What brought you to Rutgers? I attended Rutgers University because it was the only school that accepted me for undergraduate studies. I made a conscious decision to apply to four schools. I felt that I didn’t know enough about many schools and it would not be worth my time and effort to apply to approximately 10 or so schools like everyone else in my high school class. Rutgers was my safety school and ultimately the only school that let me in. Thus, it really wasn’t a difficult decision. I attribute this to sub-par scholastic behavior as a high school student.

What was your high school self like? My high school self was angry, quiet, and bitter. I consciously made the decision to do as little work as possible in high school (see: Rutgers, only school that accepted me) as I felt there were intrinsic problems with our educational system. In my juvenile mindset, rather than use a flawed tool to achieve my own ends, I had to fight it completely rather than compromise my principles. While it seemed nice and idealistic at the time, it seems completely idiotic to me now. I would also attempt to go unnoticed and listen much more than speak. There is an old Norse tale that always stuck with me for its simplicity and its message. Odin, who was traveling around Earth in disguise, was offered food and shelter by a friendly man and his family. Impressed by this man’s hospitality, he told stories with hidden advice. The punch line of one of those stories was, to paraphrase, that people have two ears and only one mouth so that they can only say half of what they hear. I think this is more of a proverb that that says that gossip is bad, but it made me determined to listen as often as I could.

What’d you see as the flaws of the system and how do you feel about those flaws now? My take on the educational system is that for the most part it doesn’t mold students into analytically minded individuals who are able to think about issues, analyze facts, and develop conclusions on their own. Most teachers I had would rather have you repeat their opinions rather than come up with and defend your own. Obviously not all teachers are like this, and the few that I have had who broke the mold are some of my favorites. I also feel that the educational system does a lousy job of making connections between what is done in the classroom and what occurs outside the classroom. I feel the major failing of our school system is in the fields of history, politics, and civics. For the most part science and math curricula are fine (although we tolerate an incredible ignorance of math in our kids). I am not quite sure how I feel about these flaws now. I still do not like them, but I don’t have any obvious solutions. Clearly, throwing money at the problem is not effective. The best fix that I have seen is for parents, students, and teachers to take an active role in the educational process. If all three parties demand excellence from the others, that generally tends to be a recipe for success.

How’d you decide on your major(s)? When I was a sophomore in high school, I distinctly remembered becoming fascinated by politics, global events, and history. It was amazing to see human dramas that had been unfolding for centuries and were constantly evolving before my eyes. It certainly didn’t hurt that this was 2001 and the world looked very different in October than it did in August. I began to follow current events very closely and would spend a significant portion of my time reading everything I could on the internet. It soon became clear to me that the single variable with the greatest explanatory power (in terms of explaining historical and current events) was economic interest. I knew from that point on that I was interested in economics and politics.

What sort of aspirations did you have growing up and which of these, if any, are you putting the most effort into making a reality? As a kid, I was exposed to a lot of literature from an early age. Both my parents and my brother are avid readers and I would always be picking up books or magazines around the house and reading them. Whether I was reading fiction or non-fiction, there would always be some sort of dynamic character who achieved greatness in some form or another. These characters were inspirational in some sense as they motivated me to want to do something great. As cliché as it sounds, I always remember the story of how Julius Caesar came upon a statue of Alexander the Great (my namesake) and exclaimed something along the lines of, “At this age you had conquered the world! What have I done?” To me, this was a clarion call that I wanted to do something for which I would be remembered.

In a nutshell, my aspiration is to be a leader on a global scale and help shape the world into a better place. I have attempted to learn more about this by interning for my U.S. Representative, Rush Holt, in Washington D.C. There I quickly learned that politics was much dirtier and frustrating than I had initially expected. I then turned to attempting to shape public opinion through writing for the Targum and the Johnsonville Press. Now, I am in graduate school in an effort to master my understanding of economics and use this knowledge to guide public policy in the future.

I’d like to further explore what turned you off about holding an elected office. What seemed so unappealing? Part of why I decided I would never want to hold an elected office is the spotlight that is constantly shone onto politicians and celebrities. I could never live having every word I say scrutinized to a ridiculous degree by the media. While I feel that I can be very diplomatic, I do not always wish to be so. I believe I would lose a key part of myself if I had to spend every day sucking up to people who most likely need to be criticized and get a swift kick in the ass. I also think that it is nice to be able to walk down the street and not be bothered by anybody. If I were an elected official on the national level, a simple act as going to the grocery store would be unimaginable.

How would you describe your relationship with writing? I used to dislike writing as a kid. Now, I realize that this was because I was never taught to write well. When that changed, in 6th grade, I found a new love for writing that complemented my love of reading. My current relationship with writing is that it is an amazing tool for expressing my ideas that often falls short of my expectations. Unfortunately, it seems that writing is perhaps not the optimal tool to reach a mass audience in present day America. Perhaps being a talking head on TV would be better than being a columnist in a national newspaper…

Why do you think writing is not the best tool to reach people?I feel that writing is not the best tool to reach people because, in general, they are not proficient at reading or writing. There is a significant downward trend in people’s ability to use and understand the written language. I often think that I could reach a much larger audience by just screaming at the top of my lungs at a busy intersection.

How did you change over the course of your time at Rutgers? During my time at Rutgers, I learned a few things about myself. The first one was that I needed to step up and take control of my life. Rutgers was the ideal location for this realization. The fact that you are just a number to the Rutgers administration forces you to become your own advocate. There was nobody at Rutgers who was there to hold my hand throughout the process. If I wanted something done, I had to step up and do it. I also realized that math and physics were amazing. As a child I had always been good at math but constantly hated it. This was, in no small part, some form of teenage rebellion against my parents who are both physicists. I finished my math requirements for Rutgers in high school and made the decision that I would never take math again. My sophomore year at Rutgers I took a general physics class and the next year I took Calc III and got back into math. I am very glad that I took them because I feel that they have given me even more tools to understand the universe around me. Similarly, I realized that I did not want to be a politician any more. When I entered Rutgers, I was determined to be the next President of the United States (or World, really). By the time I left Rutgers, I only wanted to be the man behind the curtain whispering into the ear of a prominent politician. Fame is something I wish to avoid like the plague. However, the most transformational experience I had at Rutgers was undertaking a senior honors thesis. My advisor was, to say the least, phenomenal. He constantly challenged me and forced me to refine my ideas and writing in a way that I had never really encountered. It was revelatory to see myself held up to a higher standard and learn that in certain aspects I was lacking.

What are some things you might whisper today? I am not sure what I would whisper. Probably something like, “they’re listening to us”.

What do you think of graduate school thus far? It’s a lot of work but I really enjoy it. The best part is the other students. I feel that I learn more from the other students than I actually am from the professors. I am constantly aware that all the other students in my program are very talented and bright individuals. It makes me want to work harder in order to not seem like a complete fool. This was a situation that I very rarely experienced at Rutgers. I also really like the fact that most of the students are from abroad. They offer very different perspectives on the world and current events than you would find in an American-only group.

How did you find out about the JVP? I found out about the JVP through Alex Giannattasio and Mike Stuzynski. I knew these guys from my sophomore year in Brett Hall and became good friends with them. Mike was also responsible for me writing a twice-a-month column for the Daily Targum, entitled “Draine on Society”. They told me that there were thinking about creating some sort of magazine or periodical which would compile works from various authors and individuals. Being someone with strong opinions, I jumped at the opportunity and told them that I would love to get involved. It also helped that I frequently disagree with the two of them (one more than the other) and felt that if I could express my thoughts as cogent argument on paper, then I could change their opinions.

Have you changed any opinions thus far? Well this is such a broad question that I am sure the answer is yes. I have a much more jaded view on the value of life than I did when I got out of high school. The idealistic part of me wanted to believe that every life was precious and that each person’s viewpoint was valuable. Now I have reached the conclusion that life is incredibly cheap and most people’s opinions are not worth responding to. I am also much more pessimistic and suspicious of people than I was before coming to Rutgers. This is probably from knowing several people who have been robbed or mugged and having chance encounters with people on the Rutgers bus system.

Do you try to reconcile the idealistic part of you with the part of you that thinks life is cheap and most people’s opinions are not worth responding to? Not really. I feel that expending such effort probably isn’t worth it. We all have limited time and energy and I would rather devote said time and energy to something that either makes me happy or is self-improving.

What makes life cheap? I’m not exactly sure what “makes” life cheap. It just seems to be a reality in which we live. I tend to view the world through a statistically-tinted lens. The fact that we, as individuals, are alive is just a statistical coincidence. There is nothing inherently special about us. In fact, I bet I could purchase a living human being for a relatively small sum in most parts of the world. The fact that the same might not be possible in the United States says nothing about the worth of a human life, only an American life. We are all just another link in a long, unbroken chain from our much more primate ancestors. To think that our particular link is something special represents some form of hubris.??Why do you think other people’s opinions aren’t worth responding to?I feel that most opinions are not worth responding to because most people don’t formulate them based on logic or facts. While some individuals do, and it is always a pleasure to debate with, the majority of people I have encountered based their opinions on dogma and ideology and refuse to let facts get in the way. There is simply no point in responding to such an opinion when the person will not be swayed no matter what you say. Only a fool will believe on Wednesday what they believed on Monday, independent of what occurs on Tuesday.

Have you been contemplating solutions to the problems that you identify and what do these problems make you feel/think about the present and future? I am always trying to think of solutions to problems I see. However, this is more easily said than done. The reason most of these issues are still problems is that there isn’t a particularly optimal solution. There are always trade-offs; most policies that make one group better off typically come at the expense of another group. It is not so much the problems that define how I think about the present or the future. History is filled with problems. I am more dismayed by our approach to these problems than the issues themselves. Our current political climate is one of pandering to extremes, denigrating knowledge, and appealing to emotions rather than reason. When you have significant camps within major political parties steadfastly refusing to acknowledge facts, then there is a major problem. I think much of this has to do with a general ignorance about science and quantitative analysis. The attempt to paint everything as black and white does a great disservice to our society as we effectively constrict our set of policy options.

We seem to be at a crossroads in the United States. Attending a prestigious university almost seems to be a liability rather than an asset in the public sphere. There is a deep distrust of experts. There is a general perception that the most basic answer is the correct one. In my mind, these are dangerous trends that act to undermine the security and prosperity of our society. If we are able to reverse this trend, and value learning, reward genius, and appreciate nuance then I think the future will be a brighter place.

Jhoany Benetiz: I believe that this upcoming election is crucial. People are losing trust in our president and the Democratic Party, which I find very upsetting. I think that people need to learn to be patient and not expect drastic changes overnight. My family and I have been affected by the recession, so I totally understand why people are growing desperate and need things to improve. But, still, people should not lose hope like that. Obama’s doing what he can.

I know that not everyone agrees with this. I constantly hear my professors urge us to vote on Tuesday and make a difference. But, unfortunately, I will not be voting. Why? Because I’m a permanent resident and only American citizens can vote. Isn’t that something? But I would vote if I could. Believe me!

Brendan Kaplan: Yes, I will be voting. I’m more concerned with keeping my pulse on the local state of things rather than any of the other races.

Also, I’m going to be voting in Princeton, my hometown community. I’ve heard a lot over the past few years about students needing to make a bigger difference in the political landscape of New Brunswick. I think that that is great, as long as one plans on staying in (or owning property in) this city. Aside from that, I think a more genuine way to give back to the community that more or less graciously provides us a place to study is through local community action rather that local community politics. True service can’t be put on a resume and should be undertaken as a means to an end, in this case hopefully a healthier community.

Additionally, there are a number of issues that are important to me in good old P-town. My parents still live and own property there. There are also a number of changes happening downtown there, especially with the construction of the new hospital getting closer and closer to completion. I’m going to follow the progress there with a watchful eye, and hope everyone takes the time to lend their own personal expertise to their hometown races. We grew up there, we know the issues.

Bilal Ahmed: This question does not entirely pertain to me because I am a Canadian citizen. However, I would advise people to register their dissent. I understand that voting sometimes appears to be a means of enabling a broken system, but I have watched enough news programs in the United States to know that most statistics are based on registered voters rather than eligible ones. The only way for your decision not to vote to have any effect on how party politics are conducted is to register before staying home on Election Day. I realize that some will argue that both parties are fundamentally flawed, but I have noticed that most objections to the American political process in this area of the country come from frustrations with the Democrat Party. They are labeled as spineless, cowardly, and unable to take a firm stance on issues such as Afghanistan. If I were able to vote in the 2010 election, I would register as a Democrat and remain at home in protest because of President Obama’s decision to escalate the war. I’d register in protest of the Afghan troop surge, as I believe it to be a political compromise that relegates bloodshed to an international theater rather than risking it in Congress. President Obama has decided to place life and human morality below American party politics, and in response I would register my disapproval.

Matia Guardabascio: Yes. I will be voting in the election. I am voting because it is my civic duty to do so. I am voting because I want to make sure I did my part to help the country avoid the wrath of incompetent politicians. Voting in a state—Massachusetts— that is historically Democratic (except for Scott Brown), my voting day is less of a hot spot than most. Still, the gubernatorial race up here has been heated and I am anxious to cast my vote for a man who has done a good job as governor for the last four years. I am also anxious to remind Barney Frank that he will always win his district back home, in spite of the lies and propaganda spewing from the other side. And given the issues on the ballot this year (particularly the lowering of taxes), I feel obligated to go out and vote to make sure that the reasonable and responsible decision is made.

Mike Stuzynski: I’m voting because, even though I have honestly lost faith in politics, a right un-exercised is a right lost. And my faith in politics will be restored only when everyone who voted for the bailout is no longer in office.  Ask Alex G if he remembers how exciting it was last year when we found out that the House of Reps rejected it the first time.  We had quite the celebration, and that was honestly the last time I really thought that the government was paying attention to my interests and wishes.  The current health care law is a joke, but you’d only find that out if you read the entire thing (hint: it’s long).  Listen to the media and they either criticize it for the wrong reasons (the asinine–but possibly true–notion that it’s an unconstitutional use of the commerce clause) or emphasize one or two talking points again and again.  The bill failed to establish the goal of government run health care, but also did little to change the already highly structured and monopolistic private health insurance industry.  Instead of using the natural force of private competition to drive costs of care down, the law allows insurance providers to divide up the market and keep prices artificially high.  Because of all this, the law just does more harm than good. It’s like you sent your buddies out for beer, and they come back with a keg of O’Douls, and you still have to pay for it!

Alex Draine: It was my intention to vote, but I will not be voting because the great state of New Jersey has failed to send me my absentee ballot in a timely fashion.  Either that or the US postal service lost my application for an absentee ballot in its journey to Trenton.

Dave Imbriaco: I plan on voting today and in every future election.  Why?  Because it’s the LEAST that a responsible citizen can do in a democracy.  I know it’s a trite expression, but democracy is not a spectator sport.  You can’t expect to have your interests represented in government if you don’t take the time one day a year to cast a ballot, and that is really the barest minimum that someone who considers themselves a responsible citizen can do.  I would never expect for people to get as involved in politics as I do (doing what I do requires a bit of insanity), but I truly don’t understand why people don’t vote (well I do, I just tend to think their reasons for not doing so are stupid).  It doesn’t matter if your choice is between a giant douche and a turd sandwich (credit: South Park), you still have a choice to make.  If voting was always an easy thing to do, it wouldn’t be called a civic DUTY.  You are lucky enough to be born in a country where you have the fucking chance to shape your own government, anyone who puts that down is an unappreciative asshole in my book.

Moreso, it’s ESPECIALLY important that us young people get out to the polls.  Do you all really expect our parents’ and grandparents’ to solve all the problems that they created?  If the American youth doesn’t step up and assert themselves and demand their place in American politics, no one will give it to them and we’re fucked as a generation and a county.

The day that I’m convinced that my vote doesn’t mean anything, you’ll find me on the front lines of the second revolution.

Marlana Moore: I am going home to vote on Tuesday. My dad is running for council in my very small town, and he needs every vote he can get. I should have just voted by mail, but I forgot to get the ballot. I am not sure if my vote will matter all too much. In fact, I haven’t yet looked up the other candidates. The last two elections have been pretty big ones, and I guess I have seen the most aggressive campaigning in other states that are voting on senators. As a culture, we stress the gubernatorial and senatorial candidates so much more than local county positions even though that is the sphere where your vote has the most direct impact. But does anyone know who is on the Board of Freeholders, or even what they do? How about the County Sheriff? I don’t, and I think that I should. In Merchantville, I know that my vote will count, at least personally. I will probably continue to vote, just because I can.

Rebecca Zandstein: I will be voting in the elections on November 2nd. I do not think I can complain about certain local legislation and actions being taken by our House representative if I did not at least vote. Voting is the minimum that is asked of us to do as out civic duty [as citizens]; voting is an easy way to go out and show that I care about what happens within my district. I do not approve of those who complain about budgets and taxes (cuts and increases) and free markets versus extensive restrictions on businesses when they did not even vote for a candidate who abides by their ideology. Furthermore, voting encourages education: one needs to know the core values behind each candidate and many times research is required for values that are not understood in depth. Educating oneself within society for the benefit of self and others is, in my opinion, a primary benefit to voting.

Ben Kharakh: While I’m currently of the opinion that voting is less than the least that one can do, I also recognize that the government exists. A lot of times people get caught up in criticizing and theorizing without admitting that, hey, the world is a particular way right now. If you’re going to try to change anything in anyway, you’re better off taking the current state-of-affairs into consideration. So, I will vote.

At first I was going to pick the candidates who seemed like they’d come closest to voting in the manner that I would vote, but they all fell short of that standard. And that’s based on websites designed with the purpose of making the candidates look good! So, rather than voting based on who I think will do the most good, I will vote based on who I think will do the least damage.

Recently, several pieces of legislation crafted by Congress have come under fire from politicians for their effect on the national debt.  Typically these critics have been dubbed “deficit hawks” due to their conservative, or hawkish, viewpoints on the subject.  But this type of behavior is not limited to one side of the political aisle.  Indeed, all sound-minded and forward-looking individuals ought to agree that we must ultimately reduce the size of the national debt.  Thus, a closer look into the nature of debt and deficits is warranted.

When a household or firm is considering spending decisions, it must always do so within the confines of a budget.  The budget represents their net ability to spend; in economics jargon, we refer to this as the “budget constraint”.  This is the core of constrained optimization which is at the heart of modern Macroeconomics.

Yet strictly speaking, households and firms are not truly constrained by their current income; they can spend more than they earn by taking on and accumulating debt.  Debt is a financial obligation from the borrower to the lender.  There are several key features of debt that characterize any form of loan or bond.

The first characteristic is the principal.  This is the amount that is borrowed and the amount that is to be paid back upon maturity of the bond.  The maturity of the bond is the length of time until the principal is expected to be paid back in full.  Treasury bonds, loans from private individuals to the government, have maturities ranging from 3 months to 30 years.  The final characteristic of a bond is perhaps the one we are most familiar with – the interest rate.

The interest rate takes on many roles and can be considered in many ways.  One way to describe an interest rate is that it is the price of borrowing money.  In this sense, economists are looking at money not simply as a medium of exchange but as a good in and of itself.  Thus as there are markets for goods, labor, and capital, there is also a corresponding market for money.  Here the supply of and demand for money dictate the price of money – the interest rate.

A second way of looking at interest rates is as a form of risk compensation for the lender.  The borrower always knows more about their activities and motives than the lender does.  This is referred to as “information asymmetry”.  Since through the act of lending the lender is taking on some risk of not being repaid, he or she demands additional compensation in the form of interest rates.

Now that we understand what debt is, we can address the issue of households, firms, and even governments taking on debt.

All debt is not created equal.  When taking on debt, one must carefully consider what the money is going to be used for and what are the potential benefits of such an investment.  That is to say, some debt is beneficial while other debt is harmful.

Let’s take a look at two kinds of debt that are applicable to the household and thus should be familiar to most people.  Assume a household takes out a loan and has a choice of how to spend that money.  If the household spent that money on purchasing a brand new HDTV complete with sound system, then that is not a productive use of that money.  Unless you play video games for a living and feel that this will grant you a competitive edge, this is a form of bad debt.  On the other hand, taking out a loan to pay for a college education is a good form of debt.  The key difference between them is that the college education will increase your human capital and earning ability over the long run while purchasing a new TV will not.  Thus, when considering debt, one must always examine the potential for growth that this debt might allow.

The same is true for firms and governments.  A firm might take on debt through the sale of bonds in order to raise capital for a new manufacturing plant.  This capital expansion increases the total productivity of the firm allowing them to earn more profits and thus be in a better position to pay back their debt.

What are some good and bad examples of government debt?  Sticking to the metric outlined above, anything that will serve to promote economic growth can be considered good debt (if the return is high enough, of course), while deficit spending that does little to stimulate growth is bad debt.

Investment in education, infrastructure, and other forms of human and physical capital are always a good form of debt.  These forms of spending increase the economic potential of the nation and through increased economic output, the future revenues of the government itself.  Thus these forms of debt will often be able to pay themselves back over time.

Tangentially, some have suggested that tax cuts also represent a viable government economic policy option. To the contrary, it has been shown that tax cuts are wasteful forms of debt from an economic perspective.  The returns from tax cuts are significantly less than the returns from government spending in terms of stimulating economic activity.  Of course, one might make a political argument about the nature of liberty; this article focuses on economic arguments and will sidestep that issue completely.

So now that we understand what debt is and the merits of different uses of debt, we can now address the question of how much debt is the right amount?  The first condition to be laid down is very straightforward and should come as no surprise to anyone.  A household, firm, or government should not accumulate debt that exceeds its lifetime ability to pay back said debt.  This is commonly referred to as the “No Ponzi-Game Condition”, though perhaps we could relabel it the “No Madoff-Scheme Condition” in light of recent history.

We can also look at the volume of debt in two distinct ways that will have different implications.  The first is to look at the absolute level of debt.  Consider two hypothetical individuals, Fred and Molly, both of whom have accumulated debt over the years.  Ignoring where the debt came from, let us suppose that Fred owes creditors a sum of $100,000 while Molly owes her creditors a sum of $200,000.  In absolute terms Molly owes twice as much as Fred which makes her level of debt seem much worse.

Now let us consider these levels of debt in relative terms – not relative to each other but relative to the earning power of each individual.  Suppose Fred earns a salary of $100,00 per year while Molly has a much higher salary of $500,000 per year.  In absolute terms, Molly still owes twice as much as Fred.  But when considering their levels of debt relative to their earning power, Fred’s debt amounts to 100% of his annual salary while Molly’s debt amounts to only 40% of her annual salary.  When considering each individual’s debt in this light, it seems that Molly’s level of debt is much more manageable than Fred’s, even though she owes twice as much.

This relative level of debt is how we must consider government debt.  Any amount of government debt is likely to be on such a massive scale that it seems enormous in comparison to an individual salary and a household’s budget.  But when these values are calculated in terms of percentage of GDP, one is able to truly get a good picture of how much debt it really is.

Returning to the lead of this article, we are now able to evaluate government deficit spending, which is of course a form of debt accumulation.  When in an economic recession the government should pursue a policy of deficit spending.  This is especially true if monetary policy is made impotent, such as when interest rates are already at the zero lower bound (one cannot effectively push interest rates negative).  Deficit spending, while accumulating debt, is a very effective form of stimulus that will raise output and employment back up towards their full-employment levels.  The economic costs of not doing so can be quite tremendous.  As a quick back of the envelope calculation, consider the following scenario.  Suppose a full-employment economy (a misnomer) involves an unemployment rate of 4%.  Consider the case when the national unemployment rate is 10% (which also hides the true cost of under-employment).  Thus, the economy is losing (.06)/(.96) of its potential output – the so-called “output gap”.  Assuming a national GDP of $10 trillion (slightly low for the United States), this amounts to approximately $625 billion worth of lost output annually.  Note that this calculation is intended to be a low-ball estimate as it does not include the trust costs of under-employment, those who have stopped seeking work, and the self-perpetuating effects of mass unemployment.

The cost of massive unemployment is enshrined in the idea of the “Paradox of Thrift”.  The “Paradox of Thrift” is a phrase coined by Keynes and attempts to explain why recessions can spiral out of control.  The basic idea is that when a large number of people are laid off, they can no longer spend and consume at previous levels since they no longer have a steady income.  This lowers demand and firms will then lower output so as not to overproduce.  This will either directly lead to other workers being laid off or will do so indirectly through the Paradox of Thrift.  As workers speculate that they might be the next to lose their job, they make a rational calculation that they should spend less in order to have larger accumulated savings if they become unemployed. Yet when everyone does this, it leads to even less spending and demand, and thus more workers are fired as firms scale back to produce less.  This in turn becomes a self-reinforcing spiral of unemployment.  It takes a large boost in demand to combat the economic and psychological forces that are driving this collapse in demand and unemployment.  Typically only the government is large enough, or willing enough to take on debt, to deliver the sort of shock which is necessary to jump-start the economy.

However, this policy of deficit spending in bad times must be accompanied by a policy of fiscal and financial responsibility during the good times.  While it is acceptable, and even desirable to increase the deficit during times of recession, we must be willing to rein in this spending and increase taxes to pay for our spending when prosperity returns.  Much of our current financial situation comes not from unsound economics but rather from a collective willingness to forget the pain as soon as the pleasure returns.  There is no rational economic argument against deficit spending that seeks to reduce unemployment or ameliorate the pain of unemployment during times of recession.

Ultimately, we cannot be afraid of debt.  Debt is simply a financial tool that can be used properly and improperly.  In order to use debt in beneficial methods, we must first understand what it is, and how it can be used for gain.  We must be critical of deficit spending, but only in the same sense that we must be critical of everything.  Debt must be used to pick up the slack during the bad times, and funds put aside to pay for that debt in the good times in order to promote economic stability.

There are two forms of government economic policy: monetary and fiscal. Monetary policy is conducted by a central bank, or the Federal Reserve Bank in the United States, while fiscal policy is conducted by the Department of the Treasury and the Legislative Branch.  This article will examine both forms and evaluate their relative effectiveness in promoting economic activity and growth in times of recession.

Monetary policy is conducted in a single fashion: the raising and lowering of interest rates.  Specifically, the Federal Reserve targets a single interest rate known as the Federal Funds Rate.  This is the interest rate that commercial banks charge each other on overnight loans.  This in turn will partially determine the values of most other interest rates in the economy.  The Federal Reserve affects the Fed Funds Rate by means of supply and demand.  The Federal Reserve Bank of New York (one of the twelve banks that comprise the Federal Reserve system) holds what are known as open market operations wherein they buy or sell large quantities of securities.  Through these operations, the Federal Reserve is able to modify the portfolio composition of commercial banks to achieve the desired levels of liquidity.  When they purchase large quantities of securities, they are replacing less liquid securities with fully liquid cash.  This has the effect of pumping additional cash into the commercial banking system, and by increasing the supply of loanable funds, they are able to lower the price of those funds (the interest rate).  The counterpart of this is to sell large volumes of securities; this sale removes liquid cash from the commercial banking system and replaces it with less-liquid assets.  This reduces the amount of loanable funds in the system, thereby raising the price (the interest rate).

The general level of interest rates has an effect on economic activity.  When interest rates are low, the cost of borrowing money goes down and more people are induced to borrow in order to spend or invest.  This leads to economic growth and spurs inflationary pressure.  Conversely, when interest rates are high the cost of borrowing increases which tends to reduce investment and spending, leading to decreased economic output and deflationary pressure.  Alternatively, when interest rates are low there is a small premium to saving, which should induce individuals to consume more and save less.  Similarly, when interest rates are high, there is a large premium to saving, which should induce individuals to shift their earnings from consumption into savings.

The fiscal policy can take one of two forms.  These forms are tax cuts and government spending.  Each tends to have a similar effect, but one is clearly superior to the other from an economic standpoint.  Tax cuts and spending both aim to increase output by stimulating demand.  The increased demand will cause firms to increase production and thereby hire additional employees and rent additional capital.

The key characteristic of fiscal policy is something known as the “Fiscal Multiplier”.  This is the multiplicative effect of fiscal policy on overall economic output.  The key concept behind understanding this is an individual trait known as the marginal propensity to consume.  The marginal propensity to consume is the fraction of an additional dollar of income that an individual will choose to spend on consumption.  The marginal propensity to save is the remaining fraction, which the individual chooses to save.

The story behind the fiscal multiplier goes like this: suppose an individual receives an additional $100.  Let us assume that this individual’s marginal propensity to consume is 0.9.  That is, he will spend $90 of that original $100.  For the sake of numerical simplicity, let us assume that all agents in the economy have an identical marginal propensity to consume.  The first individual, let us call him A, will spend that $90 at a store owned by B.  B then sees an additional income of $90, and will decide to spend $81.  This $81 is now income to individual C, who will spend 90 percent of it and so forth and so forth.  From this simple example, we can see that the overall effect of that $100 on economic output is much more than $100.  In this example, the multiplier takes the form of a geometric series and would take a value of 10.  In fact, the greater the marginal propensity to consume, the greater the value of the fiscal multiplier will be.

This understanding allows us to compare the relative effects of tax cuts or government spending.  Let us again compare a tax cut of $100 and government spending of $100, where agents are assumed to have a marginal propensity to consume of 0.9.  The tax cut will be returned to an individual, who will then spend $90 of it, and the multiplicative effect will begin from the initial outlay of $90.  With government spending, however, that initial $100 is completely spent beginning the multiplicative spiral from there.  Thus it is easy to see that government spending will have a larger overall multiplier than tax cuts due to the fact that the public will save a fraction of the initial tax cut which will then not experience the expansionary effect of the multiplier.  Another caveat about tax cuts is that they tend to accrue to the wealthy, who are much less likely to spend this additional income than working or lower-class individuals.  When an individual’s basic needs are met, he or she will be more willing to save additional income, thereby lowering their marginal propensity to consume.

An extension of this investigation into the fiscal multiplier suggests that the optimal way to conduct fiscal policy is to spend on infrastructure and education and to increase transfer payments to the poor and unemployed, rather than to simply cut taxes.  The poor and unemployed are least likely to have their basic needs met and thus will be more likely to spend any additional income they receive.  In other words, the poor and unemployed should have the greatest marginal propensity to consume and will have the greatest stimulatory effect on the economy.

There are some who claim that government spending cannot increase output because it is merely taking a dollar away from private consumption and allocating it to public consumption.  Therefore, the total amount of consumption has not changed, merely the composition of consumption.  This argument is technically correct, but only if certain conditions are satisfied and certain assumptions hold.  In reality, they almost never hold.  The argument rests on the assumption that the economy is in a perfectly competitive equilibrium with full-employment, that all resources are fully-utilized, and that unemployment is never involuntary.  It is easy to see that these conditions are almost never satisfied; in fact, it is possible to say that they are never satisfied when fiscal policy is being viewed as a potential option.  In fact, this line of logic would explain the Great Depression as occurring because a quarter of the U.S. workforce decided to take an extended vacation.

The argument that government spending “crowds out” private spending is an interesting one that deserves greater scrutiny.  The late British economist John Maynard Keynes expounded upon this argument in a manner that is worth repeating.  If we are to assume that government spending merely shifts capital from one use to another, and thereby cannot increase the total level of output, then let us extend that argument to private firms.  If a private firm wishes to increase its investment and build up capital, it must be that it can only do so by taking capital away from some other productive use, and therefore can neither increase employment nor output.  This is obviously incorrect, and I doubt that there are any economists who would craft such an argument.  But it shows that the only way the “crowding out” effect of government spending can be validated is if the economy is at full-employment or we treat the government as a fundamentally different economic creature than private firms.

There is no reason why we should think of firms as being different from the government.  Both seek to maximize the profits accrued to their shareholders.  In the case of the government, it is not monetary dividends that accrue to the shareholders (the public) but rather dividends in the form of security.  That security could come in the form of national security, financial security through a safety net, or even health security if we manage to enact meaningful healthcare reform such as a single-payer system.  The government also provides basic services to the populace in the form of roads, airports, parks, museums, public education, municipal police and fire departments, and more.

However, fiscal policy is generally a second choice of the government, which uses monetary policy as the first tool in the toolbox.  This is perhaps due to the fact that the Federal Reserve is an independent entity which can act without seemingly endless deliberation and posturing by Congress.  However, when monetary policy loses all traction, as is the case now when the target federal funds rate is 0.25%, then fiscal policy must step in to fill that void.  Thus is important to know how to compare the different forms of fiscal policy by means of their estimated multiplier.

According to congressional testimony by Mark Zandi, the chief economist for Moody’s, the highest estimated multiplier for any form of tax cuts was 1.29.  In contrast, research done by Christina Romer, the chair of Obama’s Council of Economic Advisers, estimated the multiplier on government spending to be approximately 1.5.  Additionally, the most effective form of government spending, an increase in food stamps to the needy, had an estimated multiplier of about 1.7.  Furthermore, recent research done by Gautti Eggerttson of the New York Federal Reserve Bank has estimated that when facing the zero interest rate lower bound (as we do today), the multiplier of fiscal policy increases to approximately 2.  He explains this as due to the fact that people find the Central Bank’s promises of price inflation targeting to be no longer credible as they cannot lower interest rates any further, and people do not expect them to raise rates given the economic climate.  If people feel that the government cannot respond to inflation (by raising interest rates), then they might decide to purchase consumption goods now before prices rise.

Thus it can be seen that economic policy by the government can be useful in periods of recession in order to help jump-start economic activity, as well as in expansionary periods to curtail inflationary pressure.  The appropriate mechanism is always case-dependent.  There is no economic policy panacea that is suitable for all environments.  Monetary policy should be the first line of policy in order to deliver quick stuns and jolts to the economy; but when monetary policy fails, fiscal policy must take its place in the form of massive stimulus spending in order to pull the economy out of a deep rut.

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The global warming debate has become infantile in practice as both sides stick to their approved platitudes and mantras and each side accuses the other of lies, manipulation, and conspiracy.  The truth, as usual, is more complicated than either side makes it out to be, but not so complicated that the average individual cannot get a good understanding of it.

The first thing that needs to be addressed, in my opinion, is the choice of words.  The catchphrase “global warming” is now used to frame the totality of the environmental debate.  The truth is, global warming is just one effect of human and natural activity.  I believe, and will argue, that the debate should be defined in terms of “environmental change” which is much more broad and encompassing and does more justice to what humans and nature are actually doing to the ecosystem in which we live.

Let us begin with the basics and work our way up from there.  There are two major forces that act upon global climate.  The first is natural forces, which include solar activity, the rotation of the Earth, etc.  These forces have been the cause of Ice Ages in the past, and many people have attempted to explain current climate change as a result of purely natural forces.

The second force that impacts global climate is human activity.  Since the Industrial Revolution, human activity has become associated with pollution of many sorts.  This includes, but is not limited to, air pollution, water pollution, and the acidification of the environment.  Much of this stems from our heavy dependence upon fossil fuels for energy, but some of it simply arises because of our high standards of living which require the harvesting of natural resources and the production of manufactured goods.

Global warming is one result of both natural and human activity.  However, the natural activity is periodic and, in the past, has resulted in both periods of global warming and periods of global cooling.  The human activity is more straight-forward and here is the basic science behind it.  The vast majority of activity in developed countries uses electricity which is created by burning some form of fossil fuel.  The exhaust from this combustion is emitted into the atmosphere where the gases accumulate.

Sunlight is absorbed by the Earth, and then re-emitted in the form of infrared radiation.  The so-called “greenhouse gases” are gases that are highly absorbent in the infrared region of the electromagnetic spectrum and less-so in the visible light part of the spectrum.  In other words, they let most of the sunlight through to the Earth but then block the escape of the infrared radiation, resulting in increasing temperatures.  However, this is not to suggest that all contamination of the atmosphere will result in global warming; historically many large volcanic eruptions have cast so much ash and smoke into the atmosphere that they blocked incoming sunlight causing global temperatures to fall.

The global warming issue has become contentious for a number of reasons.  The first is that the ongoing debate over whether the widely-observed rise in global temperatures is anthropogenic or natural in origin.  Some claim that there have been variations in global temperatures in the past and that such changes as we are experiencing now can fall under that category.  Others stress that the currently observed changes are not large in scale and can thus be ignored.  I believe that both of these lines of argument are incorrect.  While there are certainly natural variations that are occurring, there is indisputable evidence of anthropogenic global warming via emissions of methane, carbon dioixde, and water vapor.  Even though there may be short-term up-and-down fluctuations, the long-term view shows an upward trend in temperatures.

Furthermore, just because the current increases in temperature are not drastic does not imply that future increases will not be.  Global warming appears to be a self-reinforcing cycle.  As global temperatures rise, more liquid water will evaporate and find itself in the atmosphere as water vapor, which is a potent greenhouse gas.  More ice and tundra will melt.  The melting ice will lower the albedo, or reflectivity, of the Earth as a whole which means more sunlight hitting the Earth will be absorbed and converted to heat.  The melting tundra and permafrost will exhume large volumes of methane, another greenhouse gas, which will cause the impact of global warming to grow over time.

Another point of contention in the global warming, or environmental change, debate has been the emergence of various emails from climatology researchers at the Climate Research Unit (CRU) at the University of East Anglia in England.  The emails, made public by an anonymous hacker, are claimed by some to show indisputable proof that global warming is a hoax and a conspiracy.  The truth seems less clear.  The researchers in question did indeed cross some lines regarding their duties as scientists.  Data, which should always be preserved, was deleted.  In addition, some questionable methodology was used to frame their results.  However, their actions do not refute the independent works of thousands of other scientists of different fields and nationalities on the issue.

The CRU used dendrochronology to measure global warming; that is, they used data from trees and their rings to measure global temperatures over a hundred year period.  This was done because one hundred years ago there were not sophisticated instruments available for use in measuring average surface temperatures or average water temperatures.  Data from approximately 1900-1960 shows an increasing trend-line in global temperatures.  However, from 1960 to the present, the data does not seem to show such a trend.  Again, this does not imply that the trend does not exist, as a slew of other measurements using a variety of different instruments do indeed observe this trend.  The researchers at CRU wished to have their data conform to the widely-observed data and appear to have manipulated the data as a result.  This is unethical and should not be condoned by anyone.  However, all that the CRU emails and study shows is that dendrochronology is neither an effective nor precise method to measure global temperature over a period of time and that these scientists were human beings.

The impact of global warming is uncertain, which brings me to the point I am intending to make.  There is much uncertainty surrounding global warming and climate change in general.  Let us suppose that the global temperature increased by 10 degrees Kelvin.  Would we be better or worse off?  I believe that the answer is both; certain areas of the world would be winners and certain areas would be losers.  The tropics would tend to be worse off while parts of the global North and global South would be made better off.  Certain habitable areas may become inhabitable, while the opposite may occur in different regions of the world.  We currently do not possess complex enough models or enough computing power to quickly and accurately predict the future evolution of a system as complicated as the global climate.

But the threat we are facing comes from more than just rising or falling temperatures.  One of the biggest threats we face is the degradation of the global water supply.  Industrial pollution and farm runoff inject impurities, poisons, and excrement into our water.  Such actions greatly increase the safety and health risks associated with drinking water that has not been properly treated with chemicals.  Imagine the economic costs associated with filtering heavy metals and toxins out of our domestic water supply.  Further, such pollution and acidification of the water supply will spell disaster for marine life and the wildlife that feeds upon it.  We are already beginning to more frequently encounter “dead zones” in our oceans – areas of hundreds of square miles where marine life does not exist due to low levels of oxygen.  Although dead zones can occur naturally, it is believed that the extensive use of agricultural fertilizer promotes their formation.

Given the uncertainty surrounding climate change, it would seem prudent to err on the side of caution.  Given the possibility of catastrophic consequences, this is an urgent matter that requires the concerted attention of the United States in particular and developing and industrial nations more generally.  If we continue to dither and avoid decisive action, future generations may curse our memory for not tackling problems when they were manageable.

On Tuesday December 1st, 2009, President Barack Obama made public his intention to send an additional 30,000 American soldiers to the combat theater of Afghanistan.  Though expected, this move was drastic and raised questions about the intentions of his administration regarding the ongoing wars in both Iraq and Afghanistan.  The decision to add 30,000 troops to Afghanistan is reminiscent of the decision of the Bush administration to bolster the troop levels in Iraq by approximately 25,000.

The obvious parallel to President Obama’s recent decision is the surge in Iraq.  Conventional wisdom holds that the surge has been a great success.  When looking at the numbers, one can see that since 2006, when the surge was implemented, conditions on the ground in Iraq have improved.  These conditions are measured in terms of American lives lost, Iraqi civilian lives lost, output of oil, and access to electricity.  It must still be noted that these measures are still worse than pre-war conditions in Iraq.

Yet, this conventional wisdom begs greater scrutiny.  What the surge has achieved is something commonsense.  With more boots on the ground, coalition forces have a greater ability to project their influence and secure the civilian population.  In my mind, however, the true test of whether the surge has been a success is whether or not such conditions will persist after the approximately 25,000 troops have been withdrawn from operations in Iraq.

By adopting such a metric, we do not yet know whether or not the surge has truly been successful.  The provinces which have seen the greatest improvements in security have been the provinces which are dominated by Sunnis.  This may appear like a great victory.  After all, the Sunni population had been the major force behind the insurgency following the fall of Saddam Hussein and the Ba’ath Party.  However, the real reason for the improvement in security conditions in these regions has been the fact that the Sunni minority has needed a protective ally to shield them from the vindictive Shi’a majority.  Many Sunni sheikhs and tribes decided to band with the Americans in exchange for protection and weaponry.  A similar narrative has been occurring with the Kurdish population in Northern Iraq, although there is a longer history of cooperation between the Kurds and the United States.

The parts of Iraq that we find ourselves unable to control or secure are the Shi’a areas.  The Shi’a majority, finding themselves in a position of power, have been exercising that power in a vengeful manner against their former Sunni oppressors.  Large-scale pogroms have taken place in cities and towns across Iraq; much of the drop in violence over the past few years is due to the fact that many neighborhoods have been effectively purged at this point.  There is no need to protect Sunni families in some neighborhoods; they have all been killed or driven out already

The United States has been buying the security and cooperation of the Kurds, Sunni, and Shi’a through firepower.  This is especially true of the Kurds and Sunni who feel threatened by a newly empowered Shi’a majority.  The role of the U.S. Armed Forces in Iraq has been to serve as a buffer between the groups to prevent full-fledged warfare.  A real outbreak of fighting between any two groups would likely escalate into a complete Civil War between the three Iraqi factions.

Despite the many successes enjoyed by the United States Army and Marines in adopting true counter-insurgency tactics and strategy, we ultimately find ourselves at a fork in the road.  The insurgency, as it has been traditionally defined, has been effectively marginalized.  Much of the domestic insurgency has shifted their alignment to the quasi-legitimate Sunni faction.  The foreign insurgency will always remain a problem but one that should be dealt with at the borders.  The vacuum of power left by Saddam Hussein has been filled by three parties, each of which seeks to exert its influence over national affairs.  The government of Prime Minister Nouri Al-Maliki has shown itself unwilling to effectively incorporate Sunnis or Kurds into the governing coalition.  At this point, it seems like there is little role for large-scale ground operations in Iraq except to prevent a full-blown Civil War.  Thus, the question becomes how long are we willing to keep our soldiers in Iraq to prevent a political and military implosion?

I do not think there is a clear answer to that question.  I believe that we cannot stay in Iraq indefinitely, but that we should also not allow Iraq to fall into a disastrous Civil War as a consequence of our reckless invasion.  Ultimately, I feel the best scenario would be to abandon the idea of Iraq itself; rather, the country should be partitioned into three sovereign entities.  This would be similar in practice to the partitioning of a Muslim Pakistan from a Hindu India.  We could facilitate the creation of a Sunni state, a Shi’a state, and a Kurdish state.  Such a decision would have to emanate from within the Iraqi population.  A significant obstacle to this partition is the negotiation of oil rights.  The Sunni population occupies land that is lacking in oil resources; the Shi’a would want more extensive oil rights as well as political power over the Kurds and Sunnis.  Any partition would have to strike a delicate balance between the royalties each group would receive from oil profits.  Although this would not ameliorate all the tensions and problems that will arise, it would swap a Civil War for minor border skirmishes and political rivalry.

All this brings us back to Afghanistan.  Although there are notable differences between Afghanistan and Iraq, such as a different ethnic composition, more mountainous terrain and less oil, we still find ourselves confronting many of the same questions.

When we send 30,000 additional troops to Afghanistan, what is our ultimate goal?  Is the goal to create a vibrant democracy which will act like a beacon to the Middle East and Central Asian Steppes?  Or is it simply to provide measurable increases in security, drops in violence, and then declare victory and pack up?  What do we understand the long-term ramifications of such actions to be?  Without such goals, any military operation is doomed to fail.

We must also ask ourselves what is truly feasible.  To create a secular democracy that fully supports human rights in Afghanistan would be a noble goal, but an unrealistic one.  To eradicate the poppy industry in Afghanistan would also be a worthwhile goal that could help thwart the heroin trade, but is also unattainable unless we can offer a substitute crop or industry.  We can secure the cities, but it is not feasible to secure every mountain pass that connects them.

The best feasible goal that I have heard suggested is to dramatically improve the condition of women in Afghanistan by means of education.  There is currently a dissatisfied fraction of the Afghani population that wishes to send their daughters to school – something opposed by the Fundamentalist Taliban.  The Taliban, and other Fundamentalist organizations, have attempted to dissuade families and young girls by means of terror and acid attacks.  By making the protection of these schools and young women a priority, the United States can truly better the lives of these women, their families, and their communities.  Educated and empowered women will be better able to stand up for their own rights and the rights of others.  As mothers, they will instill the value of education upon their own children and we may hope to see progressive ideology begin to spread throughout Afghanistan.  Furthermore, such a goal would be just and virtuous in the stage of world opinion; we are not seeking to exploit a natural resource, but instead to protect and promote self-improvement of the local community.  Such protection would also inspire more local confidence in the abilities of the United States and the government of Hamid Karzai to protect them against the Taliban.  Experiences in both Iraq and Afghanistan have shown that people are only willing to oppose Fundamentalist groups once they feel that they and their families are safe from retribution.  Such protection would allow a domestic counter-Taliban movement to foster and effect change from within.  Any other change, such as those imposed externally, would ultimately not be seen as legitimate.

As I have stated before, there is no clear answer to any of these questions.  These question are murky and often require detailed knowledge of the situation that is not made available to a civilian.  That being said, I will now outline my proposal of how to move forward in Iraq and Afghanistan.

In Iraq, the United States must begin implementing an exit strategy as we cannot become stuck in the sand indefinitely.  If a partition is feasible and supported by the Iraqi population, then that is how we should proceed.  Each separate state would then have the option of having American forces based there.  An election would determine whether or not we should stay or leave.  However, if the partition is not feasible or popular, then we should hold provincial elections asking the Iraqi people whether or not they want coalition forces to remain.  Different provinces will return different answers; it is likely that Shi’a provinces will want American forces to leave and Sunni and Kurdish provinces will want them to stay.  By doing this, we can leave the areas where we are unwanted and stay behind in the areas where our presence is sorely needed.

In Afghanistan we must concede that it is impossible to conquer and hold the entire country.  It has not earned the moniker “the graveyard of empires” for no reason.  We must focus our efforts on the cities and major transportation routes.  In addition, we must also make the security and education of women a top priority as such an approach represents one of our best options to successfully transforming Afghanistan.  This must also be coupled with an aggressive micro-lending operation that is given protection by the United States Armed Forces.  The infusion of education and capital, coupled with effective security against the Taliban or other Fundamentalist groups, should set the stage for a metamorphosis of Afghani society that erodes support for groups that wield terror as a weapon.

Money is a fascinating human invention that has facilitated economic activity for thousands for years.  The decision to introduce currency allowed humans to shift away from a barter exchange economy which had the burdensome requirement of what economists refer to as coincidence of wants.  That is, if we operated in a barter economy and I raised chickens for a living, I could only purchase goods and services from individuals who wanted chickens.

Money solves this issue by functioning in three manners: it is a medium of exchange, a unit of account, and a store of value.  The medium of exchange is the most necessary and fundamental aspect of money.  That money is a unit of account makes price comparisons simpler, but is not as important as being a medium of exchange.  The store of value aspect is perhaps the least critical as there are many other assets that one can purchase to use as a store of value (and investment to increase value) such as real estate or stocks.

Yet money also has its flaws that can severely hinder the ability of an individual to optimize their utility or the ability of an economy to pursue an optimal growth path.  Money has an intrinsic value, which, as everything else in economics, is described by supply and demand.  When the value of money falls, this is known as inflation; when the value of money rises, this is known as deflation.  One can think of these terms in relation to prices; when the value of money falls, then prices tend to rise or inflate.  Similarly, when the value of money rises, then prices tend to fall or deflate.  Rising prices is not inflation, but rather an effect of inflation.

Typically one tends to think of inflation as the great scourge of money, but I will attempt to outline a simple argument that will illustrate how both inflation and deflation should be avoided, but, in certain circumstances, may be beneficial.

It should be noted that this argument will be presented through the lens of Macroeconomics and will concern the welfare and stability of the aggregate economy.

In Macroeconomics, we tend to think of agents as either households or firms who solve an inter-temporal dynamic optimization problem.  In plain English, individuals seek to maximize their lifetime utility subject to budget constraints and a changing state of the world while firms seek to maximize profits.  Utility is a term that is used to describe the felicity or welfare that an individual derives from a bundle of goods and services.  It is assumed that individuals wish to maximize their utility.  All models capture a critical aspect of this problem: the trade-off between today and tomorrow.  Let me note that when I refer to “today” and “tomorrow” I am actually referring to consecutive discrete time periods.  One can take these time periods to be seconds, days, months, or years.  This distinction is irrelevant to the question at hand; all that needs to be known is that today represents the current time period and tomorrow is the next time period, or the future.

The trade off described above involves a choice: the choice of whether to consume today or postpone current consumption for future consumption.  This decision takes into account several factors: the marginal utility of consumption (i.e. the additional amount of utility, or felicity, derived from an additional dollar of consumption), the interest rate (the rate of return on investments and savings), the discount rate (the rate at which we discount future consumption relative to current consumption), and the change in prices (inflation or deflation).  The discount rate is included in models to account for the time preference of consumption; that is individuals prefer to consume today rather than tomorrow.  This is in part due to the uncertainty of the future; if I were to postpone current consumption to increase future consumption, I may be hit by a bus before I can actually spend my savings.

When money is falling in value (as occurs in inflationary periods), the incentive to save is greatly diminished while the incentive to consume today is enhanced.  A rational actor, an agent who understands the current dynamics and chooses the best feasible option, will see that his or her dollar will be worth less tomorrow than it is today.  This knowledge should make the rational actor shift his or her wealth from savings and investment into consumption.

Symmetrically, when money is rising in value (such as in deflationary periods), the rational actor will shift from consumption today into savings and investment.  This is because the value of a dollar tomorrow will be greater than the value of that dollar today.  All other things being equal, consumption should fall and investment should rise.

The change in the value of money occurs due to the forces of supply and demand.  I will now present a hypothetical economy to illustrate how natural forces will influence the value of money.

Consider an economy with a population of 100 individuals.  There exist firms which hire labor (provided by the individuals) and rent capital (which is owned by the individuals).  Firms seek to maximize profit and the individuals seek to maximize lifetime utility.  Let us suppose that there is a fixed quantity of money, M.  Each household grows at a fixed rate (say five percent) so that the population in the the next time period is 1.05 times the population in the current time period.  In the initial time period, t=0, there is a given amount of production based on the initial capital stock (let us further assume without any loss of generality that the labor supply is some fraction of the total population).  Let us refer to the total production as Y.  The value of money will be a function of the ratio of total production, Y, to the money supply M.  As production increases and the money supply remains fixed, the value of money will increase.  This is because there is the same amount of money “chasing” a larger pool of goods and services.  Each dollar will be able to purchase a larger bundle of goods than in the previous period, indicating that the value of money is rising and prices are falling.  Thus, we can experience deflationary pressure when the quantity of money grows more slowly than the overall economy.

Conversely, let us assume that the quantity of money, M, is again fixed but that population is falling.  This can be done by assuming a negative growth rate.  In each successive period, there will be less production but the same quantity of money.  As the same amount of money is “chasing” a smaller pool of goods, the value of money will fall.  Thus, when the growth rate of the money supply is larger than the economic growth rate, we will experience falling value of money and rising prices – or inflation.

Why should we be concerned about these effects?  We should be concerned because there are profound implications to how much we choose to consume and save.  If we consume too much, we will save too little thereby jeopardizing our future potential for economic growth and consumption.  Similarly, if we save too much, we do so at the expense of current consumption which will lead to a lower lifetime utility.  A balance needs to be struck between consumption and savings.

When the value of money is constantly changing, individuals will encounter a new optimization problem in each time period.  They will solve this problem and choose consumption and savings paths which will maximize their lifetime utility.  However, in the next period the value of money will be different, and they will be forced to solve the same problem but with new parameter values.  An equilibrium or steady state can never be achieved because each time period reveals new parameter values with new optimal paths of consumption and savings.

If the value of money is constant, then agents can effectively solve their optimization problems and reach a steady-state or balanced growth path which will maximize their life-time utilities.  In order to maintain the value of money, it is necessary that the quantity of money grows at the same rate as the overall economy.

This interpretation has assumed that the economy is in a relatively healthy state (not in a recession or depression) and that inflation and deflation are harmful.  However, there exist cases when artificially induced inflationary or deflationary pressures may be beneficial to the economy.  When consumption has been set too high and savings too low (think of the negative real savings rate of the United States), then deflation will allow us to shift our wealth from consumption into savings thereby achieving a more sustainable growth path.  When consumption is too low and people are saving too much, inflationary pressure will induce them to shift their wealth from savings to consumption.

These monetary policies (of either inducing inflation or deflation, or attempting to stave off both) are the realm of Central Banks.  Central Banks are national institutions which are charged with conducting monetary policy.  The Federal Reserve, European Central Bank and Bank of Japan are examples.  In order for these policies to be effective, one must have a money supply that can be influenced.  Fiat money is the ideal candidate.  Fiat money is currency whose value is not intrinsically tied to a specific commodity, such as gold or silver, but is instead declared legal tender by government decree.  Specie and commodity standards have the drawback that one cannot change their quantities when it is desirable to do so; supply increases or decreases are external shocks that may do good or harm.

An example I have always found fascinating is that of the 12th century emperor of the kingdom of Mali, Mansa Musa.  Mansa Musa was a devout Muslim and accordingly made the Hajj to Mecca.  He passed through Cairo and his royal retinue brought so much gold with them that the Egyptian economy experienced hyperinflation when the quantity of money skyrocketed.  Historians noted that even a decade later, prices and the value of money had still not recovered to natural levels.  Thus, even with a commodity monetary standard, inflation and deflation can still be experienced; they are simply out of the control of any particular individual or institution.

Central Banks are able to mitigate these shocks by acting in the role of a neutral arbiter for the economy.  However, it is necessary to be prudent when implementing these changes.  Just as exercise is considered beneficial to a healthy person, rest is advised for an ill patient.  Central banks must weigh all the pros and cons of a potential decision.  For example, the current U.S. economy has been saving too little which might prompt some to call for artificially induced deflation to spur additional investment.  But, the current recession has drastically reduced consumer spending, which is the cornerstone of our economy (comprising approximately 70% of total economic activity) and thus inflationary pressure may be beneficial to jump-start consumption.  Simple solutions are rarely the answer.

It is clear that the Federal Reserve, the central bank of the United States, has not always acted in the most prudent or beneficial manner.  Mistakes have been made and always will be made; to err is human.  But one should not criticize the institution itself or seek to abolish the Federal Reserve due to past errors.  Just as one does not seek to disband the Fire Department when it fails to put out an inferno or an individual firefighter is convicted of arson, one should not seek to destroy the Federal Reserve.  We must instead seek to institute safeguards that would prevent such mistakes from reoccurring.

To conclude, money can be either a stabilizing or destabilizing force.  In order to mitigate the harmful effects of money, it is necessary to have a Central Bank capable of conducting effective monetary policy in a prudent manner.  In order for a Central Bank to do this, it must be able to control the quantity of money, or the money supply.  This is effectively impossible to do with commodity currencies as existing quantities of these commodities are fixed.  It can only be done with fiat money.  Central Banks should follow the basic tenet of growing the money supply at the same rate as the economy; however, in times of crisis, it may become necessary to artificially induce inflation or deflation.

Draine on Society

A “recession” is defined as two consecutive quarters of negative GDP growth. Thus, by the time a contraction is officially labeled a recession, it may seem painfully obvious to informed observers. A “recovery” is defined as positive growth beginning from the trough of a recession and lasting until the next recession. The overall expansion and contraction pattern is known as the business cycle, and in true cyclical nature manifests itself over and over again.

Gross Domestic Product (GDP) is roughly defined as either the sum of all incomes or the sum of all expenditures in a national economy. As one person’s expenditure is another person’s income, these two definitions should provide the same overall value of economic activity. The simple macroeconomic equation states that GDP is the sum of private consumption, investment, government expenditures, and net exports. In our current economic climate, private consumption has fallen as households face uncertainty about future revenues, investment has fallen as investors fled from stocks in favor of bonds, but government expenditures have increased to pick up some of the slack.

The latest economic indicators have been remarkably positive. Durable goods orders have surged, apparently due to new orders for airplanes and appliances, and existing housing sales have also increased. It is unclear whether these trends will last as inventories had become depleted and the rise in home sales is likely due to foreclosures and tax credits for new buyers. While it is too early to get official 3rd quarter reports (the 3rd quarter will end in September), it seems likely that the rate of GDP growth will be zero or even positive. To put things in perspective, the first quarter GDP growth rate was negative 6.4 percent and the 2nd quarter growth rate was negative one percent. Today, many economic forecasts are optimistic enough to predict positive growth rates for the third quarter.

By standard economic definitions, this would mean that we have entered the recovery phase of the business cycle. As soon as we hit the trough, GDP begins to grow and we are no longer in a recession. So if we are in a recovery, why doesn’t it feel that way to most Americans? While financial firms have returned to their fast-pace world of asset trading, the national unemployment rate hovers at just below 10%. Some parts of the country find themselves with unemployment rates of almost 15%! While Wall Street celebrates the recovery, Main Street is still struggling through the aftermath of the recession. This is due partly to the fact that, while additional trading of financial assets generates profit and is considered economic activity, it does little to boost employment.

It should also be noted that the official unemployment rates understate the extent of the problem. It does not include those who are underemployed (that is working part-time but seeking full-time employment) or those who have simply given up the prospect of looking for work.

The unemployment rate is commonly referred to as a “lagging indicator”—generally, it will continue to rise or stay constant for some period of time after the economy has bottomed out. This is because as demand picks up, it takes time before businesses start hiring additional workers to keep pace with demand. In contrast, the stock market tends to hit its trough before the overall economy, and for this reason is considered a ‘leading indicator’.

However, the past few recessions have been what are called “L-shaped recoveries” or simply “jobless recoveries”. That means that, while the economy—as measured by GDP—grows, the employment rate remains close to its trough for an extended period of time. There does not seem to be a clear consensus as to why this has been true for the past few business cycles, but it seems likely that it is due to the shifting nature of our economy.

Our economy has increasingly become more centered on services than manufacturing, especially so in the financial sector. Massive amounts of high-speed trading generate economic profit during expansionary periods (they also tend to crash during recessions, but that is another argument). In such times, there is little extra demand for consumer goods that would require business and industry to hire more workers; but GDP is growing. It is worth noting that the parts of the country suffering from the highest unemployment rates are almost all traditionally centers of manufacturing and construction. As these industries have either flooded the market with a deluge of existing homes or have shifted to other countries, it is unlikely that they will be incorporated back into the labor force.

Even though our economy has shifted from manufacturing to services, it is still largely driven by consumer spending. Businesses that find their inventories piling up will not put in new orders for additional products until there is a surge in consumer spending. This highlights one of the flaws of using GDP as a barometer of economic welfare. Simon Kuznets, who helped standardize measurements of GDP, reported to Congress in 1934 that “the welfare of a nation [can] scarcely be inferred from a measure of national income”.

While GDP measures total economic activity, it does not measure the distribution of such economic activity. Economists use another instrument to measure income distribution, the Gini Coefficient. The Gini Coefficient ranges from 0 (which indicates perfect income equality) to 1 (which indicates perfect income inequality). In 2000, the Gini Coefficient for the United States was 0.408. In 2007, the Gini Coefficient for the United States was 0.463. This measure is important because at a fundamental level, it is necessary to know who has money that they are willing and able to spend.

In an economy based on consumer spending, it is necessary that consumers have disposable income to keep the economy running. A failure to meet that condition would result in a massive drop in consumption which would in turn lead to large numbers of layoffs and rising unemployment. No matter how many incentives you give to business to produce goods, it will not matter if the average consumer cannot afford to purchase them. One of the reasons why Henry Ford was so successful was that he paid his employees enough so that they could purchase their own automobiles (never mind the fact that the bill was simply deducted from their wages….and not really their choice).

One way to ameliorate the massive decline in consumer spending would be to institute an effective social safety net. The decisions of consumers to curtail their spending are rationally based on the fear of not having any available income in the future to meet their basic needs. If some minimal level of income were assured to private citizens, then they would be more inclined to spend. This could come either in the form of universal healthcare or transfer payments, such as Social Security.

This discussion of economic health also makes the point clearly for the usefulness of government stimulus. When the federal interest rate approaches zero, the Federal Reserve cannot stimulate the economy by lowering it even further. Therefore, additional government spending is necessary to pick up the slack left by private consumption, and thereby avoid a reinforcing spiral of layoffs. It is even better if these government expenditures were used to create something beneficial to society, such as improved transportation infrastructure, or universal health coverage. All the workers needed to implement such programs, along the lines of the Works Progress Administration under Pres. Franklin Delano Roosevelt, are given employment and disposable income. Their expenditures become another person’s income and so forth, generating economic activity.

From this, one can infer that measuring the wellbeing of an economy by GDP alone is not necessarily a good indicator. There are other, more tangible measures that reflect the welfare and attitude of the economy as whole, without the skewed results that come from having a small fraction of the population representing a large fraction of the economy. It might be useful for economists to focus instead on alternative measures. One such measure is the Human Development Index (HDI), which includes GDP as an input but also includes factors such as life expectancy and education levels. Another alternative is the Genuine Progress Indicator (GPI) which also includes GDP as a factor but attempts to measure whether overall economic growth results in improved welfare for the population. It does this by including environmental factors such as pollution and loss of land, as well as attempting to include the social costs of crime and unemployment.

The national discussion on health care reform has recently taken a dangerous turn. What should have been a meaningful discussion on goals and feasibility has been transformed into a campaign of deliberate misinformation. The goal of this campaign is not to enact any meaningful reform whatsoever, but to foster an atmosphere of fear and misunderstanding that will threaten any attempt to change the status quo. This campaign has been portrayed by its founders as an organic grassroots campaign; however, the validity of this claim is suspect. Several journalists and reporters have uncovered evidence that massive corporations with a stake in the health care industry have been major donors to the so-called grassroots campaign.

Let’s consider some of the claims that have been propagated regarding President Obama’s and the Congressional Democrats health care reform bill.

Recently, Senator Charles Grassley (R-IA) attempted to illustrate the evils of government health care. His example was his fellow Senator Ted Kennedy (D-MA). Sen. Grassley claimed that Sen. Kennedy would have been denied treatment for brain cancer had he been covered by a government insurance program, like those in Europe. His implicit claim was that private American insurance covered Kennedy’s treatment while government European insurance would have let him die. This argument is easily torn down when you realize that Sen. Kennedy is covered by government insurance. As a federal employee, Sen. Kennedy is covered under the Federal Employees Health Benefits (FEHB) program. While it is true that Sen. Kennedy is probably receiving above-standard treatment due to his wealth and status as a Senator, he is covered by an insurance program run by the Federal Government.

This methodology has carried over to discussions on Medicare. At countless town hall meetings and interviews, protesters and even U.S. Senators and Representatives have decried the socialistic power grab of the U.S. Government to expand its control over Medicare. Even Art Laffer, the economist known for the Laffer Curve which measures the relationship between tax revenue and tax rates, has rhetorically asked, “What will happen when Government runs Medicare?”. It is very hard to believe that these individuals do not know that Medicare is an example of an incredibly successful government-run program. Medicare has been wildly popular amongst those it covers. Citizens aged 65 and over who are covered by Medicare have been very resistant to any proposed changes. That doesn’t exactly seem like the type of behavior of people who are being screwed over by government bureaucrats.

Much of the senior citizen discontent has been fomented by outright falsehoods. The wild claim is that Obama’s health care plan would force mandatory euthanasia on elderly citizens. This is a preposterous argument that is being disseminated by those who know that it is false; the Obama health care plan would advocate end-of-life counseling for those who are diagnosed with terminal illnesses. This would merely advise patients who are considered by the medical profession to be in the end-stages of their lives what options are available to them.

The claim that government-run insurance would ration health care is not blatantly false, but is certainly disingenuous. This is also tied to the claim that Medicare is terrible because not all doctors or hospitals will accept it. The simple refutation to these arguments against health care reform or a single-payer system is that these occur already in the private insurance industry. Ask any individual with private insurance if they have been denied coverage for a condition or procedure. A large number of Americans would answer in the positive; this is rationing. Health care is also further rationed by income; those who cannot afford health care generally do not receive it. Also, many individuals who do have private insurance are told by doctors and hospitals that they do not accept that carrier, and all costs must be paid out of pocket. To imply that an inherent problem with the health care industry will only occur with government-run insurance is misleading and dishonest.

It is clear to all rational observers that something must be done to reform our failing health care system. We spend more per capita than other industrialized nations and yet rank more poorly than those nations when it comes to objective measurements of health, such as infant mortality rates and life expectancy. As a nation we must do something to control spiraling health care costs and the dreadful lack of insurance which plagues some 40 or 50 million Americans. However, to do this we must be willing to look at the situation as it really is. This can only be done by reaching a common ground on what the facts are; it will not be solved by misleading fear-mongering, scare tactics, and outright lies.

Hydrocarbon consumption is the American way of life. Every facet of our society is supported by the generation of energy through combustion of hydrocarbons, otherwise known as fossil fuels. The explosive use of fossil fuels has allowed us to make a giant break from the dire population predictions of Thomas Malthus. Mechanized production caused workers’ productivity to soar and outpace population growth, which would have otherwise eaten up all material gains in standards of living. However, this party may be coming to an end, or we may at least be presented with a bill for our time.

The greatest concern with fossil fuels is that the costs of externalities have been largely hidden from the consumer. The chemical reactions that oxidize hydrocarbon chains emit many gaseous byproducts, some of which are more harmful than others. These gasses, especially the heavier ones, accumulate in the atmosphere where they act as “greenhouse gasses”.

A greenhouse gas is a gas that absorbs and traps energy emissions from the Earth. This energy is then contained within the global environmental system, much in the way that a greenhouse traps heat. The scientific principle behind this is fairly simple; every object absorbs and radiates energy depending on its temperature and specific characteristics, such as pigmentation. Objects like the Earth tend to radiate energy in infrared portion of the electromagnetic spectrum as the Earth is not very hot. The sun, by contrast, is much hotter and radiates much of its energy as visible light. This energy is radiated in the form of photons – particles of light with wave-like properties. Everything is able to absorb energy, although certain elements and molecules have peak absorption bands at certain wavelengths. That is, a molecule like CO2 will absorb energy, but will be much more efficient at absorbing infrared radiation than visible light. As we increase the volume of greenhouse gasses in the atmosphere, the rate at which radiated energy will be trapped within the system will increase, with consequences that are not fully understood.

A bill on climate change and environmental issues, known as the American Clean Energy and Security Act of 2009 or “Waxman-Markey” after its main sponsors, passed the House of Representatives last week. This bill would seek to re-structure the way energy is priced in the United States, lower emissions levels within the United States, as well as lay groundwork for new energy industries to develop.

The most visible component of the bill would be a “cap-and-trade” system of pollution credits. Under such a system, there would be a fixed ‘cap’ of pollution that could be emitted annually by the United States economy. The total volume of pollution credits would be set to decrease with time in order to meet target emission levels. Credits could be allocated either by auction or appropriation. Industries which either received or purchased these credits could then trade them in a marketplace to other businesses. In this manner, energy efficient industries could sell and trade their credits, thus creating a financial incentive to operate in a carbon-neutral manner. Big polluters would be forced to purchase additional credits to compensate for the externalities caused by their emissions. This new market, regulated by the Environmental Protection Agency, would use economic incentives to encourage companies to operate in more environmentally friendly ways. The knowledge of who bought how many pollution credits would be of worth to modern investors who wish to invest in the companies of the future, rather than the aging behemoths of the past.

There is no free lunch and there is a cost associated with cap-and-trade measures. By including the cost of externalities in energy production, the price of energy will rise. This is neither good nor bad, but rather necessary. The price of energy has been kept artificially low in the United States through a combination of economic and militaristic dominance, as well as willful ignorance of the environmental impact of pollution. It is ludicrous that a gallon of gasoline, refined from petroleum that is found in finite supplies, is cheaper than a gallon of milk, which can be produced as long as we have cows. Increased energy prices will mean increased prices for producers and ultimately consumers. This cannot be denied. However, the newly increased price would embody the true cost of fossil fuel energy. In turn, the increased price of hydrocarbons relative to renewable energy sources such as biomass, solar, wave, or even nuclear will make these alternative energy sources more economically competitive and viable in the marketplace. Nuclear power is especially promising; there is enough fissile material to power our economy for a long time and there is an effectively infinite supply of material for fusion if we can develop that technology. As investment pours into these nascent industries, the cost of generating and distributing that energy will decrease and these savings will eventually be passed on to the consumers. Whether the increase in the price of hydrocarbons comes as a result of an instituted policy of taxation or cap-and-trade, the price increase will occur – it is inevitable.

We appear to have already passed peak global oil production – supply will be going downhill from here on. Since we have essentially already hit maximum oil production, supply will begin to diminish as less oil is available to be refined and transported to market. On the other side of the classic economic equation, demand is set to sky-rocket as newly industrialized nations such as China and India are set to claim their place on the world stage. The price of oil is set to soar; the low gasoline prices of the recession are already starting to climb and will shortly reach $3 per gallon in New Jersey, which boasts some of the cheapest gasoline in the nation.

Thus, there are also political and military aspects to implementing energy changes now. Given that demand for fossil fuels is far outpacing supply, alternative energy sources are necessary for future growth. The United States is presented with an opportunity to take a large lead in the development of the production and infrastructure needed to exploit new energy sources. By taking the lead, the United States would be able to capture a large share of the new market as well as reap financial rewards that would accumulate from patents, copyrights, and other intellectual property rights. The first nation to truly develop effective alternative energy sources and motor engines would be able to retool their entire domestic workforce and military to run off renewable energy. This would give that nation a head-start relative to other nations. At some point in time, the question will not be “How many destroyers, tanks, and jet fighters does each nation have?” but rather “How many destroyers, tanks, and jet fighters can each nation fuel?”.

Climate-science skeptics and opponents of government regulation will argue that such measures will impose massive costs on consumers and would cripple the economy to protect us against something beyond our control. While some of the measured impact on the environment is certainly due to natural variations in climate patterns, a significant part is due to human activity. Finally, the costs associated with re-structuring our economy to run on alternatives to fossil fuels are inevitable. We can put them off as long as we want, but the cost will only increase with time. By tackling such issues sooner rather than later we can grant ourselves the time necessary to complete such changes, minimize their costs, and allow ourselves a new competitive advantage relative to the rest of the world.