How an Economic Crisis Affects The Military

on November 1, 2011 · Leave a Comment

 

Many people have many ideas and concepts on what an economic recession actually is. To many people, an economic crisis is when there is a shortage of credit or it is an economic crisis when the stock market crashes or when a country goes into severe debt. All these are actually outcomes of a recession and not causes of a recession.

Economists define an economic recession as a period of time where there is reduced economic activity. It is referred to as the ‘recessionary phase of the economy’. What it basically means is that there is reduced production and consumption at this point of time.

We all know what the outcomes of a recession are. There is much lesser commercial activity, people lose jobs, and there is a shortage of credit, the stock market crashes, countries go into debt and a lot more.

In any country, there are 2 very important attributes. One is the economic capability and the other is the military capability. Both of these are essential for the prosperity of a country. Both of these attributes are interdependent. For a good economy, you need to secure it with astrong military and in order to sustain a strong military you need to have a good economy. Needless to say, that any problems in the economy will directly or indirectly affect the military

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During an economic recession, the military will feel the pinch of it. Any military requires funds to sustain it. Most militaries get their funds from their respective national governments.

During a recession, the government faces shortages in its budget. Many countries see negative growth. The government will be forced to cut down on their spending. Needless to say, the military is hit with the recession too. Most countries import their weapons from the few countries which manufacture weapons. Weapon procurement programs come to a standstill. Even the countries that produce weapons are affected as countries reduce their purchases of weapons.

The military is forced to spend much lesser on training and maintenance. Lesser military exercises are conducted. Even recruitment is not encouraged very much at this time. All military spending is carefully monitored and is reduced as far as possible.

The reader must note that this does not mean that there is a cut or a compromise in the quality or there is a complete downsizing. To many national governments, National security is a priority which cannot be ignored or compromised even at the time of an economic crisis. Only unnecessary costs are cut and effort is made to ensure the quality.

Sometimes, an economic recession can alter the entire focus, goal and objective of the military. For example, most militaries before the recession focused on preparedness for full-fledged war. However, the recession forced most militaries to change their focus to terrorism and national security.

Therefore, we can see that the economic crisis does have a large impact on the military. It is a feat to sustain a strong military in the absence of a strong economy.

Written by vanguard76
Part time writer and student from India

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Are The Failed Economic Policies of Japan And Obamanomics One And The Same?

on October 29, 2011 · 25 Comments

Robert Samuelson had an interesting article in the latest issue of Newsweek magazine, “Why Japan Fell And What It teaches Us.” Mr. Samuelson reviews how Japan got into its current and long running economic slump, highlights of which include the following:

– Japan’s economic problems started after several economic bubbles arose in the late 1980s including a tripling of their stock market’s value from 1985 to 1989 and the tripling of its real estate values by 1991. However, by the end of 1992, the stock market had lost 57% of its peak value and land prices fell so low that they are still at early 1980s level. Banks weakened as the bubbles burst and they did not have enough collateral, with some banks going bankrupt.

– Economic growth stalled and grew only about 1% a year for the entire decade of the 1990s. This was a fraction of the annual 4% average growth in the 1980s in Japan.

– Despite implementing massive government stimulus spending programs, the economy is still stalled two decades later. They increased government spending while cutting taxes, resulting in massive budget deficits. Government debt as a percent of Japan’s GDP went from 63% in 1991 to 101% by 1997 to 200% today. 

– The Bank Of Japan, their equivalent of the Federal Reserve Bank in the U.S., cut interest rates all the way down to zero percent by 1999 with no discernible impact on the economy. Japan has an aging and shrinking population which tends to dampen domestic economic demand and growth. All of these policies and facts have led to twenty years of anemic economic growth in what used to be a power house economic engine.

Do the symptoms of the Japanese experience sound familiar? They are almost identical to the economic policies of the Obama administration and Democratic Congress, policies that have been successful in only creating a skyrocketing national debt. Our political class and other arms of the Federal government never saw the devastating impact of the impending real estate bubble burst before it happened, just like in Japan. Our national bank continues to support very low interest rates with not positive results, just like in Japan. Our political class spends hundreds of billions of dollars on stimulus programs that do not work, just like in Japan. Our annual GDP growth has been steadily below the long term GDP growth rate, just like in Japan. Our national debt as a percentage of GDP is getting dangerously close to 100%, just like in Japan. We have an aging population, just like in Japan.Sounds like we are going down the same road as the Japanese went through and that is not good. Everything that the Obama administration has done from an economic policy has mimicked the failed Japanese model with the same results: low growth, high unemployment, growing national debt, no apparent way out.

However, there may be some ways out if we look at our own history and some of the contrarian economic actions being taken by governments around the world:

– After Word War II, the United States faced an economic quandary. Much of the civilian workforce worked in the war factories making goods to support the war effort. Their current jobs were no longer needed once the war was over. Millions of military people were about to be discharged into civilian life, all of whom would be looking for a job. What did the Truman administration do? Did they significantly increase government spending to provide government jobs for everyone? Did they raise the national debt to frightening levels? Did they drop interest rates to near zero?

No, between 1945 and 1948, the budget of the United States government was shrunk by over 60%. Unemployment, despite this high influx of new workers, never got about 4.5%. Economic growth, even without massive government stimulus and deficit spending, was robust every year. In other words, they did the exact opposite what Japan did and Obama, and the got outstanding economic results.

– In Europe, France has taken the bold step of increasing its retirement age by two years to alleviate the financial pressure on their national retirement system caused by its aging population, i.e. they are cutting government spending. England is making substantial cuts in its military budget and is cutting nearly half a million government employees from its payroll, i.e. they are cutting government spending. Other western European countries are also cutting government spending, contrary to what the Obama administration budget busting spending is doing.

– Other countries outside of western Europe are also shrinking its itself by selling off government assets. According to an article in the November 1, 2010 issue of Businessweek, the Russian government is selling some of its government ownership in over 900 government companies, India plans to sell some government stakes in at least eight companies in the next five months, Poland is selling shares in its energy, insurance, copper, telecom, and power companies, and Malaysia is selling government interests in its postal system, its national chemical company, and other companies. In other words, while the Obama administration is becoming more and more entangled with U.S. businesses, e.g. General Motors, Chrysler, banks, the rest of the world is trying to shrink its government footprint in its domestic industries and shrink its national debt. While the rest of the world is trying to get its government spending under control, the Obama adminstration has ruled over astronomical growth government spending, just like in Japan.

In fact, everything that this administration is doing on the economic front is just like what did not succeed in Japan. Albert Einstein once said that the definition of stupidity is doing the same thing over and over and expecting the same results. Japan has been doing the same thing over and over with a failed twenty year track record. Could the Obama administration be fulfilling Einstein’s insight?

Mr. Samuelson concludes his article with the remedy for our ailing economy and a way to not follow Japan down the failed rabbit hole of economic policy. He is one of many Americans, most of whom do not currently hold an elected office,  who recognize that lasting economic prosperity and employment opportunities lie not with governments and politicians since governments and politicians do not create jobs. Only the private sector creates true, lasting jobs and wealth. Unless we reduce the thicket of business regulations, create a viable and low cost tax policy, reduce government spending and, most importantly, remove uncertainty from the equation, Mr. Samuelson predicts, probably correctly, that we will follow the path of a faltering Japan.

Removing uncertainty is the key. The Obama administration has introduced never before seen levels of uncertainty in the economy. Uncertainty as it results from a 2,500 page health care reform bill, uncertainty as it applies to the delay in finalizing tax rates for small business, historically the engine of this nation’s economic growth, uncertainty from what would happen if cap and trade ever occurred, uncertainty from a financial sector regulation bill that left all of the details to unknown Federal government bureaucrats, etc. No wonder no American businesses are hiring, they have no idea what the future holds due to Obama’s uncertainty factor but understand that the future is starting to look like Japan’s past, and that is plain stupid.  

Written by brunokorschek

default Are The Failed Economic Policies of Japan And Obamanomics One And The Same?

“Mankiw’s 10 principles of economics, translated for the uninitiated”, by Yoram Bauman, www.standupeconomist.com . Presented at the AAAS humor session, February 16, 2007. For the record, the talk contains two unattributed quotes (“9 out of 5″ is adapted from a line attributed to Paul Samuelson—although apparently he said it about Wall Street indices, not macroeconomists—and “wrong about things” is paraphrased from PJ O’Rourke’s Eat the Rich) and, of course, the Einstein “simple” quote is an intentional misquote. The talk is based on a published article in Annals of Improbable Research (see http ), which sponsored my talk and to which you should subscribe (improb.com ). In the paper you can see the “constructive example” of how trade can make everyone worse off (or you can just wait 50 years to see what happens with climate change). More info and other clips on my website (www.standupeconomist.com ), and please sign up for my email list. (No spam I promise.)

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Economic Issues – Economic Growth

on October 25, 2011 · Leave a Comment

Economic Issues

Economic Growth

Economic Growth is a country’s productive capacity and can be defined as an increase in the volume of goods and services that an economy can produce over a period of time.

Aggregate Demand and Supply :

John Maynard Keynes Theory:

? Aggregate demand (spending), according to Keynes theory, is the most important influence on economic growth.

? Level of consumer spending is vital because if consumers are too pessimistic their spending will decrease, businesses will decrease their investments, which leads to higher unemployment and eventually a recession will occur.

? The Government should use the Budget to counter economic trends towards recession and inflation. E.g. running a budget deficit to stimulate spending.

Aggregate Demand- is the total level of expenditure in an economy over a given period of time.

AD= C + I + G + (X-M)

Aggregate Supply- is the total level of income in the economy over a given period of time.

Y = C + S + T

The economy is in equilibrium and stable when aggregate supply equals aggregate demand in an economy. A change in demand can change economic activity as the equilibrium at times is not an ideal situation and movement away from equilibrium can cause problems. The government uses Macroeconomic policies to prevent or fix these situations.

Injections and Withdrawals :

In the circular flow of income, equilibrium occurs when the Leakages = Injections.

S + T + M = I + G + X

Components of Aggregate Demand (C + I + G + (X – M) :

à Consumption is influenced by :

? Consumer expectations- expectations of future inflation rates, future real incomes and availability of goods.

? Level of interest rates- rise in rates may discourage spending.

? Level of income- most significant determinant on how much people will spend (MPC and MPS would be considered).

? Distribution of income- more even distribution allows a higher rate of spending. Lower income earners spend more than higher income earners.

Marginal Propensity to Consume- is the proportion of each extra dollar of income that is spent on consumer goods.

Marginal Propensity to Save- is t he proportion of each extra dollar of income that is saved.

à Business investment is influenced by :

? Relative cost of capital equipment which is influenced by:

*Changes in interest rates- falling rates makes capital is cheaper.

*Changes in government policies- related to investment and tax concessions.

*Change in price or productivity of labour- labour substitutes capital.

? Business expectations:

*Increase in expected demand could lead to an investment in more capital.

*Change in the economic outlook.

*Discovery of new resources or technology.

* Inflation and uncertainty of future prices leads to a reduction in investment in capital.

à Government spending and taxation is influenced by:

? The level of economic activity- changes with fiscal policy to maintain a strong a stable rate of economic growth by reducing fluctuations through government policies.

à Exports and Imports are influenced by:

? Overseas income rise then Australia’s exports rise.

? Australia’s income rises, then our imports rise.

? Exchange rate, level of international competitiveness and consumers tastes and preferences.

The measurement of economic growth :

Economic Growth is measured by the annual rate in real GDP ( goods and services produced in an economy in a year, adjusted for inflation).

**Economic Growth (%) = real GDP(current) – real GDP (previous) x 100

Real GDP (previous yr) 1

**Real GDP (%) = Nominal (money) GDP x 100

1 CPI

Every 3 months, ABS calculates quarterly economic growth and Australia‘s yearly economic growth rate. Annual growth is an increase from the previous financial years GDP.

Australia ’s economic growth- After the recession of 90- 91 with negative growth -2%, the economy grew slowly. Growth of 5.3% occurred in 98-99 but fell to 2% in 2000 (Olympics caused the decline). Australia’s growth rate has slowed to 3% and has enjoyed 16-17 years of economic growth.

The multiplier process :

Is the number of times an increase in national income exceeds the increase in aggregate demand that caused it.

** K = 1 . (Marginal Propensity to Consume)

1-MPC

** K = 1 . (Marginal Propensity to Save)

MPS

The total increase in national incomes will be the multiplier multiplied by the original change in aggregate demand.

Sources of economic growth :

The main sources if economic growth are exactly the same as the components of aggregate demand. Once again they are:

1. Consumption by households- C (60% of GDP)

2. Investment- I (20% of GDP)

3. Government spending- G (budget deficit or surplus)

4. Net Exports- (X – M)

Technological changes are the most important driver growth as it is all about finding new ways to be more efficient.

The benefits of economic growth :

1. Living Standards- Faster economic growth means higher “material living standards.”

2. Employment- Economic growth creates jobs.

3. Increased Productivity- Producers become more productive to keep up with demand.

4. New Business investment- Businesses will invest more to exploit increased demand.

5. Increased Tax Revenue- High income and spending leads increased tax.

6. Increased exports- Growth leads to increased output, hence incomes can be gained from trade and can be used to produce cheaply in other countries.

7. More Leisure Time- As income rises, people will trade work for more leisure time.

The costs of economic growth :

1. Environmental damage- Natural resources are needed to sustain high growth however this results in pollution and deforestation.

2. Structural Unemployment- Technological and Production changes.

3. Materialism- Loss of traditional values.

4. Widening gap of income distribution- benefits high income earners.

5. Inflation- General price of goods inflate.

6. External Balance- Spending on imports lead to larger CAD.

Trends in Australia’s Business Life Cycle :

One complete cycle averages about 7years and is from Trough to Trough or Boom to Boom.

Four distinct phases of the Business Cycle:

1. Trough- Income is at the lowest level and unemployment is at its highest. Australia’s 1990 recession had growth of - 2% and unemployment at 11%.

2. Upswing- Expansion of level of output and employment. 1n 94, real GDP rose to 2.7% and unemployment fell to 8.9%.

3. Boom- Economy has grown to its capacity. In 94-96, the real GDP averaged at 4.5%, unemployment fell to 6.9% but inflation increased by 4.5%.

4. Downswing- Falling unemployment and output. In 00-02, growth slowed to 2% because of a slow down in the US economy.

The Government uses counter cyclical or stabilisation (macroeconomic- fiscal or monetary) policies to smooth out fluctuations in the business cycle. E.g. During a boom the government would run a budget surplus and raise interest rates to decrease spending and prevent inflation.

Policies to sustain economic growth :

The Government uses Macroeconomic policies to minimise and smooth the fluctuation of the business cycle. These policies are short term as they can only make a limited impact in the long run.

The Fiscal Policy (budget) is a macro policy that allows the government to increase economic growth by: reducing taxation and increase government spending.

The Monetary Policy (interest rates) is another macro policy that the government can use by influencing the Reserve Bank of Australia (RBA).

Microeconomic Reforms (long term) are used to increase sustainable economic growth in the future as they look at the whole economy. Individual industries- structural change and labour markets and focus on increasing productivity and competitiveness. E.g. Work choices policy= productivity.

Recent economic growth trends in Australia :

? Global economic conditions have been favourable since the 90s with low inflation, low interest rates and low unemployment. The macroeconomic stability world wide such as the strong performance of the US economy also contributed towards Australia’s growth. China as a major resource supplier and Australia‘s resources boom at the moment are also favourable.

? Terms of trade (ratio of the price receive for exports to the price we pay for imports) are also good at the moment as they have lifted domestic incomes and increased Australia’s economic growth. Growing resource demands of industrializing economies such as China have also increased commodity prices which has given us the highest level of the terms of trade in 50 years.

? Currency movements have also helped Australia’s economic expansion. Australia’s export growth was threatened in the late 90s and the global downturn of 2001 and depreciated at times because of this. However, a depreciating Aussie dollar allows us to become internationally competitive.

? Sustainable range of economic growth has to maintained so that inflation does not go over 2-3% and does not push our CAD so high. Our current sustainable growth rate of 3% allows us to balance our CAD.

Factors that help sustain Australia’s recent economic growth performance :

? The RBA focuses on maintaining low inflation and have policies in place to keep it below 3%.

? Low inflation keeps interest rates down, which encourages consumer spending. The RBA tries to control consumer spending to lower inflation.

? Productivity growth reached record levels, due to extensive microeconomic reform.

? Business and consumer confidence were boosted by low inflation, encouraging more spending and investment.

? Large increases in asset prices such as shares encourage people to spend more.

? New technology helped raise productivity and efficiency.

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