This is our group’s video proposal for free community college in the United States. Jason Gentry and Parker Smith are in the video to present our idea, Hayley Lenio directed, Travis Seale filmed the video, and Jason also edited the video. Our proposal is intended to help lower unemployment and increase economic output and overall worker well-being by making community college tuition free for the people willing to work for it. We used a variation of the two-sector model to show our reasoning as to why community college education will help the economy’s production.
No Change for the Federal Funds Rate Yet
The Federal Open Market Committee has decided to keep the federal funds rate the same at 0 to 1/4 percent. This is still at a level that the FOMC considers below normal level, but they see it fit to keep it this way until situations improve more in the labor market. They appear uncertain in how long it will remain the same, but the main goal is still to reach 2% inflation and the highest employment rate possible. As shown in the graph, the federal funds rate after the recent recession has been extremely low compared to any time in the past 60 years.
The current unemployment rate is sitting at around 5.5% and dropping, but that is still not back to the rate that it was at before the recession. I am expecting the FOMC to consider it back to normal at about 4.5%-5%. I see that as being the lowest that would be a reasonable expectation considering the lowest we have seen in the last 10 years was 4.4% in December 2006.
So far, I think that the FOMC has been making the right decisions, but I think that once the unemployment rate reaches anything under 5% that they should probably start to slowly increase the federal funds rate. It has been incredibly low for over 5 years now so they will have to be extremely careful when they start to change it if they want to keep the unemployment rate low and inflation around the goal. All of the goals of the FOMC have been getting closer, even though they are getting there at a slow rate. Soon it will be time to start to get other things back to normal in order to further recover from the recession. I am fully expecting the FOMC to announce at least some change in the federal funds rate either later this year or in 2016. My suggestion would probably be to increase the federal funds rate to about .5% whenever the unemployment rate reaches under 5% since inflation is almost at the FOMC‘s goal and the unemployment rate seems close behind.
http://www.federalreserve.gov/newsevents/press/monetary/20150318a.htm
The U.S. Dollar Strengthening: Good or Bad?
The value of the U.S. dollar is currently increasing compared to other currencies, and it looks like this is hurting many U.S. exports. Eastman Machine’s CEO, Robert Stevenson, has been talking about the negative outcomes that his company has dealt with. They started by cutting prices down so that they would not lose customers across seas, but this escalated into American customers wanting the same benefits. Now this company, founded in 1888, is now barely making money in order to keep their customers.
Bigger companies like McCormick & Company have also announced that they could be taking a hit in the following months. With the first quarter end coming up, many economists are expected several other companies to come out with warnings about the following months. Our growing American exports have been a major component in our recovering economy, so this is not the best of news on an even larger scale. The Federal Reserve has already been aware of this, and Janet Yellen has already warned us of the effects of a stronger dollar.
This is helping us when it comes to imports and traveling abroad, but we are still losing our exports and some U.S. jobs could be at stake for companies that export most of their sales. Eastman Machine has reported that they are not losing that many customers, but they are losing a lot of profit by having to lower their sales to compete. So it appears that the companies mostly being affected are the U.S. companies that produce their goods here. It is not easy to just move production overseas in the short term, so companies have to deal with the outcomes of the value of the dollar changing.
If the price of the dollar keeps rising, I expect the Federal Reserve to decrease interest rates to lower the demand for the U.S. dollar since less people will be trying to get our interest rate in our banks. With the Federal Reserve already warning us about the rising value, I expect this to be their next step before American companies are forced to shut down due to losing profits.
http://en.wikipedia.org/wiki/Currency_appreciation_and_depreciation
Competitive Wages Could Lead to More Recovery
The United States added almost 300,000 jobs in February, and the unemployment rate has dropped down to a low 5.5%. While both of these are amazing statistics to hear, the current issue is that wages only increased by 0.1% over this time. People are getting jobs, but people are still struggling. All of us still know someone that has been out of work for years that are still waiting for better times. Many of the people that are getting jobs are actually women taking jobs in lower paying fields. 55% of the new workers were women, but 39% of those were women taking sub par jobs that could possibly still be having a difficult time paying their bills.
Our economy is having no problem adding plenty of jobs, but how many of these new workers can actually live comfortably off of their wages? Many people are still searching for full time positions and having to settle for part-time employment. The share of part-time workers in the market has decreased from 25.6% to 25.1%, but people are still needing increased hours or increased wages to be able to live comfortably. Walmart and TJX Companies are a couple of the leaders in trying to help out their employees at this time. Both companies are trying diligently to increase their minimum wages so that their employees can live better lives, but it does not seem to be helping that much yet. Hopefully, other employers will follow suit.
I think that the best solution to this issue is for other companies to follow in Walmart’s steps and increase their wages to a more competitive wage. The more companies that follow this lead, the better off the people living on lower wages will recover. More jobs and more companies offering better wages would make employers have to compete to be able to find good workers. It would also help a lot more if companies could offer more hours to their part-time employees, but I do not see many companies cooperating in that aspect. Since both the unemployment rate and the job growth rate are headed in the right direction, I would not recommend that the government gets involved with this at the moment. I see this as a problem that employers will have to rise to the occasion to solve over time because the government increasing the minimum wage is a lot more drastic and volatile.
Spending Less & Saving More
We all know that gas prices have been down for a while now, so what are you doing with that extra spending money? We would normally expect people to be spending that money on other things, but it looks like most people have been tossing it into their savings. Even with the small increase in gas prices so far, we are all still saving millions compared to this time last year, but it looks like people just are not spending it. Personal income even increased by 0.3% to bring it up to $15.06 trillion, but consumption still fell by 0.2% to $12.09 trillion in January from December 2014. Construction spending specifically seems to have taken one of the biggest hits, dropping by 1.1% in January alone.
As far as construction spending goes, at least some of the fall can be attributed to the winter weather throughout most of the country for January, so many economists are hoping that the spending bounces back this spring. Spending on home construction rose by 0.6%, but spending on nonresidential projects and government projects both dropped by 1.6% and 2.8%, respectively.
Along with all of these decreases, the unemployment rate is also falling. It is currently at 5.6%, the lowest it has been since 2008. This would normally also be a cause of increased consumption, but it looks like people are still just saving and paying off debts in the case that gas prices rise back up or misfortune strikes. A few big retail stores are also announcing plans to raise their minimum wages soon (Walmart, T.J. Maxx, and Marshalls specifically). This could help out a lot with consumption due to the fact that most of these workers simply do not have to means to save their money, therefor increasing their spending.
Personally, I do not like the sign of consumption decreasing right now, but I feel safer after trying to examine the causes. I believe that a good bit of it could be due to the weather, but I also think that a lot of it is just due to people having the means to be able to save some money because they do not trust that gas prices will stay low. I also think that is a good plan since I expect gas prices to continue to rise for a while longer. I am expecting consumption to come right back up after spring starts and as soon as these retailers begin to raise wages for their workers, I think it will help us pull consumption above where it has been the last few months for sure. The Fed has been resisting to put any policy in effect as of yet for this purpose, but it looks like our country will have everything under control again in no time with our increasing employment rates and increasing the pay for many Americans.
http://www.nytimes.com/reuters/2015/03/02/business/02reuters-usa-economy-spending.html?ref=business
Japan: Cutting it Short
Japan has just climbed right back out of what seems to have been their sixth economic downturn over the past 20 years. The Japanese economy has started to recover from their latest recession (using the definition of recession that consists of two declining quarters of GDP in a row). The general idea from economists is that the two periods of falling GDP that made this a recession were mostly caused by increasing national taxes at imperfect times. There was actually another tax increase that was planned to come into play in October of 2014, but of Prime Minister Shinzo Abe shot it down. 
Abe seems to have redeemed himself by bringing Japan’s economy out of the fall in late 2014 after having been re-elected just when the recession was in sight. Japan’s gross domestic product actually rose by 2.2% during the fourth quarter. Abe has been using what he calls Abenomics (economic policies Abe brought into play during his second term) and the Bank of Japan to bulk up the money supply by buying government bonds. Also, in 2015, the yen has become weaker which is helping increase the country’s national exports. Economists are expecting a slow growth while Japan continues to recover from this short recession.
While Japan has been struggling over the past couple of years, I think that Prime Minister Abe has put some good policies into play that will hopefully keep Japan out of any more downturns for a while. He has caused a 1.6% growth since he started his campaign in 2013. If he can keep from increasing the sales taxes for a little longer until he increases the money supply enough to be able to handle a tax increase, I think it can work out. I am expecting exports to increase even more as the money supply increases due to the yen weakening. Along with their slowly increasing consumption and investments, their GDP should be able to stay on a gradual rise. If Abe can keep slowly dealing with changes as they come, maybe he and the Japanese government can stabilize the Japanese economy so it can hold its place as the third largest economy in the world.
http://en.wikipedia.org/wiki/Recession
http://newscult.com/japan-apparently-coming-recession-period/
http://vacationadvice101.com/20-gorgeous-pictures-of-the-tokyo-skyline/
Lesson Learned: Control Your Greed – Financial Crisis of 2008
Back in 2006, housing prices had been going up fairly quickly for the past 5 or so years. Due to financial institutions lending out many subprime mortgages, a lot of people jumped aboard for “cheap credit” and ended up being unable to pay their mortgages due to a mix of high prices and lack of funds in later years. Many institutions were also leveraging much more than anyone would recommend due to the feeling that the economy was great at the time. Credit lenders were just trying to make money any way that they could, so they ended up making a lot of poor credit decisions by lending to the wrong people. Between lenders craving money and borrowers trying to live beyond their means through credit, all of the greed just turned into a disaster for the financial markets. The default rate for mortgages rose drastically and investors became more vigilant of who they risked their money with. Prices on homes began to fall in 2006 making it even more difficult for people to pay back their high interest loans. Interest rates began to rise and the federal funds rate even reached up to 5.25% by September 2007.
As you can see in this chart, the prices for a new home in the U.S. had been rising for a long time with few exceptions before 2007 when both the median and average prices just appear to drop out of nowhere.
This second chart just shows how much lending was actually going to subprime mortgages, you can see that it is obviously spiked from 2004-2006 which played a huge factor in all of the financial crises.
Around 2007, companies with mass amounts of money in mortgage backed securities began struggling. In 2008, some of the big players in investment companies, such as Bear Stearns and Lehman Brothers, that people thought were secure started to fail. Lending stopped, and Lehman Brothers went bankrupt causing everyone distress. Bailouts and government lending started coming into play around this time for certain firms that were suffering to bring back some liquidity to the financial markets. To try to restore order, the Federal Reserve began lowering the federal funds rate quickly. It got back down to 1% by October 2008 and even got under 0.25% by December 2008. The government basically tried to do everything within its control to increase liquidity and money flow until things settled down, but we will be left fixing the economic issues left behind by the crisis for years to come.
http://www.investopedia.com/articles/economics/09/financial-crisis-review.asp
http://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%9308
Gas Prices Back on the Rise
It was great while it lasted, but it looks like gas prices are beginning to rise back up. Analysts from GasBuddy, a website that monitors gas prices, have said that prices are most likely going to be affected by factors such as refinery maintenance, pricier productions of different gas blends, and a strike that started Sunday. United Steelworkers is launching a strike in nine different refineries throughout the United States for better health insurance and safety regulations. Therefor, with less of a supply of gas and rising wholesale costs, the retail prices for gasoline will be rising across the country. Average gas prices across the nation rose 2.7 cents over the past week to $2.05 a gallon. The gas prices in California specifically are predicted to rise drastically over the next two weeks due to multiple of the refineries being on the West Coast. Monday, average gas prices for the Sacramento area had already gone up a penny from Sunday, up to $2.34, with GasBuddy expecting the prices to continue to rise.
Energy analysts say that gas prices can spike unexpectedly for many unforeseen reasons, but gas prices are already known to generally rise from January to Memorial Day. It is extremely difficult to predict how much of an increase is to be expected, but historically, gas prices have spiked around 55 to 65 cents between January and Memorial Day. I do not see that any economic policies should be enacted at the moment because I think that all of these events are actually the gas prices attempting to go back to the equilibrium price because they dropped so low fairly fast. I expect gas prices to continue to rise for a good part of the year before slowing down when they near the more regular price range that we have seen over the past couple of years.
Even Cheaper Oil and Gas?
The Obama Administration is currently working to propose a new plan for more offshore drilling in the Atlantic Ocean. The plan could be proposed as soon as Tuesday. The proposal is for 2017 to 2022 and is for space located off of South Carolina, North Carolina, and Virginia. Oil prices have already been falling recently due to large supply and low demand. If we open up more drilling sites, those prices could fall even more due to even more supply. Some drillers will probably begin to back out to attempt to keep the supply at a normal level.
The proposal will also be introducing the idea of opening up more waters in the Arctic Ocean. Obama is also attempting to protect the wildlife in the Arctic Refuge by adding 7.8 million acres to the existing 12 million acres that are protected by the federal government where drilling is banned. Democrats and Republicans are currently battling over whether people should be allowed to drill on the refuge or not. If the protected area is increased, Alaskans are afraid that they will be losing income, they even compared it to saying it was like keeping Hawaii from gaining tourism. Obama is hoping that opening up more drilling into the Arctic Ocean will help with this issue.
For both of these events together, I see prices on oil and gas falling to an even lower point than they are at because of extra drilling. I am expecting some drilling in Alaska itself to slow down. I think that many companies will drop out of the oil and gas businesses or slow drilling to be able to make up for this until prices eventually balance out at a reasonable point.
http://www.reuters.com/article/2015/01/27/us-usa-drilling-plan-idUSKBN0L00AM20150127
http://www.reuters.com/article/2015/01/26/us-environment-usa-arctic-idUSKBN0KY0RF20150126
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