Fiscal Cliff

Obama fired the opening shot of the battle of the fiscal cliff by calling for more revenue increases than were included in the failed summer compromise. Perhaps the best spin on this strident approach is that Obama is giving the Republicans a way to save face and accept the summer compromise.

If Democrats and Republicans cannot reach agreement by January 1rst or shortly thereafter,  GDP will be 5% lower than it otherwise would have been over the next 12 months. Considering that the U.S. only grew by 2% last year, this implies a significant recession.

Even if a plan is passed in the next month that bridges the fiscal cliff, the long term budget problem will not be solved.  To get a feel for the challenge try this budget game:
NY Times (11-13-2010) Budget Puzzle: You Fix the Budget



 Two favorite recent articles:
1. Philadelphia Inquirer (11-11-2012) "Fiscal cliff' poses risks of another recession by Joel L. Naroff
2. The Economist (11-10-2012) The budget deficit; To the cliff, and beyond; Barack Obama and the Republicans have precious little time to act

For my students:
1. Complete the NY Times game and discuss your solution.
2. As the situation evolves daily, discuss your ideal solution and your expectations of the actual outcome of the battle of the fiscal cliff.

QE3?

Questions for class:

1. Is QE3 (the third round of quantitative easing, i.e., the Fed printing $40 billion each month to buy mortgage backed securities) going to help the economy? If inflation returns, will the Fed be able to reverse it policies fast enough to soak up all the money it has injected into the economy?

2. Find another source to support your case.

For a good review of Fed basics (and changes in natural unemployment rate) watch this 40 min video:

Lecture at NY Fed's Symposium for College Professors (3-2012) by Robert Rich

The link to the slides for Robert Rich's lecture:
PowerPoint slides from Robert Rich's Fed lecture on Dual Mandate (3-2012)

Update on Global Income Inequality

16 min TED talk on income inequality across the world

This global map of the gini coefficient (thanks to  Wikipedia Commons) show that South Africa has greater income inequality than almost any other country in the world. The gini coefficient ranges between 0 and 1, and a higher number indicates more income inequality.



















The latest issue of The Economist features a special report on global income inequality. It includes a similar global map that show the changes in the gini coefficient in the past 20 years. This map reveals that Brazil has made great strides in reducing income inequality - primarily by focusing on improving education and implementing targeted transfer programs for the poor.  Brazil's Bolsa Familia program started in the 1990's and gives monthly payments to poor families if their children go to school. Several other countries in Latin America have created similar programs and have also lowered their income inequality.

The countries which have seen the largest increase in their income inequality in the last twenty years are: the United States, Nigeria, and China.

The Economist (10-13-2012) For richer, for poorer Growing inequality is one of the biggest social, economic and political challenges of our time. But it is not inevitable, says Zanny Minton Beddoes

If you follow links in the above article, you can read the other articles in The Economist's special report.

Questions for Students:
1. Which fact most surprised you?
2. What policies would you suggest to address this problem in the U.S. and in South Africa?

Update on South Africa

While South Africa has not been hit as hard by the financial crisis as its major trading partners in the EU, its expected annual GDP growth rate has been revised down to 2.5% for 2012. South Africa needs a growth rate closer to 7% to bring down its 25% unemployment rate.  Approximately half of its population still lives below the poverty line. According to estimates provided by the CIA World Factbook, South Africa has grown slower than all of it immediate neighbors:

                    2010 growth rate                2011 growth rate               2011 GDP/capita
Country           real GDP                             real GDP                      U.S. dollars PPP
Botswana           7.2%                                     4.6%                               $16,200
South Africa      2.9%                                     3.1%                                 11,100
Namibia             6.6%                                     3.6%                                  7,500
Mozambique      6.8%                                     7.1%                                  1,100
Zimbabwe          8.1%                                     9.3%                                     500

Concern over potential nationalization of mines may further discourage foreign direct investment (FDI).

For two good articles on the current state of Africa's largest economy read:

1.  The Economist (6-2-2012) South Africa: The gateway to Africa? South Africa’s business pre-eminence is being challenged


2. WSJ (7-24-2012) Growing Pains Strain South Africa: World Bank Cuts Outlook for Continent's Largest Economy, Citing Income Inequality, Jobless Rate, Commodity-Price Risks

Class, to prepare you for your trip to South Africa:
1. Why has growth in South Africa slowed?
2. What economic policies would you advise?