« February 2010 | Main | April 2010 »

March 31, 2010

The Greek problem

Economic problems in Greece have topped financial headlines in recent weeks. What's happening, and why is it a big deal?

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

"Greece as a country ... is in danger of defaulting on its bonds. Translated, it is in essence going bankrupt. It borrowed a lot of money. It spent a lot of money. And the recession has obviously reduced their tax revenues.

"Now if in the old days Greece is a country, and of course we love Greece but it is a small country and if they have their own little economy there a lot of people wouldn't think twice about this.

"But the issue today is Greece is now a part of the European community -- most of western and central Europe -- and they use the common currency of that European community, the euro. And so the problems in Greece are affecting a much wider geographical area -- i.e., it is affecting that European community, which we are talking about an economy of over 300 million people.

"Many of those European banks have invested, bought those great bonds. And because Greece is tied to the euro, investors are worried about the euro, the stability of the euro and in fact the euro's value has gone down.

"And then on top of this you have the fact that there are some other European countries that are not quite as bad as Greece, but they are close to it: Portugal, Ireland and Spain.

"And so you have a situation where you have got some strong fiscal problems in Greece. And how it might affect you and me is if Europe as a whole as a market falters and either the recession gets worse or they have very slow economic growth, they are still a major trading partner of ours. And that could affect the steam in our economic engine."

Posted by deeshore at 08:23 AM | Comments (0)

March 30, 2010

Inflation at the movies

One of the big movies of this year, "Avatar," is being called the box-office leader of all time. But is it?

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

"No, it is not the leading revenue-generator, and it has nothing to do with what I think of 'Avatar' as a movie. And this is because when you hear these rankings, they have not adjusted for the changing value of the dollar.

"I mean, everyone knows if they sit down and think about it that 30 years ago a dollar bought much more than it does today; 50 years ago it bought even more. And yet these revenue numbers that you see for movies, the leading revenue-generating movies of all time, they don't adjust for that.

"And so this is actually something that is easy to do. And economists that have done this find that you get a much different ranking of which were the box-office leaders over all time when you do adjust for inflation. And let me tell our listeners what those are.

"The leader is still 'Gone With the Wind.' In today's dollars, 'Gone With the Wind' grossed $1.5 billion -- twice that so far of 'Avatar.' 'Star Wars' was number two; 'The Sound of Music,' number three. 'E.T.' and then 'The Ten Commandments' round out the top five."

Posted by deeshore at 10:01 AM | Comments (0)

March 29, 2010

Economic cliffs

The pharmaceutical industry is an important part of North Carolina's economy. Pharmaceutical companies rely on patents to earn revenues high enough to recover their costs of developing new drugs. But what happens when these patents expire?

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

"This is known in the business in the pharmaceutical business as a patent cliff because what happens is, revenues that those companies are earning from the pharmaceuticals tremendously decline. They slide down like a cliff off a hill when that patent expires.

"What a patent does, of course, is protect a company from competition. If you develop a drug and you patent it, then you have a certain number of years in which you are the exclusive seller of that drug. And you can charge higher prices.

"Now the pharmaceutical industry says they need that because, number one, developing pharmaceuticals is very uncertain. You never know if you are going to end up with a patentable or marketable drug. And secondly, it is very costly. You can have a pharmaceutical company spend almost a billion -- that is a billion with a B -- dollars before they actually sell any of that drug. So when the patent does expire, that is a big deal to the pharmaceutical companies.

"And the concern is, if the pharmaceutical companies don't -- have not recovered the revenue from developing those drugs -- will they be motivated to explore new pharmaceuticals?

"So a big, big issue not only for pharmaceuticals but also here in North Carolina because of the importance of the industry."

Posted by deeshore at 08:26 AM | Comments (0)

March 26, 2010

Canadian banks

U.S. banks suffered greatly during the recession, so much so that major intervention by the federal government kept many of them afloat. But the same problems didn't occur for Canadian Banks. Why?

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

"The simple answer is that there wasn't the same kind of real estate boom in Canada that we've had in the U.S. And of course, what happened in the U.S. was we had this big real-estate boom that fueled speculation in the real-estate market. That motivated banks to make a lot of loans in the real-estate market.

"Without that boom, you didn't have Canadian banks making those kinds of loans. They were much more diligent in making sure the loans they did make were good loans.

"So one big question is, Why didn't we have the real-estate boom in Canada? And I think one reason goes back to how Canada taxes real estate. In the U.S., real estate is very favored. We get to deduct our mortgage interest. Also when we sell our homes any capital gains are not taxed.

"You don't have that in Canada. There is no deduction for mortgage interest, and capital gains are taxed when the home is sold.

"So as a result Canadian banks -- they do obviously make real-estate loans, but they didn't get into that go-go mentality that making real-estate loans was just going to lead to everyone getting rich."

Posted by deeshore at 09:09 AM | Comments (0)

March 25, 2010

Don't write off manufacturing

A recent TV show about the condition of manufacturing in the United States today implied that because we have lost many manufacturing jobs we are no longer a manufacturing country. But is that right?

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

"That is just plain wrong. If you look at the amount, the amount of manufacturing output that our country does, that is what is produced out of the factory gates each year, we are producing more out of our factories today than we were 50 years ago. In fact, we are producing more than we were 10 or 15 years ago -- that is, manufacturing output except during recessions in our country tends to go up.

"So how can it be, however, that we are producing all this additional manufacturing output but with fewer people? Well it's because you have to recognize that to make something labor is one component. Another component would be machinery. Another, a third component would be technology. And what has been happening in our country, and indeed it has actually been happening around the world, is that manufacturers have been shifting away from using people to manufacture things to using more equipment and more technology.

"So what has resulted is a situation very akin to agriculture, where we produce much much more -- many many more agricultural products -- today with a tiny, tiny fraction of the people that were used 70 years ago. That's where manufacturing is headed."

Posted by deeshore at 08:00 AM | Comments (0)

March 24, 2010

Firings and hirings

Most of us look at the unemployment rate as a barometer telling us how well the job market is doing. We also hear reports about the net number of new jobs created. By both of these measures, the job picture isn't very good. Unemployment is up, and net new jobs are down. Does this mean no one is hiring?

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

"Not at all. ... In fact, what our numbers that we receive each month on the job market mean is they mean the difference between hiring and firing. For example, last year we had a negative number of 7 million: that is, more than 7 million people lost their jobs compared to those that found jobs. Now where does this number come from?

"Well, actually, if you look at last year, 50 million people found a job; 50 million people were hired last year. But it turns out that 57 million people were either fired or quit. So you have to remember even in the dark year of 2009, where unemployment went way up, we actually had 50 million people hired.

"So you have to be aware that we do always have hiring going on, which means that even in tough economic times, if you have the skills that the job market wants, you should not give up.

"You should go out there and look because there are people always always hiring."

Posted by deeshore at 07:33 AM | Comments (0)

March 23, 2010

Inflating our way out of debt

There is much water-cooler talk about the big rise in the national debt and what it will mean for taxes and for general economic conditions. Is there a way to address this debt without eventually raising taxes?

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

"If we look at history, there are three ways that countries have handled unsustainable rises in national debt: One is simply to increase taxes. Of course, that is a solution that many people say we will have to do. Others don't like that. But that certainly is a solution.

"A second way is to default -- simply for the government to say, 'Hey, you know what, we are not going to honor that debt; we are not going to pay off on it.' And countries have done that. The problem with our country doing it is, first of all, half of our debt is owed to ourselves, the citizens. So anyone who has investment in treasury securities would lose. And secondly that would very much damage our financial reputation if we, as a country, tried to borrow money in the future after defaulting. We would have to pay an enormously high interest rate.

"The third solution is to inflate our way out of the debt: simply to print money, which causes inflation and therefore lowers the inflation-adjusted value of the debt. Now you would have to have the cooperation of the Federal Reserve to do this because the Federal Reserve actually controls the printing presses -- the money supply.

"But then you would deal with the issue of actually the holders of that debt seeing the value of that debt going down. And, again, remember half of that debt is owed to ourselves. Then secondly we would have to deal with the economic cost of high inflation.

"So bottom line here, there is no simple way out of our debt."

Posted by deeshore at 10:18 AM | Comments (0)

March 22, 2010

A boom in natural gas

There's been a virtual revolution in the energy area: a revolution in production of natural gas. What's the excitement about?

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

"What's happened is really for many people under the radar quietly we have seen the discovery of new fields of natural gas in our country just skyrocket over the past couple of years. So natural gas supplies have gone up tremendously. And this is a result of improved technology in finding natural gas and being able to deliver that natural gas to the market.

"So many people are excited that we could see the day not too far off in the future where natural gas replaces, say, oil. And gasoline from oil is our major source for not only heating but also for transportation.

"But before we get all excited there are two challenges: One is transporting natural gas. It's a vapor, and so it is best transported if it is liquefied. And that has always been a problem, but we have seen some advances made here.

"The second issue is, let's say, for example, we do convert our vehicles to being powered by natural gas; we need a new distribution process to do that. We need gas stations that now sell natural gas, and that takes a long time -- that takes an investment to do.

"But we have seen technological advances solve problems like this in the past, and we may see them solve these problems in the future.
So there is a lot of excitement right now about natural gas perhaps being the solution to our energy problems."

Posted by deeshore at 09:06 AM | Comments (0)

March 19, 2010

Working the spread

The difference between short-term and long-term interest rates is significant today. What does this imply for investors? Specifically, what kinds of pitfalls might be encountered?

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

"People are looking for safe ways to invest their money, but at the same time they want to get a little better interest rate, a little better return on that money. And what people are finding is that if they are willing to commit their money for a longer period of time, they can see a significant increase in the interest rates paid.

"For example, if you look at CDs right now, if you take out a 5-year CD the interest rate paid on that CD will be twice that paid of a 6-month CD.

"But, but there is a risk. And the risk is that when you invest in a long-term, let's say CD, you are locking in that interest rate. That interest rate is not going to change. Same way if you take a long-term bond.

"The problem is that, What happens if interest rates over the next couple of years rise? Well if you have locked in that long-term interest rate, your interest rate isn't going to rise. So what might look like a good investment today could in the future turn out to be a bad investment.

"Furthermore, if you were to invest in something -- in like a long-term bond, which you could actually sell before the end of the term, if you tried to sell that bond where you had locked in the interest rate and interest rates on new bonds were much higher you would have to sell that bond at a loss.

"Economists call this rate risk, and it is very hard to solve. Because right now we would like to get more interest on our money, but you do have to be worried about this risk.

"Probably the best advice I can say is to invest in investments like CDs or bonds with different maturities. Sort of stack those investments. Don't put all of your money in long-term or all of your money in short-term, but have a mix."

Posted by deeshore at 07:37 AM | Comments (0)

March 18, 2010

The cost of national debt

The national debt has increased rapidly, and it looks like it will increase even more this decade. Besides the dollar and cents cost of the debt, do economists see any issues with this borrowing?

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

"We do. ... In fact, a recent economic study looked at all of the episodes of rising national debt over all countries, not just the U.S., going actually back hundreds of years. And the rule of thumb that economists have come up with is that when your national debt gets to be larger than 90 percent of your economy -- or what we call gross domestic product -- then the main cost that you see is that that results in slower economic growth. And I think the reason is several-fold:

"One, that the government is spending more money on servicing the debt. So that money cannot be spent on education or transportation or helping out with social programs.

"Also given the fact that we now borrow much of our money from outside of our country a lot of the servicing on that debt goes to other countries -- doesn't stay here in the U.S.

"And then, finally, with the government borrowing so much money, that tends to put upward pressure on interest rates and that will crowd out private investment.

"The concern we have right now is that based on the Congressional Budget Office forecast, if nothing is done over the next decade we will see our national debt as a percent of the economy rise to 105 percent by 2020, clearly above that 90 percent threshold."

Posted by deeshore at 07:28 AM | Comments (0)

March 17, 2010

The worst recession ever

People know the current recession has been bad. But can we definitely say this is the worst recession in modern times?

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

"Well let's go back and compare recessions over the past 40 years, and I think the answer is going to be pretty much a yes. For example, reduction in gross domestic product, which is the broadest measure of our economy: this recession, down 3.8 percent. The next closest was the recession in the mid '70s, down 3.5 percent.

"Factory output: this recession, down 17 percent; mid '70s, down 15 percent.

"Percentage job loss: this recession, down 5 percent; down 2 percent for the recession of the early '80s.

"Decline in the stock market: this recession, down 54 percent; down 40 percent for the recession of the mid '70s.

"The one however, that really caught my eye was the reduction in household wealth: During this recession, the average household has lost 26 percent of its wealth. The next highest was the reduction of only 10 percent in the recession of the mid '70s.

"So, yes, I think we can clearly say that this recession when you consider all these factors, has been the worst in modern times."

Posted by deeshore at 07:28 AM | Comments (0)

March 16, 2010

Reducing energy usage

Many people see two big benefits to more efficient use of energy: First, it reduces cost. And second, it may help the environment. Are there any innovative programs that have helped people become better users of energy?

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

"There is an interesting program that is being run in California, where residents there are sent reports. Now these reports are anonymous of energy usage of other households in their neighborhood.

"So, for example, if the Waldens were in California, we would get a report maybe every month that said, 'In your immediate neighborhood, here is the energy usage on average of your neighbors.'

"And what people of California have found that by a household knowing the energy usage of their fellow households they actually are motivated to reduce their own energy usage by about 1 to 2 percent.

"And furthermore it didn't matter if the average energy usage in the neighborhood compared to your household was higher or lower. People still went ahead and reduced their energy usage.

"And I think this is based on the idea that part of how and why we consume and buy things is driven by what others are doing because it sort of gives us a frame of reference.

"So this could be a very simple program. It wouldn't cost a lot of money for the power companies to implement, where we do get this report every month and we could see how it would work here in North Carolina."

Posted by deeshore at 06:56 AM | Comments (0)

March 15, 2010

Reducing persistent high poverty

We've seen poverty rates rise just about everywhere during this recession. However, even in good economic times many areas in our country and in North Carolina struggle with high unemployment and high poverty. What can be done to change this?

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

"Economists, as people know, disagree on many things. But on this question, there is widespread agreement. The best advice for any locality, any county that is suffering from persistently high unemployment, persistently high poverty, is to increase the training and skills of workers in their area.

"That will work. Studies show time and time again in our modern economy businesses are attracted to areas where they have skills to hire -- where they have people with high levels of skills.

"And the good news is that these studies show that for let's say a 10 percent increase in educational attainment level in a high poverty county, they are going to get more bang for that buck, more bang for that increase than say a 10 percent increase in educational attainment in a high income county.

"So you really do get a lot of return for your money.

"However -- however -- these efforts should be put in perspective. You are not going to reduce the poverty, for example, among elderly people who are retired or among single parents who don't have the time to work. So you are not going to wipe out poverty in these areas, but you are going to see a dramatic improvement in poverty among working folks if you increase their skill level."

Posted by deeshore at 07:47 AM | Comments (0)

March 12, 2010

How can we create jobs?

Bringing more jobs to the country and to North Carolina is the Number One economic priority for many people. People are tired of seeing the unemployment rate at 10 or 11 percent. Is there any simple answer to getting our job engine started?

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

"Unfortunately there is no silver bullet. There are a lot of ideas, but there is no guarantee any will work, or any of these ideas do have some downsides.

"For example, at one extreme we could say we are just going to hire all the unemployed workers. This would cost the government a lot of money -- about $300 billion a year if you pay the average salary.

"And then you are going to have to borrow that money, and some say that would actually create unemployment somewhere else in the economy.

"We could mandate a shorter work week. Of course, many people don't work on a work week now, and they don't have to pay those workers the same wages. If they did that would probably keep the unemployment rate high.

"A middle ground -- and, indeed, this is what the government is talking about now -- is to have tax credits or tax reductions for businesses that create jobs. This has worked in the past, but we are not going to get the unemployment rate say cut in half by doing this.

"And then maybe at the other extreme is the attitude that some have that says ... 'Look, what we have to have is government actually do less: Lower spending, lower taxes and let the private sector hire folks.' The problem is, we haven't seen that done over the last couple of years; there is no guarantee.

"So this is going to be a hard slog to get the unemployment rate down."

Posted by deeshore at 09:10 AM | Comments (0)

March 11, 2010

Still the largest market

Many people are pessimistic about the economic future of the country. They see other countries moving ahead faster. Are we being left in the dust?

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

"There is no question that the rate at which economies grow differs from country to country, and that countries like those in Europe, Western Europe (and) the U.S. have been growing at a slower rate than countries in some of the developing areas like China, India (and) some of the Eastern European countries. In fact, there is an economic theory that says this in natural: that economic growth rates tend to ... converge.

"But this should not hide the fact that when you look at economies around the world and you simply say, 'At a point in time, what economy is the largest?' the U.S. economy is still by far the largest in the world.

"In fact, in terms of what we produce -- both products, manufactured products as well as services, or another way of looking at the income we earn -- we are twice as large. We have a twice as big economy as the next, as the second-place economies -- which right now, second place is being challenged by China and Japan.

"What this means is that foreign companies still want to sell here. They want to bring their products here and sell them to this gigantic market here in the U.S. And I think an increasing source of jobs here in the U.S. in the future will be from foreign companies, foreign manufacturing companies, coming to the U.S. and putting factories here and producing products that they are going to sell to the domestic audience here, if you will.

"We've seen that with the foreign auto companies. I think we are going to see that more with other foreign companies."

Posted by deeshore at 08:29 AM | Comments (0)

March 10, 2010

Who's hit harder by recessions?

By many measures the current recession is the worst since the 1930s. There has been plenty of pain, but has it been spread around equally?

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

"Recessions have never been equal pain occurrences. They always hit some groups harder than others. And we can clearly see that in the current recession. For example, men have suffered much more than women. The male unemployment rate has risen twice as fast as the female unemployment rate.

"Single persons have appeared to suffer more than married persons; they have had a higher unemployment rate. So, too, with younger workers. For example, the unemployment for those who are between the ages of 16 and 19 is now 20 percent. But for those between the ages 45 and 54 it is only 3 percent.

"And then finally the great difference is between those with education and those without. The unemployment rate actually has gone down by a small amount for those with the highest levels of education."

Posted by deeshore at 08:46 AM | Comments (0)

March 09, 2010

Quantitative easing

The Federal Reserve has been very busy fighting the recession. Specifically, the Fed has kept short-term interest rates low and the supply of money high. But are these the only tactics the Fed has used?

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

"he Fed under Mr. Bernanke has actually increased the use of something called quantitative easing. Now translated, what that means is that in addition to what you said the Fed has been doing -- low-interest rates, a lot of money being created -- the Fed has also gone directly into investment markets and bought up investments. In particular, what the Fed has been doing is buying mortgages. Virtually every mortgage that has been issued in the last year and a half has ultimately been bought by the Federal Reserve.

"And the Federal Reserve has been doing this, number one, to encourage banks to loan money on mortgages -- banks, therefore, knowing that if they don't want to hold the mortgage they can sell it back; they can sell it to the Fed.

"And also by the Fed doing this they have been working to keep mortgage rates, which is a long-term rate, low. And in fact the Fed over the last year and a half has purchased $1 trillion worth of mortgages.

"Now as the Fed begins to, however, de-stimulate, they have announced that they are going to stop doing this. They are going to stop buying mortgages. And there is some concern right now about what this is, A, going to do to the housing market; will this mean that banks are going to be less willing to offer mortgages to home buyers? And secondly, what will it do to mortgage interest rates? Will they in fact go up?"

Posted by deeshore at 08:20 AM | Comments (0)

March 08, 2010

Can money find happiness?

There is an old saying that money can't buy happiness. Some may reply, "It sure does help." But what do economists have to say about the relationship between money and how happy we are?

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

"This has been a long-run topic of economic study. And the studies are somewhat mixed. Some studies find that there is a relationship between how much money a person has and how happy that person is. Other studies find, no there is no relationship.

"Now there are a couple of issues here. One, of course, is that measuring happiness is going to be very subjective. So you can always question whether the study has accurately measured happiness.

"But another explanation, particularly those that find no relationship between money and happiness, has to do with how someone perceives their economic position. And the point is that someone may not simply look at whether they have more money now than they did a year ago, but they will look at how much money they have relative to particularly people above them. And if someone above them in the economic pecking order has actually gotten bigger increases in their income than you have, then you actually may become less happy -- that is, more unhappy.

"And in fact if you look at what has happened in the U.S., in our country, in the last 30 or 40 years, households of all income levels on average have seen their incomes rise. But it has been households at the top income levels that have had the biggest increase in income.

"So the distance, if you will, in income from those at the very top and those in the middle and bottom (has) increased. And that may lead to unhappiness."

Posted by deeshore at 08:09 AM | Comments (0)

March 05, 2010

Housing starts

The recession hit the housing market hard. During the height of the hard times, sales of homes plunged and foreclosures skyrocketed. As a result, the construction of new homes came to a virtual halt. Give us some perspective on just how bad it has been.

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

"It has really been mind boggling. And I think this really illustrates how tough things have been for the construction market.
Three years ago builders across the nation were building 2.5 million homes a year. In 2009, they built only .5 million homes -- 500,000.

"And there are two big reasons for this: One, of course, is the recession -- what the recession has done to unemployment; what the recession has done to household incomes. If people don't have a job, they really can't qualify for a mortgage and buy a house. So if people aren't buying homes, builders aren't going to build new homes. So that's from the so-called demand side.

"But there has also been influence from the supply side. In that, all of the foreclosures that have occurred over the last two to three years -- all of those foreclosures -- have resulted in a big increase in the supply of homes available for sale. So, again, if you have a lot of homes sitting on the market because they have been foreclosed on, builders again are not going to build.

"Now the good news is economists think -- most economists think -- the housing market has bottomed out. That is, the worst is over and we are going to begin to see some come back of the housing market.

"But it is going to be modest. We may, for example, this year see housing construction increase somewhere between 5 and 10 percent.
So certainly an upward movement, but nowhere getting us back to where we were those 2.5 million homes being built a year -- nowhere getting back to that anytime soon."

Posted by deeshore at 08:30 AM | Comments (0)

March 04, 2010

Deficits and debt

With the president's new budget just released there's been much discussion about deficit financing and growth of the national debt. People often use the terms deficit and debt interchangeably. But are they really the same?

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

"They really are not ... Deficit is what ... in this case, the government borrows in a given year. So when you hear deficit that means the amount the government is borrowing in that year. It's sort of like what you add to your credit card bill -- your credit card balance, if you will, in a given year.

"Debt is the total amount of your outstanding borrowing, which would include borrowing over many years. So again, going back to the credit card example, it would be your outstanding credit card balance.

"This means the debt is always going to be bigger than the deficit. For example, this year the deficit is going to be around $1 trillion -- meaning this year the federal government will borrow about $1 trillion, whereas the debt, the so-called national debt, is $12 trillion. That represents all the borrowing that the federal government has done in fact since its creation that it has not yet repaid.

"So although people use these words interchangeably there are really some technical differences -- big technical differences -- between deficit and debt."

Posted by deeshore at 09:12 AM | Comments (0)

March 03, 2010

The proposed budget freeze

A freeze on part of the federal budget has been proposed as a way for dealing with the national debt. What does this mean? And is it a viable solution to the nation's fiscal issues?

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

"It is useful to think of the federal budget in four pieces: defense spending, interest payments on the debt, what we call mandatory spending, and discretionary spending.

"Now defense spending: With the country fighting two wars, the consensus is we need to maintain defense spending, and that is sort of off limits for cuts.

"We can't reduce interest payments on debt. That would mean we would be defaulting as a country on our debt. We can't do that.

"Mandatory spending is spending on programs like Social Security, Medicare, Medicaid. They operate on formulas, and so they are driven by how many people qualify. And those numbers -- that spending can't change unless Congress goes in and changes the formula.

"This leaves discretionary spending as really being the category that Congress can change quickly in a short time. This is where the proposed budget freeze would apply. The problem -- the problem, though -- is discretionary spending takes only 16 percent of the budget. And so this is really not a long-run solution if we want to perhaps bring the budget more in balance. A long-run solution will have to include some of those other components."

Posted by deeshore at 08:14 AM | Comments (0)

March 02, 2010

The good GDP report

The latest reading from the nation's report card, technically known as gross domestic product, was very good. The report showed the economy expanded by a very strong 6 percent in the final three months of 2009. Is this report as good as it seems?

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

"Before I answer that we have to remember that there are four major components of spending to the economy. There is consumption: what consumers spend. There is what government spends. There is net exports, and then there is business investment.

"Now consumer spending in the fourth quarter was good. It wasn't great, but it was good. It was actually a little less on a percentage basis in terms of growth.

"And in the third quarter, net exports were strong. We expanded exports actually faster than imports. Government didn't change.

"The big contribution -- the big contribution -- however, was from business investment. This means that businesses were producing more products and services and putting them in stock and storage, if you will. They were replacing inventories that had been brought down during the recession.

"And the concern economists have is that generally this is temporary -- that businesses will not go on expanding inventories as they did in the fourth quarter.

"Bottom line, here this 6 percent growth rate in GDP was very strong. We don't think it is going to continue. We think GDP growth will settle down to the 2 to 3 percent range for the rest of the year."

Posted by deeshore at 08:00 AM | Comments (0)

March 01, 2010

Federal budget outlook

The Congressional Budget Office, the non-partisan federal agency that tracks the federal budget, recently released its latest analysis of federal revenues and spending over the next decade. What are the highlights?

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

"The deficit is still going to be an issue. The deficit as a percent of the economy will be 9 percent this year, it will be 6 percent next year, then 4 percent and then settle down in the 3 percent range for the rest of the decade. So this means we will be borrowing, but fortunately we will be borrowing at a slightly lower pace as we move through this decade.

"However, this means as we are borrowing more money the national debt is going to increase. Again, measured as a percent of the economy it is going to go from 53 percent now up to 67 percent at the end of the decade.

"Interest payments, consequently, will rise. In fact by the end of the decade, interest payments on the national debt will take almost as much of the federal budget as defense spending.

"Now revenues coming into the government have certainly slowed during the recession. They are expected to return to their long run average. But spending is going to go higher. And what is really driving spending in the federal budget for most of this decade will be the big three programs: Social Security, Medicare and Medicaid."

Posted by deeshore at 08:04 AM | Comments (0)