Funferal

Economic analysis 101

Economics is something I’m interested in, but of which I have little knowledge. I’m constantly drawn to reports of income distributions or measures of poverty. More recently, I’ve become interested in macro-economics, particularly those of the United States and Europe. [I’m also somewhat interested in following the federal debt&deficit of the United States]. The short story is that various reports have claimed that Europe will not meet the Lisbon targets of hitting US GDP/capita levels (except, possibly, for Ireland!), while (critical) coverage here in the United States concentrates on the trade deficit of the United States, and how that points to the impending collapse of that economy.Since I’m not an economist, I only come across reports that reach the mainstream media, or that I come across at random on alternative sites. Today I decided to dig a little, and pulled together some information on the US debt, GDP, trade deficit, and population, together with projections for at least some of those. Currently my model (in Excel) isn’t complex enough to provide any useful (or even, most likely, accurate) information. However, the snapshot is useful. Currently the US federal debt is just over 65% of GDP. At current rates – and I don’t see why Bush will change course in the next four years, unless he succeeds in incredibly radical cuts to core domestic programs (which I suppose can’t be ruled out) – it will reach 81% by 2008. For reference, countries joining the Euro had to have debt under, or heading down towards, 80% of GDP. So the USA is currently reasonable, but is heading in very much the wrong direction. Similarly, and moving to macro-economics, by 2008 – with current GDP growth rates – the trade deficit is predicted to move from 4.3% of GDP to 6.68%. That means that within 10 years (at current rates) foreigners should own something like 70% of the U.S. economy.Of couse, what complicates all these figures is that macro-economics studies what is really often a self-righting system. For example, the durrent drop in the dollar – which resumed this morning – illustrates the weak U.S. economy, but also means that exports from the U.S. become cheaper to others, pushing towards a better trade stuation for the country. In addition, as a friend pointed out to me in discussion today, the drop in the dollar will increase pressure for a rise in interest rates in the US (to encourage people to invest in dollars) which would reduce the differential between rates elsewhere and the US (where the Federal Reserve’s base rate is currently around 1.5%).Of course, as you can see there’s an increasing number of variables and factors that need to be taken into account to get any useful information out the far side. However, I’ve managed to get some interesting stats. Such as that Bush will need to create in the region of 8 million new jobs by 2008 for the extra working-age members of the population. This is built on an assumption that the ‘working-age population’ consists of all those, and only those, between 20 and 65. Students and stay-at-home spouses depress the figure. Working before 20, or after 65 increases it. Not sure if these quite ‘cancel out’ but you get a ball-park figure. Now, given that GDP is currently growing at 3.1%, and 8 million works out at an increase of just over 2% per annum, this is very doable, as long as the increasing GDP is taken as a proxy for growth in economic activity. However, if we take inflation into account – due to be 2% next year – the numbers don’t quite add up, since the increase in GDP will partly go towards compensating for increasing costs, and the remainder can’t fund enough jobs – at least at the same rates as current jobs pay on average.My apologies to any actual economists incensed by any simplifications, or obvious errors, I have made. However, I plan to maintain my model and populate it with whatever information I can get, so pointers will be welcome!