Video on Middle Class Employment Difficulties

The video helps highlight the concept that Americans need opportunities to succeed. These opportunities come from both the gaining of skills to compete on the global market but also the businesses that create opportunities to put these skills to good use. The recession has hurt many middle class Americans and through new efforts and pushes for development Americans can regain leading market positions. 8 million + jobs were lost during this period. The video helps in explaining the difficulty middle class Americans faced.

Is Higher Education Crashing? Report Indicates Major Problems on Horizon

States are cutting funding and college tuition is rising and student loans are exploding and we are officially in a public higher education crisis. According to the Center on Budget and Policy Priorities more states are pushing the burden on students and this may have an impact on the skill level of the next generation and their ability to successfully navigate the economic environment. The problems are a result of a number of issues related to budget cuts, increased tuition, and policy decisions. 

The primary issue is that public college education is increasingly being removed out of the hands of the average student. During the recession it was necessary to cut state budgets to ensure that the books were in balance. Despite these cuts many states still were not able to balance their budgets in other areas. State appropriates from 2008 to 2013 for higher education declined around 19%, student expenditures rose 27% and enrollment has increased over 11%.

The report indicates that policy decisions appear to be the major problem. Although one cannot disagree with the concept that the decisions we make impact other things down the line we have to wonder if there is something more fundamental going on. Has the college education refused to change with the times and bulky systems are now eating a larger lion’s share of personal, state, and federal costs?

There are three fundamental problems. 1.) States must raise revenue and become more efficient, 2.) Higher education needs to reform to make it cost effective and convenient, and 3.) Higher education should become more relevant to both the individual student and their employment prospects. 

Raising revenue doesn’t necessarily mean raising taxes but can mean raising economic activity that leads to greater revenue generation. Updating appropriate infrastructure and encouraging economic activity can create efficiencies and better long-term budgeting. Higher education must focus on their core responsibilities and encourage the development of the entire human being through innovative development that lowers costs. Higher education should be aligned to the needs of the modern market while still respecting the arts and other programs that foster the creativity needed to succeed. 

We know that this is a huge problem and no one is likely to have all the answers. Yet through working together, brain storming, taking action, and implementing we can change the foundational aspects of higher education that allow more members of society to learn the skills they need to make their lives successful. We can no longer afford to bury our heads in the sand and pretend we don’t have some work to do. There are lots of bright people with bright ideas….we only need to find the one’s that will work. For now…we are engaging in a public discussion with few right or wrong answers.

Report

American Gothic as a Depiction of the Great Depression by Grant Wood

American Gothic (1930)

The painting an American Gothic was produced by Grant Wood in 1930. It was completed in Iowa as a backlash against Europeans trying to depict Americans from their own vantage point. The concept of self-representation was called Regionalism. It was part of a movement of paintings by Americans to characterize "true" American life.

The picture is of a farmer and his daughter. Grant Woods used his sister and a dentist to model the image. One can see the age on the father's face and his willingness to work hard and save the farm. Perhaps he was saving it for his daughter. As the Depression took hold you can see the determination with just a touch of a classy sports jacket thrown over his bibs. It is an interesting clash of age and youth, wealth and poverty, ruggedness with soft flowers in the back, and commitment with a get-to-work attitude. 

Grant Woods moved to Cedar Rapids after his father passed away in 1901. He went to an art school in Minnesota and then came back to Cedar Rapids to teach in a one room school house. Around 1913 he attended the School of Art Institute in Chicago. Through his travels in Europe he exposed himself to other forms of art. He focused much of his effort on the Midwest and the lives of its inhabitants.

The Depression was a worldwide event that started in 1930 and ended in the early 40's. It is seen as the world's longest lasting economic downturn. International trade declined by 50% and unemployment rose to around 30%. The causes of the Depression range from explanations of market contraction to governmental inefficiencies. However, the initial decline of the stock market was seen by some economists as a symptom of bank and government policy failures.

In a study of the Great Depression by economist James K. Galbraith's work The Great Crash:1929 he writes:

The main relevance of The Great Crash, 1929 to the great crisis of 2008 is surely here. In both cases, the government knew what it should do. Both times, it declined to do it. In the summer of 1929 a few stern words from on high, a rise in the discount rate, a tough investigation into the pyramid schemes of the day, and the house of cards on Wall Street would have tumbled before its fall destroyed the whole economy. In 2004, the FBI warned publicly of “an epidemic of mortgage fraud.” But the government did nothing, and less than nothing, delivering instead low interest rates, deregulation and clear signals that laws would not be enforced.

Galbraith, J. (1961) , The Great Crash 1929, Pelican Books

Keynesian Theory: Benefits and Detractors

Keynesian economic theory has been under increased scrutiny as the U.S. national debt load increases and the economy suffers from a long period of recession. The theoretical standpoint of the Keynesian model is one of a mixed bag where those elements that would have a positive impact are often drowned out by inefficient governmental waste, political favoritism, and the cost of servicing the debt. Under certain circumstances the policies can help stave off economic collapse but fail to bring about positive benefits the longer it is used.

According to the U.S. Census Bureau an era between 1790's to 1930's only saw deficits in government spending in approximately 38 years. Most of this debt was short-term and a direct result of increased costs of war or economic downturns (Lee, 2012). Total federal budgets ran at approximately 3.2% of GNP when compared to nearly 70% of GNP today (The 2012 Long-Term, 2012). At such a high debt-to-earnings scenario the Keynesian approach loses its power to encourage future economic benefits.

To Dr. Dwight Lee, from the University of Georgia, most recessions were relatively small before the Great Depression of the 1930's (2012). They were small because market forces moved in to clear up slack in the economic system and create more productivity. He further makes the argument that Keynesian economics work best when running a surplus for many years and then used to spur economic growth in a quick paced fashion. However, running a long-term deficit and then applying additional debt on top of old debt creates higher levels of inefficiencies and costs. It dilutes the potential positive power of each dollar spent and increases its costs. 

One problem with Keynesian economics result from the political process that filters effective action through multiple competing interests and short-term results that create fiscal irresponsibility (Lee, 2012). What could have been considered effective government spending is often wasted in unrelated expenditures that do little to solve economic problems. This often occurs as decisions are filtered through the political process and sifted to those who support that process. It is always easier to spend then it is to save or ask for a tax increase.

It can be beneficial to see how poorly designed spending matched with political favoritism can impact the effectiveness of taxpayer liabilities. Accordingly, natural disaster legislation has shown that in the past nearly half of the funds were allocated based upon political interests versus that which actually aligns with the needs of victims (Garrett and Sobel, 2003). Such wasteful activities dilute much of the potential benefits of a stimulus that encourages recovery and growth by inappropriately allocating resources to the least effective entities and pinning them to taxpayer debt. 

It is this political favoritism that has made economic policy more dangerous. For example, the multiplier effect is based upon the concept of Keynes statements, “to dig holes in the ground" can benefit society (Keynes, 1936). In this concept, as money is paid for employment purposes it impacts secondary services through the economic chain passing resources to small businesses, companies, and other entities. However, if only a percentage of that money makes it through to these secondary entities its overall impact is diminished.

The end result of misguided economic applications of Keynes theory will result in higher taxes and greater expenses on debt (Barro, 1974). Someone will need to pay back the money. In most cases it will be the next generation and the one thereafter. The costs associated with debt servicing rises above the original costs creating ever increasing problems for the future. It is this future that is short changed for current needs.

The concepts of Keynesian economics works well under certain circumstances but can be disastrous if inappropriately applied in the long term. Positive applications of Keynesian economics occurs when the nation has been running a surplus for a number of years and uses this surplus to spur economic growth through liquidity that fosters cash flow and lending. Such monies will need to be effectively and efficiently allocated only to those areas where it is likely to have the most beneficial and long-term impact. As political favoritism, debt servicing costs, and inefficiencies rise the effectiveness of the financial economic injection diminishes.When used appropriately with assurances of proper expenditures in strategic entities it has the ability to increase economic activity in the short run.

Key Points:
-Keynesian Economics comes with benefits and risks.
-Money spent should have an immediate impact with long-term potential.
-The economic chain and spending decisions should avoid all waste.
-The cost of debt rises over time.

-Keynesian policies work in the short-run to counter quick shocks to the market.
-Political favoritism diminishes its impact.

-Economic activity would need to pick up much more than the costs associated with debt and misspending when compared to low debt and efficient spending in order to justify such policies. 
-The risks and benefits of using such policies should be carefully analyzed and calculated. 

Garrett, T., and Sobel, R. (2003) The Political Economy of FEMA Disaster Payments. Economic Inquiry 41 (3): 496–509.

Lee, G. (2012).  The Keynesian Path to Fiscal Irresponsibility. Kato Journal, 32 (3).

Keynes, J. M. (1936) The General Theory of Employment, Interest and Money. New York: Harcourt, Brace and Co.

The 2012 Long-Term Budget Outlook. (June 5th, 2012). Congressional Budget Office. Retrieved January 14th, 2013 from http://www.cbo.gov/publication/43288

The Concept of Business Cycles and Recession in Economics

Economic cycles are a natural part of business life and have occurred in one form or another for nearly every generation. These boom and bust cycles exist in everything from the biological organisms to stock market investing. It is often beneficial to view economic theories of business cycles to understand how imperfect information impacts the national economy as it moves through these growth patterns. Such cycles are many years in the making and can have a devastating impact on the economy if recovery is not forthcoming.

Bob Lucas, a Nobel  Prize Laureate, developed a monetary theory of business cycles that helps explain economic growth spurts and decline (1972). To him, inaccurate perceptions of economic factors contribute to these cycles that push the system out of homeostasis. Firms, and their management, only have limited time and resources for understanding their environment and typically focus on only that information which is needed for their immediate purposes. It takes considerable amount of effort for firms to figure out what changes in the environment are temporary and what changes are more permanent. It is this inaccuracy that leads to market overreaction that veers the system off of course.

It is beneficial to see how this works in a smaller market. Organizations working within a localized market determine the prices they can reasonably sell their products (Lucas Jr., 1972). Price is impacted by the amount of purchases and the supply of  products. With perfect information quantities adjust to supply while prices respond to aggregate spending shocks. Accordingly, with imperfect information firms respond to aggregate spending shocks in the short-run but not the supply quantities in the long run. This can create overproduction which impacts the economic chain throughout a business cycle and even into the next generation.

A model developed by Paul Samuelson (1958) helps to further explain the concept of a generational contract. Two generations, one young and one old, are engaged in the market. The young sell part of their production to the old who give the young financial compensation. The young hope to save some of the money in the anticipation of purchasing products from the next generation. The entire process works off of anticipation and an implied social contract. It is believed that by producing today the young will reap the rewards of their work tomorrow.

The wider impact of this veering off of course can impact generational growth potentially breaking the generational economic cycle. Artificially adjusting the market in one generation could have an impact on the economic viability of the next. Using the above example it is possible to see how an economic problem is created if one generation cannot produce and save in order to purchase from the next generation. As the money supply dries up, underutilized human capital, and contraction limits employment opportunities it will effectively leave one generation worse off than preceding generations. To fix this problem may lay in expanding the market to other nations (i.e. selling of products and services) to use excess labor capital, improve investment returns, and create natural liquidity in cash flow.

According to Dobrescu and Paicu (2012), when additional monies are injected into the system the prices of products increases which causes inflationary pressure. In essence, the products are rising in monetary terms but not in their real earthly value. An injection of money from a large generation of people with easy credit will impact the amount of money available for the next and smaller generation who are selling their production. A large market expansion could cause a comparatively large contraction later. The excessive use of credit and debt artificially inflates the system while ignoring underlining market principles. A contraction in such a situation is likely to be more devastating when a products "real worth" becomes realized (i.e. housing crisis).

We learn that as economic firms overact to market increases they will increase production based upon price increases. If credit markets are artificially expanded to increase purchases it hedges out the next generations purchasing power and money supply. One of the generations will need to pay the debt back or default on the debt. There will be a large contraction, or market flux, when this money is not available for purchases of products that keep the generational exchange of money and labor in full growth. As the market contracts the GNP and economic system slows down. The cost of debt becomes over-burdensome in an economic recession creating additional difficulties in market clearance.

Boom and bust cycles are common in normal economic activity. Such boom and bust cycles often follow an increase in production and then a quick contraction as resources are used up (Sherman & Hunt, 2008). The same cycle can occur in credit markets, production of goods, housing prices, or even entire economies. When boom and bust cycles are large it can impact generational growth patterns as seen in a long-term economic recession. Before an economic system can move back into homeostasis it must complete a market clearing of excess supply and demand. However, excessive periods of market clearing mechanisms may change the underlining assumptions of the entire economic system.


Dobrescu, M. & Paicu, C. (2012). New approaches to business cycle theory in current economic science. Theoretical & Applied Economics, 19 (7).

Lucas, R. (1972). Expectations and the Neutrality of Money. Journal of Economic Theory, 4, pp. 103-124.

Sherman, H. & Hunt, E. (2008). Spread of the business cycle. Economics: An introduction and progressive views (6th Edition). Armonk, NY: ME. Sharp.