# Knowing when to Hold em and When to Fold em Evaluating data from growing economies requires that you know what they are growing from and what they are.

## Presentation on theme: "Knowing when to Hold em and When to Fold em Evaluating data from growing economies requires that you know what they are growing from and what they are."— Presentation transcript:

Knowing when to Hold em and When to Fold em Evaluating data from growing economies requires that you know what they are growing from and what they are growing to. This is especially true when considering an investment or infusion of wealth into an economy. It may be a “hot” opportunity or it may be an “overheated” disaster just waiting to happen. Recent work by various economists suggest methods of evaluating this in order to delve more deeply into the functioning of any economy and this is based on the policy dependent components of the national income model. In the attached diagram the model can be used to analyze consumption, investment, or government expenditure. And can make a contribution to analyzing some of the policy strategies that nations use.

Legacy or Burden Rates The legacy or burden rate is the ratio of the threshold by autonomous activity area to the feasible target income level. It is the ratio of two areas and is a pure number. Y = Income Y’ = Income Target Consumption Investment Government Expenditure Autonomous A Threshold T Burden Rate = Legacy Rate= Burden/Feasible Burden =[(A0) * (T0)]/2 Feasible= (A0Y’P) 0 Policy Target P

Policy Extension to Target Level of Income Often we need to move to the target level of income that would support the feasible area. To do that we need to break up the area 0APY’ into component parts rectangle 0ABY’ and triangle APB. Note the area of 0ABY’ is 0A * 0Y’ and the area of APB is [ 0Y’ * AC’]/2 This is a fairly complex calculation but note that the angle of PAB (given by the slope) determines the variability of Y’ Y = Income Y’ = Income Target Consumption Investment Government Expenditure Autonomous A Threshold T For any given Threshold T the higher the level of autonomous consumption, investment or government expenditure, the steeper the policy curve will become and the greater is the change in C’,I’ or G’ for any given change in overall Y. Similarly the lower the level of autonomous consumption t investment or government expenditure, the lesser will be the change in overall Y. 0 Policy Target P B C’,I’,G’ Higher autonomous Lower autonomous

Implications of Policy Curves Often governments want to influence behavioral curves and get to certain policy goals without using the power that they have over the economy. This often involves public relations efforts that attempt to use the power of persuasion. For example if they wish to create the impression of high growth in order to defend their currency, they would attempt to lower the autonomous consumption, investment or entitlements of government expenditure in order to demonstrate high growth in incomes. If they wanted to slow down growth perhaps to make the markets of other nations look better they might attempt to raise the level of autonomous behavior. The behavioral curves are secondary to other policy issues that may affect the macroeconomic performance of the country. In other words the nation may wish to “promote” itself by strategies such as currency wars, nationalization, or modernization in order to ameliorate or counter the impacts of the behaviors that typify its economy.

Currency Wars A Currency war takes place when a country purposely deflates its currency in order to make the goods that it sells to other less expensive. This allows it to maintain production by exporting product. The maintenance of production employs workers who in turn pay taxes that help the country overcome its debt problems and may even eventually return it full growth and even a surplus position. This is often referred to as exporting unemployment. The factors that affect this are: The proportion of trade that is carried out with a growing economy. The greater the proportion of trade the more effective and efficient is this manoeuvre. The nature of the products sold. If the product mix sold is heavily weighted by raw materials that are renewable (hydroelectricity, lumber, or food) as opposed to non renewable (oil and gas or minerals) and less by manufactured goods that can be readily substituted in the importing country (automobiles, electronics, etc.) then the policy will work more quickly. The stability of both the trading partners in order to be free of civil unrest and tolerant of trading in a financially orderly environment allows the gains to be cumulative and the transition to be more long lasting. If any of these conditions are not present then the deflation will not work and will soon unravel. If many nations compete for the same prize, i.e. attempt to devalue en masse, then they will each try to outdo the other and will deflate in an ever increasing spiral until they become bankrupt. A nation deflates its currency by open market operations in which it buys bonds (usually government bonds in the growing economy) in exchange for its currency which increases the supply of its currency at a fixed demand and therefore drives its price (exchange to other currencies) downwards.

Nationalization A nation may seek to exert market dominance or influence on a particular industrial or resource market by combining the power of the state and the business aspirations of its industrial sector. This is often done by a legal process known as nationalization through which a country takes ownership of the industry and manages it as an extension of it political power. This may include any number of forms such as collectivization, isolation or integration. Collectivization refers to a process of taking all similar businesses and forcing them to turn over their assets to the state. In Soviet Russia peasants were forced to turn over their land and crops to the state according to a quota set by the government. In the 1930’s when the crops were poor millions of farmers were left to starve. This is known as the “Holodomir”. On the other hand when the Nazis achieved power in Germany they also nationalized the wealth of Jews and eventually exterminated millions in the “Holocaust”. Isolation refers to a process whereby a specific region or process is isolated from all the rest of the industry in order to meet a social policy goal. In Canada, the Canadian Wheat Board was created to increase the amount that farmers were getting for wheat and used very exclusive means to even prosecute those farmers who did not comply with marketing orders. In England, the coal markets were isolated from the rest of the economy in order to force a standard level of production and labor rights were removed from workers. Many unionist were arrested and prosecuted heavily. Integration refers to a process wherein a company is brought into the confidence of the government and operates as an arm of the government itself. In the United States the military-industrial complex that arose during the Eisenhower administration came to dominate the US economy until the crash of the 1980’s when the “rust” belt started to tighten around the North Eastern U.S. eventually leading to the bankruptcy of major cities and towns. In Japan the integration through the “Keidanrun” or employers council lead to rapid growth of Japanese industry until the collapse of the 1980’s as well. In all cases overcoming latent behavioral issues in the “national interest” has not had a positive impact and may have caused many economic hardships.

Modernization Modernization is a process in which a national government attempts to pursue technologies that will improve the level of economic performance and lead to growth by avoiding the pitfalls of nations with currently failing technologies. This is particularly appealing when countries wish to expand their influence on levels of autonomous activity and reduce this as a method of controlling non-conformity to the “national” ideals that the government promotes. Ideologically strident slogans such as the “Great Society”, the “Great Leap Forward”, the “New Deal” proliferate in these situations. Analytically these approaches tend to become political experiments that have often been seen as failures or misguided applications of public policy. The political experiments have even gone to the extent of forced compliance such a occurred with Prohibition in the United States and the Five Year Plans of the Soviet Union. Essentially the success or failure depends on where the modernization sets its target and how well the rest of the world reacts to it. Economists use game theory to evaluate these particular approaches and have generally concluded that these are in the long run “zero-sum” games in which all benefits equal all losses.

Summary Economists use analytics to attempt to understand the issues that policy makers face and to determine if the paths that are chosen are effective in reaching the stated goals. There are many cases in which short term approaches appaear to be successful but in the long run set the stage for even worse collapses than those that were being avoided in the first place. The challenge for economists is to avoid being part of the problem as they seek to become part of the solution.

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