didn't prepare for and kept on going back to the energy issue on which, you can tell from her eyes, she was very confident. When Biden pointed out Senator McCain supported deregulation, Palin responded by saying, I quote, "I'm not finished with the taxes"(well, not so sure if these are the exact words). And there are many other similar cases.

For Biden, I think he presented good management on the issues discussed. He shows his ability to assist Obama as a vice president. Also, I like the way he organized his arguments point by point. It's easier for me to follow and it sounds rational and clear.