This blog was started in March of 2007 as a resource for economics students at the Shanghai American School, originally meant to accompany our class wiki. At first, the posts were written specifically for AP and IB Econ students at SAS, but over time readers from all over the world started visiting, reading and commenting on the blog. Other sites linked here, and our numbers steadily increased from rougly 40 visitors per day (mostly students) 12 months ago to an average of 200 visitors per day today. Since June of 2007 the blog has had over 60,000 visitors.

Welker’s Wikinomics Blog has changed in other ways as well. Teachers and students as well as other readers all over the world are reading the blog to learn how economics relates to the events going on around us in the world. Several times per week, a post is written with the purpose of applying basic economic concepts as they affect the world and explaining them in a way within the grasp of anyone seeking a principles level understanding of economics.

Recently, new authors have joined this blog, including Steve Latter from Fairfax, Virginia, who has taught AP Economics for nine years after retiring from his career as a CPA and a chief financial officer. Steve brings much real world experience to a blog that can sometimes be a bit on the academic side. Michelle Close, a fellow SAS economics teacher, continue to write the occasional post and has committed to writing regularly next year. In addition, I have recruited a few additional econ teachers from around the world to sign on as contributing authors, and I look forward to introducing them to our readers when the new school year starts.

Welker’s Wikinomics Blog has also been invited and has since joined the Forbes.com Business and Financial Blog network, an exciting opportunity that has further increased our readership and points to the credibility of what we write about here.

Right now, I am enjoying my second day of summer vacation. Two days ago I woke up in Shanghai and headed to the airport, tonight I sleep in my mountain cabin nestled in the rugged peaks of Northern Idaho. The serenity here seems like a different universe from the chaos from Shanghai. Over the next two months I will post only occasionally to this blog, but post I will… and readers can rest assured that when a new school year begins, and I once again start teaching Advanced Placement and International Baccalaureate Economics (next year I’ll be teaching at Zurich International School in Switzerland), daily posts will once again return to this blog.

For now I wish to thank readers for visiting this blog, and invite you to become not just readers or visitors, but contributors as well. Comments are always welcome, and if you are an Econ teacher or professor who is interested in becoming an Econ blogger, please send me an email and I’ll see about signing you on as an author. I can be contacted at welkerswikinomics@yahoo.com

Have a great summer. Be sure to return in early August to read more great posts from myself and my fellow authors here at Welker’s Wikinomics Blog.

~Jason

The Sky is Falling! Or is it?
I believe one of the most misunderstood areas of the U.S. economy today is the disdain shown by the average American citizen over the current level of the United States’ national debt which now totals $9.4T. Yes, currently the U.S. Government owes a collective $9.4T to American households, American institutions, and foreigners since the U.S. government has spent in excess of its tax revenue during most years, which, in economic speak is called “deficit spending”.

The shear magnitude of the U.S. national debt ($9.4T), coupled with alarmist comments by the U.S. Congress and the American press lead most Americans to conclude that our country is in a very precarious position and has perhaps grossly mismanaged its financial affairs. Moreover, more Americans are becoming aware that future Federal payouts for social security and Medicare alone, assuming current benefit levels, will rise at a much faster rate than the current tax revenues for those same social programs.

Well, guess what, I am here to tell you the concern is vastly overstated!

THE IMPORTANCE OF DEBT TO A COUNTRY (OR AN INDIVIDUAL)
Contrary to what many Americans believe to be conventional wisdom, debt is actually a beneficial and recommended pursuit, if used correctly, since it enables a nation or an individual to equalize income and expenditures over time, and improve standards of living earlier than what would otherwise be attainable. It is easier to accept this premise on the personal front as millions of Americans have been able to improve their standard of living currently by pulling their future incomes forward via borrowing to purchase homes, cars, and education. Of course, we all know that debt, like a car, can cause damage if it is not used and managed wisely, and that is where many alarmists focus, and even some go so far to say that all debt is bad and should be avoided. Many nations, with Russia being a prime example, have been criticized by noted economists for not utilizing enough national debt to improve their economy and their citizens’ standards of living. Thus, hopefully, with a conclusion that debt can actually be a ”good thing”, if used for productive purposes, one can then proceed to the next section as to what are acceptable levels of national debt.

$9.4T: AN ACCEPTABLE LEVEL OF NATIONAL DEBT?
The United States’ current level of national debt is both affordable and consistent with most all other nations. National accounting statistics show clearly that the U.S.’s 67% national debt/GDP percentage is roughly average compared with other modern economies, about right smack in the middle. Moreover, the level of U.S. national debt as a percentage of GDP (67%) is at the same ratio as it was back in 1997 and 1992, and is much less than it was in 1950! The ‘”trick” is that debt must be benchmarked to the size of a nation’s economy or income. I find it interesting that if I tell someone that Bill Gates owes someone $10M they quickly deduce that he’s probably fine, but if I tell the guy at Starbucks that the U.S. owes $9.4T they think the country is screwed up!

 One additional benchmark is to compare the annual interest paid on the U.S. national debt ($0.4T) relative to current U.S. federal tax revenue ($2.8T) to the percentage of household interest paid as a percentage of household disposable income. Both benchmarks are currently at a 14% ratio indicating that Uncle Sam’s (U.S.) debt load is actually very consistent with Uncle John’s (households).

Much has also been made of the fact that $2.4T of the U.S. national debt, or 26%, is owed to foreigners. Big deal! It sounds scary on the surface, but once you understand it is pretty harmless. Let me explain. Foreign debt is nothing more than saved U.S. dollars which will eventually be spent back into our economy. Foreigners have temporarily not purchased our products (foreigners have U.S. dollars because we bought their products!) and have temporarily lent their dollars to the U.S. Government to finance the U.S. Government’s deficit spending. Debt held by foreigners is “dollar savings” just like debt held by American citizens is “dollar savings”, so, in other words, it is really not that important whether the debt is held by foreigners or US citizens since eventually those dollars will be spent back into the U.S. economy since they can’t be spent in another economy! By the way, the U.S. national debt owed to China is only 5% of the total debt but the newspapers make it seem like 50%.  

SO IT MIGHT BE AN ACCEPTABLE LEVEL OF U.S. NATIONAL DEBT NOW, BUT WHAT ABOUT THE FUTURE?
Many have argued that the U.S. aging population coupled with the flood of “baby boomers” moving into their retirement years will cause social security and Medicare alone to “shoot through the roof” and cause the U.S. national debt to reach unacceptable and unmanageable levels, potentially, some say, even bankrupting the U.S. Government. Many use extrapolations of future social security and Medicare payments out into varying distant futures based on the number of retiring baby boomers and increasing life spans concluding that there are trillions of unfunded government obligations ($10T, $25T, $80T, etc.) which are insurmountable. The problem with most all of these analyses are that they fail to address how simple and relatively small adjustments make these problems disappear. For example, on social security, an increase in the social security tax rate from its current rate of 12.4% (6.2% for employees matched by employer) to 15.9% is deemed by one source to fully fund social security at today’s benefit structure out into perpetuity (i.e., forever). Similar analyses are out there for other actions such as updating social security retirement ages to be more consistent with longer life spans. Now granted, few would be happy with a 28% increase in their social security taxes paid or later retirement ages, but what will likely happen will be a combination of different types of changes including reduced benefits, higher taxes, later retirement ages, and reallocations of the overall federal budget.

CONCLUSION
Today’s current level of U.S. national debt is within our government’s means, is an “average” level of national debt compared to other modern economies, and has been an instrumental and, thus far, a necessary part of our country’s economic success. One should never be concerned with the increase in the nominal or absolute amount of the national debt, but rather it should be measured in relation to the corresponding growth in our nation’s economy, usually nominal GDP.

The U.S. economy has some sizable challenges ahead in terms of keeping our increasing national debt in line with increases in our economic growth. Most notably, our demographic trends of fewer births and increased retirees with longer life spans will put additional strains on our country’s debt/income relationship.

One needs to be aware of the increasing number of doomsayers and alarmists who quote projections that are too one-sided and do not paint a fair picture of our challenges ahead. Within the next several years, relatively small changes involving increasing tax rates, lowering government spending, redefining retirement & health benefits, and delaying eligibility of benefits to coincide better with increasing life spans will be necessary to position America into the future.

• Paul Krugman - Bits, Bands and Books - Op-Ed - NYTimes.com

  In the future, will everything be free? Well, maybe not everything, but lots more will. Krugman explains why:
  “…the ease with which digital content can be copied and disseminated would eventually force businesses to sell the results of creative activity cheaply, or even give it away. Whatever the product — software, books, music, movies — the cost of creation would have to be recouped indirectly: businesses would have to “distribute intellectual property free in order to sell services and relationships.”

  tags: economics

• Obama or McCain - who’s better for Housing Market | Wexzilla - Phoenix | Scottsdale Real Estate

  Blogger James Wexler summarizes McCain and Obama’s strategies for dealing with America’s housing crisis:

  “Sen. Obama has suggested $10billion in government funding to help homeowners sell their homes of modify their loans to avoid bankruptcy or Foreclosure.

  Sen. McCain feels like this is a bailout. He feels struggling homeowner and borrowers should share the responsibility and if helped should share equity (if there is a gain) with the lender and Federal Government.

  Obama wants the government to lend money to struggling home owners. Money which usually comes in the form of higher taxes

  McCain has pledged to eliminate (AMT ) taxes. A break that many Americans want (and need). However AMT tax cut with other extended tax cuts leaves less money for such help to home owners. Unless, other government programs are sacrificed. A move, most do not want.”

  tags: economics, housing prices, recession, fiscal policy

• What is Driving the High Oil Prices?

  “High oil prices are here to stay due to heightened political risks, irresponsible behavior by oil-producing governments and growing global demand outside U.S. control. Oil is a finite resource which is produced by a partially cartelized imperfect market. Consumer countries should expand cooperation in order to level the playing field and reduce prices by increasing investment and production, promoting conservation, and diminishing geopolitical risks. Yet, in the long term, high demand, inadequate supply and severe geopolitical risks combine to make oil a problematic transportation fuel.”

  tags: economics, oil prices, scarcity, resources

U.S. food stamp use up sharply, sign of hard times (Reuters) by Charles Abbott

Tags: aggregate demand, Crowding-out Effect, Fiscal Policy, food prices, food stamps

• FT.com / World - Emerging-market cities climb world rankings

  Shanghai ranked one of the best cities in the world for global commerce:

  “Shanghai jumped into the top 25 in this year’s index, joining seven other Asian cities in this group with an eight-position jump that was the most of any city in the index. Among the world’s most populous and fastest-growing cities, Shanghai’s position in the index was bolstered by its economic stability, its legal and political framework, an increased quality of life and China’s booming economy.”

  tags: economics, china

• Why the oil boom will eventually bust - Jun. 6, 2008

  Are high oil prices here to stay? This article suggests they’re not. New supplies will come online at the same time that consumers start to conserve and switch towards alternative energies.

  “The longer prices stay stratospheric, the worse the eventual crash - simply because the higher the prices and bigger the profit margins, the bigger the incentive to over-produce.

  It’s even possible that, a few years hence, we could see a sustained period of plentiful oil supplies and low prices, meaning $50 or below.”

  tags: economics, oil prices

Asia Sentinel - Malaysia cuts fuel subsidy

One of the recurring themes of this blog is the conflict between good politics and good economics. Most of the time in government, smart economic policy is sacrificed in order to achieve political favor with voters. Whether it’s price ceilings on petrol in China, Zimbabwe’s slashing of food prices, harmful import restrictions to benefit domestic producers, or the proposed suspension of gas taxes in a time when fuel conservation is really what’s needed, politicians often act in economically stupid ways to bolster or hang on to their popularity.

So when a government makes a bold move that is economically sound, it sometimes comes as a surprise, as in the case of the Malaysian government this week. The government in Kuala Lumpur has for years subsidized domestic fuel prices, which at under 2 Malaysian Ringit per liter have been the equivelant of roughly $2.40 US per gallon, far below the average price in the west. Drivers benefited from this subsidy, but were not forced to bear any of the burden of rising oil prices, nor had they any incentive to conserve or switch to more fuel efficient automobiles or alternative forms of transportation. The Malaysian government, on the other hand, has had to allocate more and more of its limited budget towards subsidizing petrol prices.

Well, as of yesterday, all price supports for petrol are cancelled, and the effect will be sweeping in the Malaysian economy:

The government announced Wednesday evening that petrol prices would rise by 78 sen (US24¢) at midnight — a 41 percent jump from RM1.92 per liter to RM2.70. That means those spending RM2,000 per month to fill the tanks of their BMWs will now be paying RM2,820. Regardless of income levels, it is likely most Malaysians will feel the pinch.

The subsidy would have cost the Malaysian government 56 billion ringit (around $17 billion) this year. With the money it will now save by ending the subsidy, the government will begin making public transport cheaper and more convenient for commuters who wish to avoid paying for the more expensive petrol to fuel their personal automobiles:

The government hopes to channel the savings into improving public transportation, as it promised many years and elections ago but with little to show. In Kuala Lumpur, despite having a light rail train service and monorail, public transportation is expensive and inconvenient. Worse, intercity travel is still being serviced by old and slow trains, and accident-prone buses.

Malaysia is not the only country taking measures to end government fuel-price supports:

Indonesia has hiked fuel prices by an average of 29 percent, saving about 34.5 trillion rupiah and kicking off a series of street demonstrations… Similarly, after slashing subsidies, Taiwan will distribute US$659 million to middle and low-income families. The latest to raise oil prices is India, whose government announced Wednesday that gasoline and diesel prices will increase by 10 percent.