The Global Economic Crisis: Three Explanations Come with their Own Policy Prescriptions

The Global Economic Crisis: Three Explanations Come with their Own Policy Prescriptions

The global financial contagion is a subject that has drawn heated debate over the last decades with the concern being the origin, the cause factors, and feasible solution to this crisis. The first major global economic and financial crisis was the spillovers of the 1997-Asian Crisis. This was followed by the 2008-2009 Euro Crises and the 2010 global crisis. Different factors have been attributed to these crises. Some of the reasons given in explaining the root cause of the global crisis is the government failure hypothesis of the Republican Party. It is believed that the federal government’s intervention in the housing market that fueled the 2006 housing bubble and the Federal Reserve failure played a major role in the global economic crises. During this period, the ‘too low for too long interest rates’ introduced by the Federal Reserve authority encourage excessive investment in the housing sector. This prices housing prices went up beyond the ability of the potential buyers, hence, excess supply over demand.

On the other hand, it was argued that ‘market failure hypothesis’ contributed to the global crisis. According to this theory, inadequate financial regulations; characterized by excessive risk-taking behavior by financial institution, perverse repayment incentives, and too far deregulation, allowed for excess finance in the economy, thereby fueling consumer debts. The labor movement ‘share prosperity destruction hypothesis’ also contributed to this crisis. According to this theory, the radical Friedman’s free market philosophy allowed free operation of the economic factors with limited regulations, hence, inadequate market regulatory policies and frameworks. The labor unions pushed for higher wages and minimum wage policy without considering the economy’s productive capacity and regardless of the demand growth factors. This forced the policymaker to abandon the Keynesian’s economic model of full employment.

In attempt to resolve this crisis, stakeholders made different proportions with respect to the above three root causes. The proponents of government failure argued that it was important for financial and labor market deregulatory frameworks to be advanced. In addition, the Federal Reserve authority should commit to low economic inflation rates and also a tax cut policy. On the other hand, in resolving shared prosperity related economic crisis, the Friedman’s economic model should be replaced by the Keynesian’s approach. This new model would be effective in restoring the lost link between productivity growth and wages.

Winners and Losers of the Minimum Wage Hike

The Federal government enacted minimum wage legislations that proposed an increase in the minimum wages with the primary aim of protecting low earners. This policy enactment has raised questions regarding its economic implications. The timing of the 11 percent minimum wage rise approved by the Congress was awkward. Different arguments have presented concerning the economic consequences of this law that with come in effect by July, 2014. According to Professor Gibbs, although the move was right in protecting the interests of the low socio-economic class, the timing is inappropriate. He reasons that given the high rate of unemployment and low inflation current being experienced in U.S., the introduction of the minimum wage policy will further hurt the economy. The most affected groups are likely to be the students in search for summer jobs and internships. With more than 31 states affected by the new law, more than 4.5 million workers are likely to benefit from this legislation. On the other hand, employers will have to incur more recurrent expenditures, hence pitting employers against employees and triggering the common historical industrial unrests. These new wage rates will be beneficial to the employees as their disposable incomes will significantly increase, thus, an increase in their purchasing powers. To the employers (companies), the news comes at a gloomy economic climate, and any hike in wages would be a setback to the pricing and hiring capacity of these firms.

With the unemployment rate reaching a record high in nearly 26 years, the mandated wage hike will be a major setback to job seekers, especially those in search for entry-level positions or temporary employment such as students on summer vocation. According to the 2008 Journal of Labor Research, a 10 percent minimum wage hike causes a 1.0 percent decrease in small-business and retail employment. Since the minimum wage policy targets low-skilled positions, a hike in the wage demand would exacerbate teen’s unemployment rate as employers may decide to reduce their employment capacity for low-wage labor and semi-skilled employers. Employers would prefer elevating part-time employees to full-time rather than hiring semi-skilled and low-wage groups. Gibbs further argued that the wage hike will increase the cost of living as companies will shift the burden to the consumers through price increase.

The long term economic and trade relations between U.S. and Nigeria have been founded on the existence of comparative advantage between these two economies. Therefore, any rift between the U.S. and Nigeria will have adverse implications to both economies, given the comparative trade advantage. In particular, since Nigeria has natural resource endowment (rich in Oil and petroleum products) and its strategic influence in African peacemaking and democracy, loosening the tie will be detrimental to the U.S’s economy and its influence in Africa.

Through comparative trade advantage theory, Nigeria specializes in the production of oil and petroleum products which they export to U.S. since it is cheaper for Nigeria to produce oil. U.S., on the other hand, enjoy comparative trade advantage over Nigeria in wheat production, therefore, the U.S. exports millions of bags of wheat to Nigeria. To avoid any jeopardy incase of diplomatic rows, it is important for Nigeria to seek product diversification that would enable her to trade with other country based on the existence of comparative trade advantage. For instance, Nigeria has the capacity and resource to specialize in Cocoa production and this would relieve the country from over depending on oil resource. However, U.S. and Nigeria should explore the comparative trade advantage that exists between them and trade-off with each other because such trade ties are a win-win situation.

Demand Elasticity in Electric Power Markets

Currently, the demand for electricity is inelastic, therefore, tends to be irresponsive to short-run changes in the prices of electricity. Since the prices of electricity represents standard long-term rates, consumer pay little attention to price changes. On the contrary, although the demand for electricity is price inelastic, the demand for electricity is relatively responsive to a number of factors including household schedules, temperature, among other factors, except for price. Currently, the electricity grids are designed in such a manner that the market always clears given that the only quantity demanded of the power is supplied. Pricing, therefore, does very little in the electricity market as the market operates purely on the demand and supply forces, hence, only quantity adjustment is ideal. For this reason, the consumers have no controlled on the quantity supplied as only grid operators have the capacity to regulate and control electricity suppliers. Therefore, the electricity market equilibrium is an example of quantity-based supply side adjustment forces.

Concerns have been raised on a possibility of price elasticity for electricity. One of the circumstance that is likely to generate electricity price elasticity is when many consumers face real time price pick and high price points to which cycling off of appliances is a possibility. Under such condition, the demand function for electricity will be highly price elastic, with the demand dropping faster than the ability of the supply side to safely accommodate such fall in demands, hence, blackout risks. This risk would be countered through price diversification signaling that are relied to the consumers, or through rolling-average pricing system as opposed to location-specific marginal pricing policy that is currently applied. Any safeguard would hamper power market efficiency, thus, resulting into losses.

The Political History of Cap and Trade

How an unlikely mix of environmentalists and free-market conservatives hammered out the strategy known as cap-and-trade

Environmental conservation is one of the areas that have attracted corporate social responsibilities in modern business environment. This reason for increased CRS in conserving the environment has been attributed to the rise in climate change and climate related challenges. This system was referred to as “cap-and-trade” system or ‘emission trading’ as earlier called. Other groups also referred to it as a “license to kill” or ‘morally bankrupt’. The environmental clean-up policy was an alliance between environmentalists and free-market Republicans. Although the move was powerfully resisted by majority, the alliance moved on and adopted it in 1990 as national law aimed at controlling power-plant pollutants that were mainly response for acid rain. With the federal authorities ready to violate the traditional cardinal bureaucracy rule and surrendering environment regulatory powers to the free marketplace, pollution and emissions trading become a spectacular success in the green movement history. An expansion plan is underway to include carbon (IV) oxide in the environmental regulations, a move that will adversely affect every American. With power plants sending up vast of sulfur dioxide clouds that were falling back as acid rain and causing damages to forests, buildings, and lakes across the U.S. and Eastern Canada, environmental regulation was inevitable.

The ‘command-and-control’ approach advocated for by environmentalist was rendered ineffective, hence, the need for marketplace solution to pollution. This was an opportunity for firms and individuals to make profit by outwitting each other. This was founded on Pigou’s theory that argued that transactions produce effect without necessarily having a change in the product prices. The costs of externalities were, therefore, internalized by the manufacturers, who in turn passed the burden to the consumers, through pollution fees and taxation, but this proved costly and ineffective. It was then proposed that a regulation system with least government involvement was feasible, hence, the introduction of “cap-and-trade” approach to environmental cleaning. The new approach was founded on the premise that instead of telling polluters to clean up their acts and take responsibility for their externalities, the government would only impose a cap-on-emissions. Polluters, therefore, had the right to pollute to certain limits. Manufactures and companies, therefore, had the right to decide the amount to use out of its pollution allowance through output restriction or use of cleaner fuels. Any company that did not exhaust its allowance would trade it off in an open market with other polluters who have exhausted their allocations.