Wednesday, November 1, 2023
Wednesday, March 29, 2023
Why the Dollar Matters
The United States dollar has been a dominant force in the world of international trade for over half a century. The dollar has served as the primary currency for transactions between nations, making it an essential component of the global economy. But why does the dollar hold such a prominent position, and what are the implications of its role in global commerce? In this article, we'll explore the significance of the dollar in international trade, examining its history, its current status, and its impact on economies around the world.
A brief history of the dollar's dominance
The dollar's dominance can be traced back to the end of World War II when the US emerged as the world's largest economy. The Bretton Woods Agreement of 1944 established the US dollar as the world's reserve currency, backed by gold at a fixed exchange rate. This system created a stable and predictable international monetary system, which fostered global economic growth for several decades.
However, the system began to unravel in the 1960s when the US experienced high inflation and trade deficits. In 1971, President Nixon suspended the convertibility of the dollar into gold, effectively ending the Bretton Woods system. The dollar became a fiat currency, meaning its value was no longer directly tied to a tangible asset.
Despite the end of the gold standard, the US dollar continued to dominate global trade. The dollar's stability, liquidity, and widespread acceptance made it the currency of choice for international transactions.
Benefits of the dollar's role in international trade
The dollar's role as the world's reserve currency has several benefits. Firstly, it provides stability and predictability in international trade. Because the dollar is widely accepted, it reduces the risk of exchange rate fluctuations and currency-related disputes.
Secondly, the dollar's dominance in global finance has made it easier for countries to borrow money. Countries that issue bonds denominated in dollars are more likely to attract investors because the dollar is seen as a safe-haven currency.
Thirdly, the dollar's status as the world's reserve currency has allowed the US to finance its budget deficits at lower interest rates. This is because central banks around the world hold large amounts of US dollars in their reserves, which creates demand for US Treasuries.
Criticisms of the dollar's role in international trade
Despite the benefits, there are also criticisms of the dollar's role in international trade. One of the most significant criticisms is that it gives the US an unfair advantage in global trade. Because the dollar is the world's reserve currency, the US can print more money without the same consequences as other countries. This can lead to inflation and currency devaluation, which can hurt other countries' economies.
Another criticism is that the dollar's dominance in global finance has created a system of financial imperialism, where the US uses its economic power to exert influence over other countries. This has led to concerns about the US's ability to weaponize its financial system for political gain.
Finally, the dollar's role in global finance has contributed to the rise of income inequality both within the US and globally. The benefits of the dollar's status as the world's reserve currency accrue mostly to the wealthy, who have greater access to global finance.
Alternatives to the dollar in international trade
Given the criticisms of the dollar's role in international trade, there have been several proposals for alternatives. One of the most significant is the creation of a new global reserve currency, such as the International Monetary Fund's (IMF) Special Drawing Rights (SDRs). SDRs are a basket of currencies that can be used as a reserve asset, but they have not gained widespread acceptance.
Another alternative to the dollar is the use of cryptocurrencies, such as Bitcoin, which are decentralized and not tied to any government. However, cryptocurrencies are still in their infancy and are not yet widely accepted as a means of payment for international trade.
Finally, some countries have sought to create their own regional reserve currencies, such as the Chinese yuan in Asia. However, these currencies have not yet gained significant traction in international trade.
Impact of the dollar's dominance on global markets
The dollar's dominance in global finance has had a significant impact on global markets. One of the most significant effects is the so-called "dollar shortage," which occurs when there is a high demand for dollars but a limited supply. This can lead to financial crises, as we saw in the 1997 Asian financial crisis and the 2008 global financial crisis.
The dollar's dominance has also contributed to the rise of global imbalances, whereby some countries run persistent trade surpluses while others run persistent trade deficits. This can lead to tensions between countries and can hurt global economic growth.
Finally, the dollar's dominance has contributed to the rise of financialization, whereby the financial sector has become increasingly important in the global economy. This has led to concerns about the prioritization of short-term profits over long-term economic growth.
Future of the dollar in international trade
Despite the criticisms and proposed alternatives, the dollar's dominance in international trade is unlikely to diminish anytime soon. The dollar's stability, liquidity, and widespread acceptance make it the currency of choice for international transactions.
However, there are some challenges on the horizon. One of the most significant is the rise of China as a global economic power. China has sought to increase the international use of the yuan and has established several bilateral currency swap agreements with other countries. This could potentially challenge the dollar's dominance in the long run.
Another challenge is the rise of cryptocurrencies, which could disrupt the traditional financial system. If cryptocurrencies become widely accepted as a means of payment for international trade, they could potentially challenge the dollar's dominance.
How individuals can navigate a world dominated by the dollar
For individuals, the dollar's dominance in international trade has several implications. Firstly, it means that the value of the dollar can affect the prices of goods and services in their home country. If the dollar appreciates, imports become cheaper, but exports become more expensive. Conversely, if the dollar depreciates, imports become more expensive, but exports become cheaper.
Secondly, the dollar's dominance means that individuals may need to consider the risks of holding assets denominated in another currency. For example, if someone holds assets denominated in euros and the euro depreciates against the dollar, the value of their assets will decrease.
Finally, individuals may want to consider the risks associated with investing in countries with significant dollar-denominated debt. If a country experiences a financial crisis, it could lead to a shortage of dollars, which could hurt the value of its investments.
Conclusion on the importance and implications of the dollar
In conclusion, the US dollar's role in international trade is significant and has far-reaching implications for the global economy. While the dollar's dominance has created stability and predictability in international trade, it has also led to criticisms of the US's economic power and financial imperialism. Despite proposed alternatives, the dollar's dominance is unlikely to diminish anytime soon, but challenges on the horizon, such as the rise of China and cryptocurrencies, could potentially disrupt the traditional financial system. Understanding the role of the dollar in international trade is crucial for anyone interested in the global economy and can help individuals navigate a world dominated by the dollar.
And That’s that!
Saturday, March 25, 2023
Federal Budget and Appropriation Process
(How Things Work)
This brief guide is designed for non-experts as an overview of the federal budget and appropriations process. It will not be easy, but with a little study, you can better understand how the budget is put together and, therefore, have a better understanding of the gibberish coming out of Washington about various aspects of the process. Several exhibits are provided in order to show the various relationships in the process. They were chosen as a matter of convenience, and no political position/opinion should be inferred.
Some Basic Information
The Federal Government operates on a fiscal year basis, which runs from October 1 to September 30 of each year. The budget follows the same period, whereas individuals and most companies follow a calendar year (January 1 to December 31).
In terms of spending, the government funds a substantial and diverse range of programs and activities. The budget process can best be understood by breaking it down into its three major components – discretionary spending (39%), mandatory spending (65%), and interest on government debt (6%). See Exhibit I
Discretionary spending is where most of the time is spent. It covers military spending and all of the administrative overhead of the government, e.g., Congress and presidential salaries and associated over head. The budget for this category and each sub category (department) is subject to much debate every year and is subject to the formal procedures described below. See Exhibit II
However, the overwhelming majority of federal spending (in terms of the dollars disbursed) consists of “mandatory spending,” sometimes called entitlements. The so-called “entitlement” category includes some programs that are theoretically self-funded through payroll deductions (like Social Security, Medicare and unemployment benefits) as well as unfunded welfare programs (like Medicaid and 80-plus means-tested initiatives).
In mandatory funded programs, legislation defines the eligibility criteria for participation, and the government allocates funds to all who are eligible, regardless of the annual cost to the Treasury. There is no debate over the dollars to be budgeted; however, debates can be held over criteria for eligibility (benefit provisions and changes thereto), which would then affect the dollars budgeted. See Exhibit III
In terms of revenue, these numbers are compiled by the Office of Management and Budget (OMB) based on their best guess and wishes at the time. See Exhibit V
The President’s Budget Request
The federal funding process begins with the submission of the president’s annual budget request to Congress. Traditionally, this is done on the first Monday in February, though that date often slips, especially when new administrations take office.
The president’s budget request details the administration’s position on the full range of federal revenue and spending. The request encompasses economic projections and analysis, as well as detailed program-by-program funding levels proposed by the administration. It also projects deficits and surpluses for the government as a result of the recommendations in the budget for the immediate fiscal year, as well as the next nine fiscal years.
In addition, the administration uses the budget request to introduce new policies, programs, or changes they would like to see enacted. The budget document overall runs several thousand pages, including related information, appendices and charts. It is prepared by the Office of Management and Budget (OMB), which functions as the chief administrative agency of the Office of the President. The OMB scores the program funding and policy changes detailed in the budget request.
It is important to remember that the president’s budget proposal is simply a request. It has no binding authority on Congress and is best understood as a detailed statement by the administration of its fiscal goals and policy preferences. Additionally, as the OMB often produces different scores than the CBO, the budget request often has different numbers than those Congress uses to make its decisions. See Exhibit IV
Here is a link to a presidential budget request:
https://www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/budget.pdf
Congressional Budgeting (re Discretionary Spending)
The president’s budget request starts the process, and then Congress responds.
The first step in the funding process is the creation of a concurrent congressional budget resolution. The budget resolution has one key purpose, which is to set the total level of discretionary funding (known as the “302a allocation”) for the next fiscal year. While the resolution looks at total federal spending over a 10-year window, it is not binding beyond the approaching fiscal year.
The budget resolution is both similar to and different from traditional legislation. Like a legislative bill, budget resolutions originate in the relevant committee (in this case, the respective budget committees of each chamber) and must be approved by the whole chamber. Unlike a traditional bill, budget resolutions do not require presidential action and can pass with a simple majority, and the Senate is barred from filibustering votes on these bills.
Budget resolutions are supposed to be filed by April 15, although this has been rare in recent sessions. More commonly of late—particularly when the chambers are controlled by opposing parties— each chamber will pass its own resolution, or simply pass a “deeming resolution,” a simple resolution which sets the 302a allocation without advancing a budget.
Budget resolutions often include multiple policy proposals, usually along the lines of extending or rescinding various tax provisions. Due to their non-legislative status, these proposals are understood to be an effort by the majority to send a message about their fiscal priorities.
Congressional Appropriations (re Discretionary Spending)
With the 302a allocations determined, the funding process moves to the appropriations committees in each chamber. Long considered one of the most powerful and prestigious committees on which to serve, Appropriations is responsible for determining program-by-program funding levels. This is done through 12 separate appropriations bills, each generated by a specific subcommittee, covering either individual or groupings of federal agencies.
The chairs of the appropriations subcommittees, under direction of the appropriations committee chairperson, divide the 302a allocation among the 12 subcommittees. This allocation provides the total funding pool for each of the appropriations bills, known as the ‘302b allocation.’ In simple terms, the 302a allocation represents the size of the whole funding pie, while the 302b allocation is equivalent to the size of one of 12 slices of that pie.
Armed with their 302b allocation, the various subcommittees then divide that funding level among the programs under their authority. This process is accompanied by multiple activities. The most visible are public hearings by the subcommittees, where they invite the secretaries of the various agencies to testify on their budget requests. Simultaneously, legislators and their staff from outside the subcommittees submit requests for funding levels they would like to see, expressing their support for programs. Finally, committee staffers often meet with advocates of the programs to discuss the funding outlook.
The subcommittee staff then produces an appropriations bill that is brought to the full subcommittee for a vote. While it is possible to amend a bill in subcommittee, it is not common. If it passes, the bill is then taken up by the full committee, often with several amendments to the underlying bill.
This process works in identical fashion in both the House and Senate. It is not uncommon for the two chambers to have different 302a’s and 302b’s, with the resulting versions of the bill millions or billions of dollars apart. Even when the chambers work from similar allocation levels, differences often occur between the total funding levels for the many programs in each bill.
In addition, it has become increasingly common for appropriations bills to include policy changes, or “riders.” A common rider is language prohibiting an agency from using any of the funds included in the bill to perform a certain action that legislators oppose. Other riders may make policy changes in order to lower the overall cost of a program. These riders may vary significantly between the chambers, adding further complication to the process of passing a unified bill.
All appropriations bills are supposed to be passed in “regular order,” meaning the full passage through both chambers by the start of the federal fiscal year on Oct. 1. Failure to provide appropriations would result in a nearly complete shutdown of federal operations, although in practice, this rarely happens.
Over the last many years, few if any of the appropriations bills have been passed in regular order, even those enjoying wide bipartisan support, such as the Defense and the Military Construction-Veterans Affairs bills. Instead, Congress often enacts a series of continuing resolutions (CRs), which are short-term spending bills that typically maintain funding levels at the previous year’s levels.
When CRs are used in place of the “regular order,” you hear accusations like “they have not produced a budget in XX years”. CRs are also harder for Congress to reject since rejection might shut down the entire (or substantial portion of the) government instead of only certain sections or departments included in one of the 12 funding pools associated with “regular order”.
CRs can last for as little as a day but usually are for a number of weeks, and are renewed when negotiations extend beyond the new deadline. CRs also can contain policy provisions and revisions to funding levels.
With so many bills and areas of possible disagreement between the House and Senate, it is not surprising that Congress has difficulty passing each appropriations bill in regular order. As the fiscal year ends, leadership in both chambers will often negotiate on passing all the bills together in one combined package, known as an omnibus bill. On certain occasions, when less controversial bills have been passed into law, a bundle of the remaining appropriations bills will be bundled to finish funding work, and this package is known colloquially as a “minibus.” The omnibus approach allows for a greater range of negotiation than any individual bill would and also makes a presidential veto over a particular issue less likely.
Regardless of the final form the appropriations bills take, the final step in enacting program funding consists of the president signing the bills. As with more traditional legislation, the president has the authority to veto appropriations bills, and Congress can then attempt to override the veto. A two-thirds vote is required in both chambers to overturn a veto. See Exhibit V.
Emergency Spending and Deficit Legislation
While the standard budget and appropriations process is meant to encompass all federal operations, in practice, there are a number of occasions where the Congress and the president pass legislation outside the normal order that impacts federal budgeting and spending.
This course of action is most commonly seen in what is known as emergency funding. Emergency funding is essentially what it sounds like: supplemental funding provided in response to an unanticipated emergency, particularly natural disasters. Over the last decade, it has also become common to fund ongoing overseas military operations—most notably those in Iraq and Afghanistan—outside of the traditional defense appropriations bill through emergency appropriations. One of the appeals of this approach to lawmakers is that funding designated as emergency funding is not subject to the limits imposed by budget resolutions or committee allocations. As a result, emergency funding can mask total spending by a Congress.
Other approaches to addressing federal spending have also been taken up outside of the regular process. Recent concern over federal spending has prompted several legislative efforts to address federal deficits and debts by setting limits on current and future spending levels, and creating mechanisms for enforcing these levels. Such efforts also were undertaken in the early 1990’s and 1970’s. The most recent example was the passage in August 2011 of the Budget Control Act (BCA), which created several extra-ordinary procedures to limit federal spending and reduce the debt. Such procedures usually focus on the big-picture, capping overall spending levels while leaving the decisions as to how to meet them up to Congress.
Links to other resources:
https://www.nationalpriorities.org/analysis/2014/presidents-2015-budget-in-pictures/
http://sparkaction.org/content/understanding-federal-budget-primer
Exhibit I
Exhibit IV
https://online.fliphtml5.com/pxvte/vuew/
Differences Between Keynesianism and Modern Monetary Theory
Introduction
As the global economy continues to evolve and face new challenges, economists and policymakers are constantly searching for the most effective ways to promote growth and stability. Two economic theories that have gained significant attention in recent years are Keynesianism and Modern Monetary Theory (MMT). While both theories aim to address economic issues, they differ in their approach and solutions. Keynesianism emphasizes government intervention and spending to stimulate economic growth, while MMT argues that governments can print money to fund public programs without causing inflation. So, which theory is best for today's economy? In this article, we'll explore the key differences between Keynesianism and MMT, and provide insights into which theory may be better suited to tackle today's economic challenges.
The Basics of Keynesianism
Keynesianism is an economic theory that was developed by British economist John Maynard Keynes in the 1930s. The theory suggests that in times of economic downturns, the government should intervene by increasing its spending and cutting taxes to encourage consumer spending and stimulate economic growth. Keynes believed that the government should be responsible for stabilizing the economy through monetary and fiscal policies.
The theory is based on the idea that the economy is driven by aggregate demand, which is the total demand for goods and services in an economy. The theory of aggregate demand (AD) explains the total demand for all final goods and services in an economy at different price levels, typically downward-sloping, meaning lower prices increase the quantity demanded due to wealth, interest rate, and exchange rate effects. Key drivers of AD include consumption (C), investment (I), government spending (G), and net exports (NX), summarized as AD = C + I + G + NX, with Keynesian theory emphasizing that government intervention (fiscal policy) can stabilize demand and output, especially during downturns.
Classical theories expected prices to adjust to restore full employment without government influence.
The Keynesian approach to economic policy is based on the idea that the government should actively manage the economy to promote full employment and stable economic growth. This means that during periods of recession, the government should increase its spending to create jobs and stimulate demand. The theory also suggests that during periods of economic growth, the government should reduce its spending to prevent inflation.
One of the key components of Keynesianism is the concept of the multiplier effect. The multiplier effect suggests that a small increase in government spending can lead to a much larger increase in the overall level of economic activity. This is because increased government spending leads to increased consumer spending, which in turn leads to increased business investment and job creation.
The Basics of Modern Monetary Theory
Modern Monetary Theory (MMT) is a relatively new economic theory that has gained popularity in recent years. The theory suggests that a government that controls its own currency can never run out of money and can use its currency to fund public programs without causing inflation. This is because the government can simply create more money to pay for its programs.
According to MMT, the government's ability to spend money is not limited by taxes or borrowing, but rather by the availability of goods and services in the economy. The theory argues that inflation is only a concern when the economy is operating at full capacity and there is a shortage of goods and services.
The MMT approach to economic policy is based on the idea that the government should focus on achieving full employment and promoting economic growth through public investment. The theory suggests that the government should increase its spending to create jobs and stimulate demand, and should only worry about inflation when the economy is operating at full capacity.
The Similarities Between Keynesianism and Modern Monetary Theory
Despite their differences, Keynesianism and MMT share some similarities. Both theories emphasize the importance of government intervention in the economy to promote growth and stability. Both theories also recognize the importance of full employment and suggest that the government should take an active role in creating jobs.
In addition, both theories reject the idea that the government's ability to spend money is limited by taxes or borrowing. Keynesianism suggests that the government can borrow money to finance its spending, while MMT suggests that the government can simply create money to fund its programs.
The Differences Between Keynesianism and Modern Monetary Theory
Although Keynesianism and MMT share some similarities, they differ in their approach to economic policy. Keynesianism emphasizes the use of fiscal policy, such as government spending and taxation, to stabilize the economy.
MMT, on the other hand, emphasizes the use of monetary policy, such as the creation of new money, to stimulate the economy.
Another key difference between the two theories is their approach to inflation. Keynesianism suggests that inflation can be controlled through a combination of monetary [central bank intervention] and fiscal [government intervention] policies, while MMT suggests that inflation is only a concern when the economy is operating at full capacity.
Finally, Keynesianism suggests that the government should balance its budget over the long term, while MMT argues that a government that controls its own currency does not need to worry about balancing its budget.
The Pros and Cons of Keynesianism
One of the main advantages of Keynesianism is that it provides a framework for government intervention in the economy during times of recession. The theory suggests that the government can use fiscal policy to stimulate demand and create jobs, which can help to stabilize the economy.
However, Keynesianism has been criticized for its potential to create inflation and for its reliance on government intervention. Critics argue that increased government spending can lead to inflation and that the government should not be involved in the economy to the extent that Keynesianism suggests.
The Pros and Cons of Modern Monetary Theory
One of the main advantages of MMT is that it provides a new way of thinking about government spending and public investment. The theory suggests that the government can create money to fund its programs without causing inflation, which can help to promote economic growth and stability.
However, MMT has been criticized for its potential to create inflation and for its reliance on monetary policy. Critics argue that increased government spending can lead to inflation and that the government should not rely on the creation of new money to fund its programs.
Which Theory is Best for Today's Economy?
There is no clear answer to which theory is best for today's economy. Both Keynesianism and MMT have their advantages and disadvantages, and the best approach will depend on a variety of factors, including the state of the economy, the level of government debt, and the political climate.
Some economists argue that a hybrid approach that combines elements of both Keynesianism and MMT may be the best approach. This could involve using fiscal policy to stimulate demand and create jobs, while also using monetary policy to fund public investment.
Ultimately, the best approach will depend on a variety of factors and will require careful consideration and analysis by policymakers and economists.
Criticisms of Both Keynesianism and Modern Monetary Theory
Both Keynesianism and MMT have been criticized for their potential to create inflation and for their reliance on government intervention in the economy. Critics argue that increased government spending and the creation of new money can lead to inflation and can cause long-term economic problems.
In addition, both theories have been criticized for their potential to lead to increased government debt. Critics argue that increased government spending can lead to increased government debt, which can have long-term consequences for the economy.
Conclusion
In conclusion, Keynesianism and Modern Monetary Theory are two economic theories that have gained significant attention in recent years. While both theories aim to address economic issues, they differ in their approach and solutions. Keynesianism emphasizes government intervention and spending to stimulate economic growth, while MMT argues that governments can print money to fund public programs without causing inflation.
There is no clear answer to which theory is best for today's economy, and the best approach will depend on a variety of factors. Some economists argue that a hybrid approach that combines elements of both Keynesianism and MMT may be the best approach.
Ultimately, the best approach will require careful consideration and analysis by policymakers and economists to promote growth and stability in today's economy.
And That’s that!