Naked economics chapter 7:financial markets

John Botterbusch

Anderson

AP Macroeconomics

15 March 2014 2014

Wheelan, C. (2010). Naked economics-undressing the dismal science. W. W. Norton & Company.

            It is of grave concern in American society that our citizens are uninformed of how banks, the stock market, and investments actually work. For one thing, the average American will probably say that the federal government are the ones creating the money, rather than the reality that it is banks that do so with their excess reserves. Stock markets are not lucrative “gold mines” that every person can make a 1000% return in a month since stocks-just like any other product being sold in a market economy-are subject to supply and demand laws and do not fluctuate as much as people think they do. These false notions of our financial system are possibly caused by the lack of proper information being passed to Americans through our media mediums (i.e. television, internet, radio, etc.). The lack of knowledge of how the financial system works is concerning since an ignorant population is doomed to make careless mistakes and cause harms to themselves. Even those with a Harvard degree in business failed to realize the problems that would have arisen in 2008 when speculations (betting on short-term price movements) on mortgage-backed securities would lead to a liquidity crisis following the mortgage crisis in 2007. A simple guideline for investment that has been painfully engrained in the minds of America following the Great Recession is that betting on bad loans so that a quick profit can be made is probably a not-so-smart idea. Rather, leaning away from loaned-backed securities and investing in other sorts of assets such as stocks, mutual funds, and bonds are a more secured and safe investment on average. In general, it is important to diversify one’s portfolio in investment in order to spread out risk and that if one egg in the basket cracks, the other ones are safe. As an avid stock investor for many years, I have appreciated the experience of winning and losing on stocks I invested in. As I continue to invest, I will look more to different types of assets such as bonds and mutual funds in order to increase diversification and possibly create better rates of return. The key to financial success is always to keep learning.

Naked Economics Chapter 9

John Botterbusch

Anderson

AP Macroeconomics

21 February 2014

Wheelan, C. (2010). Naked economics-undressing the dismal science. W. W. Norton & Company.

Open letter to Congress pertaining to economic climate

To whom it may concern,

            The health of our national economy is one of the most important concerns in the minds of American citizens and politicians alike. As a citizen of this nation, I believe that a few changes must occur now in order to ensure that the future is not as painful when financial concerns are more severe compared to what we live in now. Although there are so many different aspects of an economy that affect one another that it is almost impossible for one person-let alone simply a junior in high school taking their macroeconomics introduction class-to figure out how to make all the kinks in the economy go away, a few changes to fiscal policy in concern to taxation and government spending, as well changes to regulations of exports and outsourcing can help improve the economic environment in the country before things get worse later on.

            In concern to the nation’s current account, just in 2008, America’s account deficit was around $700 billion. We as a nation were once a creditor to the world, especially several decades ago when we were bailing out nations with major war debts, but now with the rise of government spending and decreases in revenue, the growing deficits continue to grow in alarm. Society often complains about big government, even though our government has been historically low compared to the rest of the developed world. Government spending is an important aspect of GDP growth, because what the government invests in the infrastructure and growth of the nation ultimately adds to the growth of the economy. However, when the economy is grown on a lot of credit from other nations, it can lead to problems. This all comes down to fiscal policy manipulations in order to increase the growth of the economy and decrease the fluctuations in the business cycle from recessions to growths. Our deficit problem is becoming increasingly a huge issues in the lives of Americans since it affects us all. In order to prevent a worse financial disaster in the future, it is important to affect fiscal policy in a way that raises revenues progressively by income from where it is now and while increasing spending on things like education while decreasing spending on things like excessive military spending that we in our current global state do not need compared to our cold war days. The distribution of wealth is growing considerably more and more unequal as the rich are becoming richer, with rates of 90% income growth for the 1% in the last couple of years while the lower classes have had stagnated wages. I will make this clear now that I am in no way a socialist or believe in such lunacy, but it is important that the wealthy be levied a little more tax wise while keeping tax rates the same as they are now for everyone else in order to get closer a balanced budget and a smaller current account. A current account usually runs a deficit when a nation does not export enough goods to make up for what it is taking in, as in the American market. According to the AD-AS model with depiction of real GDP and price levels in the economy, if say the government increases spending in aspects of societal infrastructure, it can help boost GDP growth and potentially get a nation out of recession faster. This may sound like I am advocating for Obama’s 2009 Stimulus package of over $500 billion dollars, but I am not. The reason I believe it was a failure was that there was that there was a lot of wasteful spending and that the spending could have been applied faster and more effectively in areas that needed it most rather than worrying about all industries as a whole, since in an economy like ours, everything affects everything. In order for stimulus from government spending to work, it needs to be an appropriate remedy to the situation, it has to be available in a timely manner, and it needs to get into action fast. For future economic downturns with the possibility of being as bad as the one we just got out of 5 years ago, the government needs to be able to efficiently and quickly come up with a plan to fund certain industries into recovery as fast as possible. That way it can keep unemployment levels lower as well as the rate of unemployment growing down. In essence, it is important for the government to spend in infrastructure, but increasing revenues by taxation when there is a need for spending is necessary in order to keep the system running functionally. It is important to make the sacrifices now in order to prevent a worse situation in the future.

Sincerely,

John 

Naked Economics Chapter 1: The power of markets

John Botterbusch

Anderson

AP Macroeconomics

8 February 2014

Wheelan, C. (2010). Naked economics-undressing the dismal science. W. W. Norton & Company.

            Market economies truly deserve a lot of credit for the progress of human development in the world. In chapter 1 of Naked Economics, Charles Wheelan discusses how market economies are so powerful in the world we live in, because of the power of choice and productivity. Markets allow for people to choose what they wish to produce with a finite amount of resources. Ultimately, markets are maximizing utility since societies-in a more basic sense-are growing around consumerist cultures, ran by firms trying to produce what people want to buy, not necessarily what they need. On the contrary, communist central planning as seen in Soviet Russia and Cuba does not allow for the most productive societies nor the most efficient. Why? Because in communist countries, the means of production is own by a group of bureaucrats, who try to allocate resources to what they think the country needs and fix prices to what they think is “market fair”. However, the fixing of prices on everything completely obliterates the ability for competition to occur and if the prices are not at equilibrium to supply and demand, the government either has made an inefficiency in either shortage or surplus of a good/product since price floors/ceilings are not market efficient. Take for an example, in which Cuba fixes the prices of Cohiba cigars at about $100 US and because of the high prices, there is a surplus of cigars that no one wants to buy for. What ultimately led to the demise of the Soviet Union and other communist nations was the fact that they were trying to change human nature: humans are meant to find their own means of production with the resources they find or have, rather than a government bureaucrat owning the means of production and dictating what can be done with it. Wheelan later on in the chapter begins to outline important points about why the market economy is so powerful and important to our lives. He begins by discussing how markets make our lives better by how profits inspires some of the greatest innovations in the world, which comes back to incentives. When people are able to get what they want and work for it, they tend to be more productive rather where in a communist country, there is no way to move up since everyone is “equal”. Wheelan discusses later on how at the same time, markets are amoral. Not that a market is immoral, but that it has no moral distinctions since morality is subjective to interpretation, like how economics is just a study of choices and how we choose to interpret them. The important point made was that markets do not create what we need, but rather what we want. That is why the poor cannot get health insurance, because they cannot pay for it. Even though the latter example seems wrong, it is the reality that if you don’t have the means to get what you want, you cannot get it. The market economy uses prices to allocate scarce resources and because markets use prices to allocate goods, most markets are self-correcting. Take for example the case of rising oil prices in the late 2000s as a result of shortening supplies of oil. Americans responded by buying smaller cars and on the supply side, oil producers started to pump more oil to take advantage of the high price. There is never a case where buyer and seller does not win, because ultimately supply and demand works for both of them. The seller is getting the best possible profit out of a price that the buyer is willing to pay for. Every market transaction, as Wheelan puts it, makes all parties better, since firms are acting in their own best interests and so are consumers. This brings back the argument against globalization, where the argument is that Asian sweatshop workers are persons of weak intellect who have many more attractive jobs offers but choose to work in sweatshops. Even though the wage earned by a typical sweatshop worker is pathetic and sweatshops are nasty places by Western standards, they often earn more than average worker’s income in the rest of the country they live in. According to behavioral economics, people act consistently in ways that make themselves better off. Even if it does not seem like much, a wage that is double what the rest of the country makes is worth it. In cases where governments choose to fix prices in a market economy--such as prior to 1978, airline fares were fixed by the government-- firms continue to find other ways to compete by either providing better quality or a distinction to their name. Some would argue that capitalism isn’t fair, but what must be acknowledged is that although market economies are flawed to an extent, they are better among all the worse of alternatives, especially socialism. When people have the means to produce and choose what they want to produce or sell, people are happier and more productive. The future of our world strives to innovate and to improve and in order for humanity to continue, people must have the freedom to choose in life, rather than be dictated. 

Naked Economics Chapter 12: Trade and Globalization

John Botterbusch

Anderson

AP Macroeconomics

18 January 2013

Wheelan , C. (2010). Naked economics-undressing the dismal science. W. W. Norton & Company.

Free trade and globalization are often controversial topics discussed in modern debates, with one side believing in its benefits to society, the world, and human development while the other sees globalization and capitalism as needless exploitation of the weak and destitute in order for developed societies to make their lives better. But are such topics truly black and white? In Chapter 12 of Naked Economics by Charles Wheelan, the author discusses how free trade overall creates more winners than losers in the long run. Whelan writes the chapter in sub-topics to try and reinforce the notion that the phenomenon of globalization and free trade are not ones of despair and exploit but rather ones of new opportunities and chances. Previously, I believed that Capitalism and globalization had benefits in improving the lives of others, but I always had a firm notion that sometimes protectionism is absolutely necessary to protect domestic jobs. However, in learning about the differences between comparative and absolute advantage and what the author discussed, my views changed from being one to question the act of globalization to endorsing it more. Countries like the United States can specialize in skilled labor rather than countries like Mexico, India, and China, who are responsible for much of the unskilled labor in the world to help provide goods and services to the rest of the world. Unskilled workers can provide most goods cheaper since the opportunity costs to do so are small compared to skilled workers, who are better off working on things they themselves can produce at a lower opportunity cost compared to the unskilled workers, like robots, machines, and more. In specializing in what countries are good at and allowing for trade to exist, each country wins in being able to get what they need and want when they themselves could not have done so (or at least not as cost efficiently). Although more developed countries have absolute advantages in being able to produce most good at lower direct, countries with large amounts of unskilled laborers can use those people to have the comparative advantage in providing goods for the skilled countries. Trade can be made between nations of poor and rich and overall wealth will be generated for both. Although some would argue that globalization has created a new advent of exploitation of workers with unsafe working conditions and poor wages, and although Wheelan acknowledges this, he does provide a crucial counterexample. He discussed how protectionism made the lives worse for those in poor countries when instead of letting kids work in sweatshops and earning an actual wage, child laborers went out onto the street with no way to provide for themselves and almost all of them turned into prostitutes and child sex slaves. Although both situations are not good, the latter is worse. When nations can trade with one another, they are able to get more of what they need or want when they themselves could not have done so in the first place since resources are scarce and production possibilities are limited, especially in poorer countries. Another argument against globalization is that it causes the outsourcing of jobs from hard working people and has no overall benefit. The author addresses that there is no such thing as a zero sum game situation in global economic trade and that although outsourcing does take jobs from people and gives it to others, it overall makes more jobs than it eradicates. Take for example the case of the North American Free Trade Act, where trade restrictions were lifted between the US, Canada, and Mexico and that even though the original outburst was that it would take away more jobs than create, in the end it allowed for economies to grow and create many new opportunities for jobs and lives for everyone in those societies. Such is the idea of free trade and markets, where letting people choose what they could do with their resources with someone else across the nation and world can create a brave new world for all. Although globalization is not a perfect system, I believe that with the opportunities it provides for everyone, it far outweighs the consequences it develops. And although mankind has ways to go till it is close to tranquility and harmony, the creation of a global market can help create stronger bonds between people and nations and hopefully create a global friendship and cooperation to help make the world a better place.