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April 30, 2009

An explanation for oil prices

Few prices have moved around as much in recent years as oil prices, from a low of $10 a barrel a decade ago to a high of $150 a barrel just last year to, now, $50 a barrel. Oil prices have been on a roller coaster. Is there a simple explanation for these movements?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Of course, there are a lot of potential explanations floating around. Some say speculation. Some say the oil market is rigged. But as an economist, I look for economic explanations, and one of my colleagues, economist James Hamilton, has, I think, come up with a very concise view of what has happened in the oil market over the last decade. He said first of all that we had the tremendous run up in oil prices for a simple reason, we've had a big increase in demand, particularly from countries like China and India. And because oil supplies were not increasing at the same rate, you had to have an increase in price in order to get some people in the world - like you and me - to reduce our consumption. And because we aren't able to reduce our consumption very much in the short run, you had to have a big increase in price. Now, as far as the reduction in oil prices, he said again, it's a result of demand, this time a decrease in demand brought on by the worldwide recession. However, prices have not come down as far as they went up simply because now people don't need to have as big a drop in oil prices in order to expand their demand because in the long run our response to price change is greater as we have more time to adapt. So I think his point here is that it's really simple economics. You don't have to go far beyond Econ 101 to explain the big changes we've seen in oil prices."

Posted by Dave at 08:00 AM

April 29, 2009

Cautions on cutting back

An author recently listed how people could save thousands of dollars annually if they simply stopped using many modern gadgets that weren't available years ago. The author's point was, "Hey, we survived without these then. Why not now?" Does this advice sound too easy?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, I would argue it is. I think, obviously, there are a lot of modern gadgets that we now have that we didn't have 20 or 30 years ago. But 20 of 30 years ago there were a lot of things that we had then that previous generations didn't have. So it's just a fact of life that we continue to improve our standard of living over time. I think before I went ahead and took this advice at face value - things like getting rid of your cell phone, only eating at home . . . another piece of advice I heard was, if you're sending a child to college, make sure you send that child to a college locally so he or she can live at home - before I would do that I would look at the benefits. Always look at the benefits of cost of something. For example, if you got rid of your cell phone and you were a business person, you might miss important calls. I know many of my friends who are business people are constantly getting calls on their cell phones and making important business decisions. If you're going to say, well, we're going to eat at home and not eat out, recognize that means you're going to have to put more time into preparing those meals. Maybe this is time you could be using better in a side business or in a second job. And as far as sending your child to college, maybe it is a college that is away from home that is going to be best for that child, that has the major that child wants and is going to lead to a better career for that child. So my point here is always look at the benefits you're giving up if you're going to give up some of these modern gadgets or conveniences and compare benefits and costs."

Posted by Dave at 08:08 AM

April 28, 2009

Do we need the Federal Reserve?

Many people have been pointing their fingers at the Federal Reserve as a major culprit behind first, the excesses that were built up in the housing market and then, the subsequent housing crash. They've taken this criticism to ask if we should abolish the Federal Reserve and go back to something like the gold standard. Is this a reasonable question?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"I think it very much is a reasonable question. I think that we can say that the easy money policy of the Federal Reserve did help build up the excesses in the housing market, which led to the housing crash. Some say that a gold standard would have prevented those excesses because if your currency - the amount of your currency - is tied to how much gold you have, and if gold isn't increasing, that's going to limit how much money you can pump into the economy. Now, a couple of comments, though, about this. First of all, we can have a Federal Reserve and we can have a gold standard. We don't have to get rid of the Federal Reserve to have a gold standard. In fact, when the Federal Reserve started about 100 years ago, we were on a gold standard. Secondly, we should remember that other than the money supply, the Federal Reserve performs an important function as a backstop, as a rescuer, if you will, of troubled banks. I think we need to keep that in mind before we abolish the Federal Reserve. And then last point, the gold standard has problems of its own. Without going into a lot of detail, many very eminent economists - like Milton Friedman, the late Milton Friedman - said that the gold standard was actually a major contributor to the depth of the Great Depression. So I think this is an important debate. I think we should focus on what the Federal Reserve has done in the past, but we need to keep in mind the pluses and minuses of the Federal Reserve before we say, let's get rid of it."

Posted by Dave at 10:37 AM

April 27, 2009

When will the job news get better?

The jobless numbers keep climbing and climbing. We now have some counties in North Carolina with unemployment rates over 12 percent. When will it end? Is there even any dim light shining at the end of this tunnel?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"These job losses in our state are really unprecedented over the last 70 years, and one of the, I think, troubling things, is there's really nowhere to hide. All sectors in our economy - we're even beginning to see it in health care - have been losing jobs. Unfortunately, most economists see job losses continuing for most of 2009. If the economy does begin to recover at the end of the year as most economists predict, we should see the job market begin to improve after that, maybe by a lag of three to six months. So we're looking maybe at spring, summer of 2010 before we would expect the unemployment rate to start to go down. The reason for this is there's always a delayed response in the job market because employers want to be absolutely certain the economy is back before they go to the very important and often expensive task of hiring new people. So I think for the rest of this year, we'll probably see the unemployment rate in the state go up - but not at the pace that we have seen - so that's, perhaps, one good thing and then, hopefully, top out maybe about a year from now, and then start to fall throughout 2010."

Posted by Dave at 08:13 AM

April 24, 2009

Why is North Carolina's unemployment rate so high?

North Carolina's unemployment rate hit 10.7 percent in February, the highest since modern statistics have been kept. We now have the fourth highest jobless rate in the nation. Why has this happened?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Just to add fuel to the fire, our unemployment rate has doubled since the recession began. I think there are several reasons for this. One, I think prime reason is despite what many people think, we are still very much a manufacturing state, more so than the nation. In fact, 20 percent of our state income is derived from manufacturing versus 12 percent for the nation. Manufacturing always gets hit harder during recessions for one simple reason: people can postpone buying manufactured products. The second reason; this recession has particularly hurt financial services, the vehicle parts industry and construction . . . these are all sectors in which we have a large number of people employed. We're also continuing to see downsizing of our traditional industries of textiles, furniture and tobacco. And I think our low unionization rate is a factor here. That makes it easier for firms to let workers go. On the other hand, when the economy does recover, and we begin hiring again, I think our low unionization actually helps attract jobs."

Posted by Dave at 08:10 AM

April 23, 2009

Moral hazard

With today's news about bank rescue plans and government subsidies for failing companies, a new term has been added to our vocabularies - moral hazard. What is moral hazard, and just how does it relate to today’s economic situation?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Moral hazard is the possibility that a company or person who knows or expects that any losses they incur will be covered by the government - or some entity, but here we're talking about the government. And when they expect that, this will motivate them to actually take more chances, actually engage in more risky behavior. So for example, what if you knew that if you invested in the stock market and you invested in some risky stocks and it turns out right, you'll make a bunch of money. But if you lose money, the government will come in and bail you out. Well, you'll probably be motivated to invest more of your money in risky stocks because it's all an upside game for you. So the application here, I think, is - obviously very clear - to what's happening in the financial markets. Many in the banking and financial services sector in recent years thought, I think implicitly, that if they got into problems, the federal government or its agents would come in and help them out, which, of course, it has. And the question is, did that motivate, perhaps, lenders to make more risky loans, more risky home loans, loans to people who, perhaps, didn't have the ability to pay those loans back. So this is a big problem, particularly in the financial area. One way of handling it, and we see this in insurance markets, is to make sure that the person who's being insured does bear some of the downside risk. In insurance, for example, we do this with co-payments and deductibles. And I think many are rethinking this for the broader financial sector, particularly banks. And there are some ideas now to reform those institutions in the future to where downside risks will be shared by those in the financial sector."

Posted by Dave at 08:04 AM

April 22, 2009

The Federal Reserve's offensive

For economists like you, the Federal Reserve made news last week. With its key interest rate effectively at zero, the Fed said it will continue to stimulate the economy by purchasing hundreds of millions of dollar's worth of treasury securities. What's the implication of this move by the nation's central bank?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, it answered a key question that many economists and others had, and that is that once the Fed's interest rate was at zero, what else could they do? The Fed answered that by saying, well, what we're going to do is go into the investment markets and start to buy up, literally, government debt. And what that is designed to do is to push other interest rates in the economy lower, like mortgage interest rates or interest rates on auto loans or personal loans. Now, when the Fed does this, when they go out and buy government debt, designed to push those interest rates lower, where's it get its money? Well, it creates it. It actually, literally, can create money. That's one of the big powers of the Federal Reserve. Now this ability to create money is a double-edged sword. Obviously, during a time like now, the Federal Reserve can use that power to keep credit cheap and plentiful and stimulate spending. But if they continue to do that once the recession is over, it can lead to higher inflation. Fortunately, Fed Chairman Bernanke said that he's well aware of this danger, and once the economy's back on track, he will seek to pull back that extra money. But right now, the Federal Reserve is on a buying spree."

Posted by Dave at 08:00 AM

April 21, 2009

Could North Carolina rebound faster?

As we look ahead to when the recession is over, questions arise as to the kind of economic rebound we'll see. Do we have reason to believe that the economic recovery here in North Carolina will be faster than in the nation?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Yes, we do, if history is any guide. Manufacturing always takes a big hit during a recession. This is simply because manufactured products can be delayed in their purchase, like a computer or furniture or appliances. You may need them but you'll say, 'Hey, I don't have the money now, or I'm worried about my job. I'm going to postpone. I'm going to keep the one that I have a little longer.' And the fact that North Carolina still is more of a manufacturing state - in fact, the best statistic that indicates this is that 20 percent of our income in the state is derived from manufacturing versus 12 percent for the nation - means that we're hit harder during a recession. But the opposite effect occurs on the rebound. Here, manufacturing usually does better because once the economy is back on track, you have all this pent-up demand for manufactured products. People delay buying them, now they really want them. And so manufacturing usually takes off, like a rocket when we're in an economic rebound. And again because North Carolina is more of a manufacturing state, historically we've seen our rebounds stronger than in other states. We hope that this pattern continues with the end of this recession. Obviously, we'll have to wait and see."

Posted by Dave at 08:09 AM

April 20, 2009

When the recession ends, then what?

Many economists are predicting the recession will finally end near the close of this year. But what exactly does it mean for the recession to end? Does it mean that, economically speaking, all of a sudden, everything is fine?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Think of this vision in your mind. Think of a recession as you or some fictitious person falling down a hole. And as long as you're falling deeper and deeper, the recession is occurring . . . the recession is getting worse and worse. Now, if you stop falling, that's what economists mean by the recession ending. That means the economy has stopped getting worse. It does not mean, to continue our analogy, that all of a sudden you're back on top. You're out of the hole. No, it just means you've stopped falling. You still have to take time to climb your way out of that hole. And, indeed, that's what happens when a recession ends. It means the economy has stopped getting worse. It doesn't mean that all of a sudden, it's back to where it was before the recession. It will still take time for the economy to grow and actually get back to where it was before the recession began. And many economists - one very prominent one being Fed Chairman Ben Bernanke - have predicted that once this recession ends, it may take up to two years for the economy to get back to where it was before the start of the economic downturn."

Posted by Dave at 08:00 AM

April 17, 2009

Boosting consumer spending

Economists agree that reviving consumer spending is essential to ending the recession. Last year, there was a tax rebate that was supposed to do this. Did it work? And if not, what lessons have we learned?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, it's now been long enough that we have good information on what happened to those tax rebates in the summer of 2008, and what we find is that consumers overwhelmingly did not spend that money. In fact, only 20 percent of households reported spending their tax rebate. The rest of that rebate - 80 percent - was either saved or was used to pay down on debt. So it didn't really do all that much to boost spending in the economy, which is what it was designed to do. Now there is a tax reduction plan that is part of the recently passed stimulus plan coming out of Washington, and I think some of the lessons from 2008 have been incorporated into this plan in that the tax reductions now will take the form of small monthly reductions in withholding . . . tax withholding from your paycheck rather than one big lump sum tax reduction. And I think the idea here from the crafters of the stimulus plan is that if people see a little bit of a reduction in their withholding they will more likely spend that than if they got one big massive paycheck and said, 'Well, gosh, I can use the paycheck to pay down my credit card or put it in the bank.' So we'll have to see, but I think we did learn some lessons in terms of trying to boost spending from the tax rebate of 2008."

Posted by Dave at 08:00 AM

April 16, 2009

Wealth gets slashed

The Federal Reserve's latest numbers on household wealth were just released. What kind of picture do they paint?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Very bad, unfortunately. Through the end of 2008, households lost $13 trillion of their wealth. That's 17 percent of the total. This, as I said, is for the entire year 2008. The recession actually began at the end of 2007. This is the greatest slide in household wealth since the 1930s. This is unprecedented in that 70-year period. Stock market wealth, of course, is way down . . . about 40 percent. But what is very unusual is wealth in real estate, mainly people's homes, is also off. Up through the end of 2008, on average, that was down 15 percent. So this is devastating news. I think this is one big reason why this recession really is different. Now there is some good news. The good news is that consumers are responding by trying to put their financial ship, if you will, in order, on course. Consumers are borrowing less, and that way, they're trying to respond to the reduction in the value of their assets. But there's no question, absolutely no question, the loss in wealth during this economic downturn is what makes this recession so fundamentally different from the recessions that we've gotten used to in the last 40 or 50 years."

Posted by Dave at 08:00 AM

April 15, 2009

Watching the stock market for clues

Everyone wants to know when this recession will end, and many are looking to the stock market for answers. What is the stock market's track record for signaling an end to the economic downturn?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, first of all, stock markets do tend to lead the economy. That is, they will turn up while the economy is still in a recession, but they will turn up in advance of that recession ending. And if you look, for example, at the recessions in the '70s, '80s and '90s, the stock market turned up about half way through the recession. So, for example, if the recession lasted a year, like it did in 1970, then the stock market began rising about six months into that recession or - another way of putting it - six months before the recession ended. Now our last complete recession of 2001, we saw a different pattern. There, the stock market continued to slide three-quarters of the way through the recession. It didn't turn up until about 25 percent of the time before the recession ended. So there wasn't a lot of lead time there, the traditional lead time that we've seen in previous stock market upswings. So, of course, now the big question everyone wants to know is, well, what about now? Will this stock market turn up earlier or later? Right now, it looks like we're following the pattern of the 2001 recession. If, for example, you think this recession will end at the end of 2009, then we've already been halfway through it because it began at the end of 2007. So if the stock market begins to turn up this spring, early summer, that would be the pattern we saw in the 2001 recession."

Posted by Dave at 08:00 AM

April 14, 2009

Where the U.S. is still number 1

There's a lot of negativity during recessions. At the same time, there's a feeling that the U.S. has lost its lead in many economic measures. But there's one area where the U.S. is still number 1. What is it?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"It's what economists call entrepreneurship, or the creation of new businesses. There's no country in the world where people can come and take risks to start a new business, hire people and grow those businesses like the U.S. We are by far and away the leader in entrepreneurship. And I think there are several reason for that. First of all, U.S. companies have a lot of freedom, much more compared to other countries, to, for example, hire and fire workers. The U.S. has the most mature venture capital sector. Venture capital is simply a fancy term for investors who want to invest money in business start-ups. Thirdly, we have a very unusual and very close relationship in this country between universities and industry. There's a lot of interplay, where industry can tap into inventions and new ways of thinking at universities. Universities are not ivory towers, sitting out there by themselves. In a lot of countries, they are. That, we think, helps spur this entrepreneurship. And then, lastly, very controversial, but, I think, a factor, is we have a relatively open immigration policy, and immigrants have historically been a big source of many small business starts."

Posted by Dave at 08:00 AM

April 13, 2009

Are workers being short-changed?

Historically there's been a close relationship between the value of what a worker produces - termed productivity - and that worker's wage or salary. But some people say that tie has broken in recent years as productivity improvements exceeded gains in wages and salaries. Is this a problem? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, this is an example of knowing what and how you're measuring. You're absolutely right. If you look at wages and salaries, what people get in their paychecks, they have not grown commensurately with the productivity of those workers. But that's missing an important point. And the important point is that over the last, really, 50 years what we call benefits - that is, what a worker gets paid but not in their paycheck but in the form of benefits . . . the most important benefit being health insurance but also vacation, disability and sick leave benefits - those benefits have been growing faster than wages and salaries. Now that's still a cost to the business, and it's still, obviously, something the worker is receiving, just not in the form of pay in their paycheck. Now economists have a term for when you put wages and salaries and benefits all together; we call that worker compensation. And, indeed, worker compensation has been growing just as fast as worker productivity. So I think to answer your question as to whether workers are being short-changed, we would say, no, it's simply that workers are being paid in a different way over the last few decades."

Posted by Dave at 08:00 AM

April 10, 2009

Is there a better way to budget?

The budget gap the governor and General Assembly are trying to close seems to appear every time there’s a recession. Are there some changes that could be added to the budget process that would eliminate or reduce this issue?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"The issue is that when the economy is going strong and growing, often times - due to how our government raises tax revenue - often times government tax revenues grow more, and that allows government to use that new revenue to develop new programs, expand existing programs, etc. Then, however, when a recession hits and government revenues slow or actually go down, government can't fund everything previously committed to; therefore, there's a budget gap. Now what some people say is, 'What we need to do is limit spending by the government on the upside of the economy.' And there are several ideas in this area. One is to, for example, limit spending this year to the revenue that was received last year. Another would be to limit spending increases to inflation plus population growth. And then a more generous one would be to limit government spending to some percentage of the private economy. Then if, during the upswing of the economy, excess revenues - that is, revenues above spending - were to arise, you would put those revenues into a reserve, a so-called rainy day fund, to be used during a recession. Now these ideas have been around a long time. Some states have tapped into them. The big problem is, of course, it takes discretion away from elected officials, and it sort of puts our elected officials into a straight jacket. They can't respond to emergencies or priorities that as they see fit. But we'll likely have this up and down with government revenue problem well into the future."

Posted by Dave at 08:00 AM

April 09, 2009

Cap and trade

Among President Obama's recently submitted budget proposals is one for a cap and trade system. This would address global warming issues related to the use of carbon-based fuels. Give us a brief description of such a system.

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, the cap part is, first, that some group - of scientists, probably - will decide how much carbon-based fuel is safe to use collectively in the country. And that will be the cap. That will say we can't use more than this amount of carbon-based fuel in any given year. Then the government will take that total amount, divide it up into little chunks, if you will, and sell permits. Each permit will allow a company, for example, to emit that amount of pollution based on their use of carbon-based fuel. The trade part will come in over time, where companies may say, 'Well, gosh, instead of buying these permits, what we're going to do is try to reduce our use of carbon-based fuels. We're going to go to alternatives, therefore, we don't need to own these permits that we have. We're going to sell them, and we'll sell them to other companies that may have a difficult time converting to non-traditional types of fuel.' And so that's the trade part. And that can go on over many, many different years. Now in terms of what the government will do with the money that they will raise by selling these permits, they could do a couple of things. They could use it to fund research on energy alternatives. They could use it to implement those new technologies, or they could use it to fund tax cuts to individuals and to companies."

Posted by Dave at 08:36 AM

April 08, 2009

North Carolina drivers do their part

There have been two reasons for people to be more conscious of how they drive in recent years. One is an environmental concern over the pollution that most vehicles emit. And second is the additional cost of driving due to higher gas prices. Are drivers in North Carolina doing their part to watch how many miles they put on the road?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Actually, yes. The available data we have through last year show that North Carolina drivers actually are doing their part. For example, when people were driving more between the years 2002 and 2006, vehicle miles traveled per person in the nation went up 2 percent a year. In North Carolina they went up 4 percent a year, so we were actually driving more at a faster rate - if you will - than the nation. But interestingly, recently as U.S. drivers have backed off and are driving less, North Carolina drivers have actually done that to a greater degree. For example, vehicle miles driven per person in North Carolina fell 6 percent a year between 2006 and 2008, and that was the seventh fastest drop among all states. So I think the message here is that we go through more of an up and down regarding driving. When the economy is good and gas prices are low, we're driving a lot more than other folks. But when the economy gets bad and specifically when gas prices go up, we pull back more here in North Carolina than folks elsewhere do."

Posted by Dave at 08:00 AM

April 07, 2009

Stress testing the banks

Banks are now getting a test of sorts called a stress test. What kind of test is this, and what does it mean for the economy?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"This is a new effort by the administration to determine the financial viability of banks and to assess how much aid will be needed to help the banking system. And what's going to happen is banks' balance sheets are going to be subjected to various economic scenarios in terms of severity of the recession. So, for example, they're going to say, ok, if we assume the recession gets worse by 10 percent, what would this do to the solvency of banks? On the other hand, if we assume the recession gets worse by 25 percent, what will this do to the solvency of banks? They're going to do this for all the major banks, and that will help them identify those banks that are going to be most in trouble. Now, the next step after they do that is - alright, they've identified the troubled banks - how are they going to help them? Should some of them be closed? Should they be merged? Should their assets be sold? Should the government simply come in a take them over? Those questions are unanswered, but the stress test, if you will, is the first step to putting a price tag on keeping our financial system afloat."

Posted by Dave at 08:00 AM

April 06, 2009

Who has debt?

One of the good things about the recession is that households are now paying more attention to their debts, and many are trying to reduce those debts. But exactly who has debt? Does household debt vary by age and even by where you live?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Household debt certainly varies by age. Typically what you see is young households who are just starting out with their job - they've got a lot of things to buy . . . house, car, stuff for the kids - they're going to have the highest relative debt. For example, households under age 35 have debts that are 45 percent of their assets. Then as you age, you begin to pay off those debts. You don't need to accumulate as many things all at once. You tend to see those debt loads go down. For example, households in their 50s and 60s have debts that are only 10 percent of their assets. Now, your question about does debt vary by where you live . . . very interesting question. If we look at the country in terms of regions, households in the West actually have the most debt followed by households in the South, then the Midwest. And Northeastern households actually have the lowest relative debt."

Posted by Dave at 08:00 AM

April 03, 2009

What's a normal deficit?

The federal budget deficit numbers being projected are huge, over $1.7 trillion this year alone. It's difficult to grasp the relative size of this number. How can we gauge the size of budget deficits, and is there anything we can call a normal deficit?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, you're right, when these numbers get up in the billions and trillions, it's hard for even economists to keep track of them and really put them in a kind of relevant view. So what we tend to do - we economists - is we look at them on a percentage basis. For example, we say, alright, a budget deficit of $1.7 trillion, what percentage is that of national income, also called gross national product? It's kind of like saying, how much - if you're doing some borrowing - how does the amount you're borrowing relate to your income? So if we look at the $1.7 trillion, it will be 12 percent of our national income and will actually be the highest since World War II. Now, on to the question about a normal budget deficit. Of course, normal is always going to be a subjective term. The administration wants to get the budget deficit back eventually to a mere 3 percent of gross domestic product. And actually many economists would agree that that level is probably manageable. You might translate manageable as meaning normal. One final point: remember the difference between deficit and debt. The deficit is what we add to the national debt each year. The national debt is the total that we owe."

Posted by Dave at 08:00 AM

April 02, 2009

Glittering gold

Gold as an investment has had a good run in recent years and is now flirting with a value of $1,000 per ounce. Why are investors flocking to gold, and will it continue?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Gold always does well as an investment during periods of economic anxiety, and we certainly have that now. During these kinds of economic times, people look to where they can put their money - store their money - in what they consider to be a safe place. And many people think that gold as an investment doesn't lose value, so we've had a lot of folks simply flocking to gold. But I would throw out a word of caution. Gold values can go down, although they have certainly gone up over the past couple of years on trend, they can go down. For example, earlier this decade, gold was under $500 an ounce. As you mentioned, it's now about $1,000 an ounce. And through most of the 1980s and 1990s, gold values actually fell. So again, beware investors, if the economic clouds part, and the sun comes out, we may very well see gold go down very quickly. Another point, how high does gold have to go to set a record? It would have to go in today's dollar values up to $2,300 an ounce to equal the peak in purchasing power it had in 1980."

Posted by Dave at 08:00 AM

April 01, 2009

How is this one different?

This recession will likely go down in the books as one of the worst, if not the worst, in 50 or 60 years. Is there one thing you can put your finger on that has made this recession so different?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"I think it's the fact that in the investment component of the recession everything has been hammered. Let's go back to the 2001 recession. People lost their jobs. Of course, we had the big tech bubble burst, and we had a big drop - a very big drop - in the stock market. But housing values, the money that you had in your home and the equity in your home, continued actually to go up. And I think that provided a safe backstop for people. They could at least be assured that they still had the money they had in their house. Well, this time we've not had that. Both the stock market and the housing market have been battered, and indeed, when this recession finally works its course, we'll probably see the average house will have lost approaching 20 percent of its beginning value. And in some sense, this recession has really left households with nowhere to hide, nowhere to put their money, and that's why many people literally almost are putting their money in a mattress. And I think again this is one reason this recession will be very long remembered."

Posted by Dave at 08:00 AM