The VMA Economist (Vol 1, Issue 3)

FEB 2020 VOL. 4 NO CHILD = POOR? Jeffrey Yu & Alex Su FEATURED IMAGE: “THE LOUISVILLE FLOOD” © MARGARET BOURKE-WHITE, 1937. TABLE OF CONTENTS Poverty in US POVERTY Despite being a developed country, the US still faces the IN US - 2 severity of the poverty issue. According to the 2018 income and poverty data from the United States Census Bureau, LACK OF EITC FOR 11.8% of all US citizens still live in poverty, whose hourly CHILDLESS WORKERS- 3 wage stays under $5.84 (2019). While the average American earns $27.16 per hour (United States Census WHY SHOULD WE Bureau, 2019), the workers under poverty often find their INCREASE IT- 3 livelihood unsustainable with the income only about 1/5 of an average person, not to mention the 10% of income tax LIMITATION& they need to pay (Amir El-Sibaie, 2019). CONCLUSION- 4 As a result, the US government has established Earned Income Tax Credit (EITC) to help reduce the income tax of the low-wage workers and even refund the extra credit (the amount larger than the income tax) back to the workers. Although this great tool of alleviating poverty has been provided to more than 22 million low-wage workers in the US, 7 million of those not receiving the same benefits as the rest (Center on Budget and Policy Priorities, 2019). THE JOURNAL PAGE 1

FEB 2020 VOL. 4 \"The Phase-In and Phaseout of the EITC\" (Amir El-Sibaie, 2019) The comparison between two reflects that the childless workers are Lack of EITC for not receiving the credit amount enough Childless Workers for pulling themselves out of poverty. Therefore, an increase in EITC for It is obvious to see from the Graph above that the low- childless workers is likely to alleviate wage workers with no children are receiving a much smaller their poverty issue. amount of credit than those with one or more children. Let’s suppose there is a worker called Jack, who earns $10000 a Recognizing the necessity and the year and needs to pay tax worth 10% of her income ($1000). significance of increasing EITC, If Jack has no children, he gets a tax credit of $424 dollars, several proposals have been established which still requires him to pay $576 as tax. by different senators and house representatives (see the Table below). However, if he has one child, he can get a tax credit of For example, Senator Bayh and former $3409. After cutting the tax, he can get a $2409 refund, President Obama proposed for raise in which can benefit his living much better than himself credit phases up to, maximum credit, without a child. etc. There is also legislation proposed by Ways and Means Committee Chairman Charles Rangel, which is similar to Senator Kerry and House Representative Pascrell’s proposal for raising Phase-In Rate, maximum credit, etc. to a much higher number. Unfortunately, the final Tax Cuts and Jobs Act in 2018 excluded these proposals, and many economists express their complaints against this “mistake” by Congress. Here we will take a look at how these proposals can indeed benefit the childless workers under poverty and why it should be passed as legislation. EITC parameters under the various proposals (Aron-Dine & Sherman, 2007) PAGE 2 THE JOURNAL

FEB 2020 VOL. 4 Why Should We The finding that EITC increases the Increase It? unemployment rate of the recipients is a great help to the less-educated men, common To begin with, an increase in EITC can prevent taxing among childless workers in poverty, a group childless workers into poverty. Rangel’s proposal would whose high unemployment rate is a major reduce the Effective Federal Tax Rate for single childless concerning problem for economists. workers from 8.3% to 1.8% (Aron-Dine & Sherman, 2007). According to the U.S. Bureau of Labor This offsets the majority of the tax burden off childless Statistics, the workers with less than a high workers, a significant benefit to a group with nearly no school degree have an unemployment rate of other forms of government support (e.g. the childless 5.3%, nearly doubled than the average workers are not qualified for Medicaid), unlike other unemployment rate at 3.6% (2019). workers with children. If Rangel’s proposal gets passed, Nevertheless, because of the encouragement EITC would be one of the most trustworthy government of work incentives and past research finding, support that childless workers can rely on, giving them a the increase of EITC for childless workers is lift out of poverty. likely to raise their employment rate. “Something is wrong, very wrong, when a single person in good health, a person who in addition possesses a working car, can barely support herself by the sweat of her brow. You don’t need a degree in economics to see that wages are too low and rents too high.” - Nickel and Dimed, by Barbara Enrenreich Moreover, an increase in EITC can improve work incentives for childless workers in poverty. When the workers are suffering through unsustainable livelihood under heavy tax burden, their incentives to work and earn income greatly drops. If the workers receive relief of tax burden from the support of the government, they are likely to be encouraged to work with the hope of getting out of poverty with support. Even though some economists believe that government support will discourage workers from working hard to earn more and totally rely on government support, research shows that EITC enacted back in the 1990s remarkably increased the share of single mothers who go to work (Marr, Huang, Murray, & Sherman, 2016). THE JOURNAL American Workers. (Left Eye on the Media, 2008) PAGE 2

FEB 2020 VOL. 4 Limitation & Conclusion Comparing the credit amount received by the childless workers and the ones with children, some may argue that the workers with children indeed need lots of more tax credit than childless workers because they have children to raise. However, many “childless” workers are actually are noncustodial parents. They share the same burden as others to raise children but instead are receiving the much smaller EITC as “childless” workers. With this concern, Senator Bayh and former Present Obama notably mention in their proposal that the noncustodial parents would receive twice the maximum credit as other childless workers. Therefore, if EITC for childless workers increased, it will have a positive impact on the children by helping their noncustodial parents under poverty. Indeed, besides giving better education to children under poverty, the original reason for the US PHOTO BY MARTIN R. SMITH government to establish such a higher credit amount for workers with children than those without back in 1990s is likely to encourage US citizens having more children and enlarging the labor force. On the other hand, the increase in EITC for childless workers is likely to impart this effect, resulting in a decrease in the cheap labor force. Nevertheless, things now are different from the past: a plethora of aboard outsourcing labor force available can replace the in-state labor force even with a cheaper price, and the numerous benefits aforementioned outweighs the drawback on declining cheap labor force by providing the childless workers under poverty with a better living. Anyhow, the cheap labor force is always declining if poverty is being reduced, but a better society with less poverty is the American Dream which everyone wants to see. References Amir El-Sibaie. (2019). 2019 Tax Brackets. Tax Foundation. https://taxfoundation.org/2019-tax-brackets/ Aron-Dine A. & Sherman A. (2007). Ways and Means Committee Chairman Charles Rangel’s Proposed Expansion of The EITC for Childless Workers: An Important Step to Make Work Pay. Center on Budget and Policy Priorities. Marr C., Huang C., Murray C., & Sherman A. (2016). Strengthening the EITC for Childless Workers Would Promote Work and Reduce Poverty: Improvement Targeted at Lone Group Taxed into Poverty. Center on Budget and Policy Priorities. Center on Budget and Policy Priorities. (2019). Policy Basics: The Earned Income Tax Credit. https://www.cbpp.org/research/federal-tax/policy-basics-the-earned-income-tax-credit United States Census Bureau. (2019). Income and Poverty in the United States: 2018. https://www.census.gov/library/publications/2019/demo/p60-266.html U.S. Bureau of Labor Statistics. (2019). Unemployment rate unchanged at 3.6 percent in May 2019. https://www.bls.gov/opub/ted/2019/unemployment-rate-unchanged-at-3-point-6-percent-in -may-2019.htm?view_full THE JOURNAL PAGE 2

THE SAUDI OIL GLUT CRISIS By Amy Wu & Jennifer Zhong TABLE OF CONTENTS Saudi Arabian Oil Company is a comprehensive international oil company with INTRODUCTION many years of history. It has a quarter of the EFFECTS OF EXCESS OIL world's crude oil reserves, and it is the world's largest oil producer. In 1999, Saudi Arabia SOLUTIONS & LIMITATIONS provided 1.4 million barrels of crude oil per FUTRURE EXPECTATION day to the United States, which is 16% of the total US crude oil imports that year. Crude oil 1. Introduction exports account for about 80-85% of its export revenue and 35-40% of its GDP. Although it is The importance of oil is self-evident. The now trying to diversify its economic structure, current development of society is related to oil it still relies heavily on the crude oil industry. everywhere since oil is the most important raw material of modern industrial society. Most In the first half of 2019, there was a transportation vehicles are driven by oil. considerable surplus in the oil market supply Additionally, oil is also used to generate that is far exceeding previous expectations. electricity, which is also an important raw The report of the International Energy Agency material for the chemical industry. Moreover, (IEA) shows that in the first half of 2019, the many countries have oil storage systems. global amount of oversupply was about 900,000 barrels per day. This oversupply increased huge inventories in the second half of 2019, when oil production soared and demand growth began to slow down. PAGE 1

--Effects PHOTO BY MARTIN R. SMITH A glut of oil will force the price of oil down. For oil companies, this 2. Effects of Excess Oil could create a huge financial crisis. If oil does not pass $40 a barrel this -Problem year, the crisis could turn into disaster. Because low oil prices Saudi Arabia is in trouble because of an oversupply of oil, directly affect the value of oil given oil production and current prices. Some countries, reserves and other collateral, low oil such as Iraq, are producing more oil in defiance of the prices have worsened the finances of Opec agreement. With the deterioration of the current oil energy companies and the Banks market oversupply situation, resulting in a sharp increase that lend to them. Because many in the downward pressure on oil prices, risks and small and medium-sized oil and gas uncertainties in the market have become a constant companies borrowed wildly during concern for oil suppliers and demand countries. Saudi the shale expansion, they are now Arabia's push to cut output has been strongly resisted by insolvent. the United States because of its role as the world's biggest supplier of crude oil. 3. Solutions & Limitations If coordination between the major oil suppliers is not effectively resolved, it will set the stage for future In order to solve the problem of changes in oil prices. lower oil prices caused by excess oil, we have summarized three desirable In addition, countries' economies are under downward solutions. pressure. If trade frictions between major oil suppliers such as the United States, Russia and Saudi Arabia and major oil demand countries increase, this will inevitably lead to a negative demand outlook and a corresponding slowdown in oil demand. PAGE 2

-1. Increase government & businesses investment Since the lower oil prices caused by excess oil Increase in government and businesses investment would shifts aggregate supply to the right, and has no rise the GDP and shift the aggregate demand to the right so effect on the aggregate demand because oil is a that it can regain the balance with the aggregate supply. In necessity and the fluctuation of prices won’t addition, it would push the long run aggregate supply affect the demand significantly. In order to return further, forming a new equilibrium at a larger output. It can to equilibrium, we must find a way to move the increase the aggregate demand both in the short run and aggregate supply to the left or the aggregate long run, causing the economic growth, which is a fairly demand to the right. If government and businesses good strategy. can increase their spending on investment, it helps the company to fill the lost of lower oil prices. What’s more, it offers the opportunity to improve the machinery and to develop more efficient machines, thereby increasing efficiency, and potentially making the days of oil reserves longer. And it may help to solve the problem of excess oil and the lower oil prices. -2. Increase exports Another way to shift the aggregate demand rightward is to increase exports. Since Saudi Arabian has an oversupply of crude oil, increase in exports may alleviate the problem of excess oil. To implement this policy, the government could export the excess oil. In other words, government could involve and help to increase oil trades between countries. As the exports increased, the real GDP would increase, moving the aggregate demand rightward, which would meet a new equilibrium with the aggregate supply. Moreover, increase in exports would also push the long run aggregate supply further, achieving to the new equilibrium consists by the short run aggregate supply and aggregate demand. Since this strategy can benefit the Saudi Arabian both in short run and in long run while return to balance, it is an advisable policy. (The graph is the same as above). PAGE 3

-3. Cut the production Instead of shifting the aggregate demand to the right, we have the option of shifting the aggregate supply to the left in order to return to the original equilibrium. The idea is to cut Saudi Arabian oil production. Since less oil would lead to less production, which would then lead to higher prices, shifting the whole aggregate supply to the left that can return to the original equilibrium. As it can reach the equilibrium, it is also an advisable solution. -4. Limitations Although these three methods are advisable, it still has some limitations. To cut the production would cut the profits Saudi Arabian can make, and the cut of their profits may lead to unwillingness of the investors, causing the possibility that investors not to cooperate. 4. Future Expectation In the future, people's awareness of improving energy efficiency and environmental protection will gradually increase, which will gradually reduce demand in the oil market. People will use and extract oil reasonably. If countries and large companies want sustainable development and long-term benefits, they can make advance predictions and deal with different problems. PAGE 4

Citation Delventhal, Shoshanna. “What Is Saudi Aramco?” Investopedia, Investopedia, 29 Jan. 2020, www.investopedia.com/what-is-saudi-aramco-4682590. ABC News, ABC News Network, abcnews.go.com/Business/wireStory/opec-nations- grapple-oversupply-oil-67485052.

FEBRUARY 2020 35 MILLION FOR A LOAF OF BREAD by Esther Xiang and Crystal Li TABLE OF CONTENTS Zimbabwe has suffered from hyperinflation for a long period of time. In 2008, Zimbabwe had the ECONOMIC ISSUES second highest incidence of hyperinflation on record. The estimated inflation rate for EFFECTS ON November 2008 was 79,600,000,000%. There is a STAKEHOLDERS proximate daily rate of 98%—prices double everyday. More and more people cannot afford SOLUTION TO THE basic good, prices rising faster than wages and PROBLEM incomes. People became “poverty billionaires”. And the national economy is unable to develop. FUTURE EXPECTATION Despite of the increasingly serious situation of inflation, Zimbabwe government continues printing money due to high national debt, decline in economic output, decline in export earnings, and lack of confidence in government. THE JOURNAL PAGE 1

FEBRUARY 2020 PHOTO BY MARTIN R. SMITH Poor Economic Policies The land reforms reduced 35 Million For a Loaf of agricultural output hence affecting Bread II Zimbabwean economy most notably tobacco farming that represented a ----Economic Issues third of the country’s foreign exchange. The manufacturing The cause of inflation is too much money printed by industry declined because of the government. Though government knows this fact as inexperienced leadership of the well, it still has to continue printing money in response black people. The economic output to several existed reasons. declined and the export had been a weak position for a long time. National Debt The situation has formed a cycle. Zimbabwe government had printed a large amount of Government prints more money to money to service their financial needs in the Second deal with people’s need due to high Congo War in order to meet the demand of higher price. As more money printed, salaries for government officials and the army. inflation increases, so more money is required for people to live. The quantity theory of Money states MV=PY. If we assume a constant V (velocity of money) and Constant Y, an increase in the Money supply leads to an increase in prices. Due to the lack of correct economic policy and government action, the inflation worsens at a rapid speed, and the development of national economy is limited. Lack of Confidence in Government Lack of confidence in government leads to institutional corruption. Zimbabwe is ranked 157th in the world in matters pertaining institutional corruption according to Transparency International. The consequence of massive corruption is a seriously high rate of inflation. THE JOURNAL PAGE 2

FEBRUARY 2020 35 Million For a Loaf of Bread III ----Effects on stakeholders People could not afford basic goods Prices rise faster than wages and incomes. People became “poverty billionaires”.They have to carry incredible amount of money when they go shopping due to the fact that a loaf of bread may cost 35 million. People’s wages can not afford their needs for basic living, so most people live with poverty and hunger. The living standard is low domestically. Damage to business confidence Banks are unwilling to lend money. Due to rising prices, the value of debt can be soon wiped out. Business and individuals are hard to borrow money, so the investment declines. In long-run, both aggregate supply and aggregate demand are affected negatively. The real GDP is low. Menu costs. Due to the double inflation rate, people are willing to spend their money straight away. The cost of bread may be 35 million today, and 70 million tomorrow, People’s expectations to the hyperinflation lead them to spend money as soon as they receive it. Low savings People who save their money loses the value rapidly unless they are able to exchange with foreign currency. However, the hyperinflation in Zimbabwe is well-known. It is hard for citizens to exchange foreign currency since foreign people are also unwilling to keep Zimbabwe currency. Also, foreign exchange controls make it very hard to take money out of the country. Therefore, the overall saving in Zimbabwe is extremely low.

35 Million For a Loaf of Bread IV ----Three solutions 1.Reduce Money supply GRAPH 1-1 2.Control the demand of society and 3.Increasing exportation for foreign exchanges increase the product supply can shift the aggregate demand rightward, 3.Increase exportation to gain more meaning that the GDP increases due to the international trade and the foreign exchanges foreign exchange. can be used to pay the national debt. The negative impact is also obvious. As the aggregate 1.Reducing money supply can keep the inflation rate stable at demand curve shift to the right, the inflation least since once the money supply becomes less, the interest would get intensified, even worse. Furthermore, rates will increase, according to the graph 1-1. As the interest currently the supply does not meet the demand, rate increases, people would like to hold less money because the so Zimbabwe need to export more in order to get money in the bank can earn more(interest), and then the AD some foreign exchanges, under the circumstance will shift to the left since the money used to invest becomes that Zimbabwe’s currency is cheap compared less. As a result, the inflation could be under-controlled. with other countries; the final result can only be However, when the government controls wage and price by more people cannot have accessed to the daily setting a price ceiling, it will cause recession that workers will necessities. become unemployed and causes products shortage. In addition, when government decreases money supply, Zimbabwe’s GDP GRAPH 1-2 will decrease because people will spend less due to their less currency. These are the short-term effect that some people will oppose to the strategies when they are first established. 2.Controlling the demand of society and increasing the product supply solve the problem of hyperinflation because when the demand of society is getting less(AD shifts to the left), the market price would become normal, less radical. It turns out that as the price of resources is lower, aggregate supply will increase.(Graph 1-2) But the limitation is that there will be a transitional time between the controlling demand and sufficient supply. While people’s demand is bound, people’s purchasing power will increase because the price level decreases accordingly. At the same time, the supply is not accordant with the high demand, so the transitional time may not be accepted by citizens.

FEBRUARY 2020 35 Million For a Loaf of Bread V ----Expectation Using price control and wage control, the inflation rate in Zimbabwe can be limited to an acceptable level. Although there is some limitation that cannot accepted by people like a period of time that cannot get enough necessities, the situation may get better later on. In long term, the currency exchanged with other countries can increase Zimbabwe’s purchasing power in importing. The initial loss in the exporting due to the weak exchange rate can be ignored in long run compared to the advantages obtain in importing. Therefore, Zimbabwe can stay in an advantageous position in international commerce. Once the nation’s economy improves, the inflation can be limited in a more stable level. Bibliography Gilbert, Kimutai. “The Story of Hyperinflation in Zimbabwe.” WorldAtlas, 6 June 2017, www.worldatlas.com/articles/the- story-of-hyperinflation-in-zimbabwe.html. Pettinger, Tejvan, et al. “Hyper Inflation in Zimbabwe.” Economics Help, 10 Dec. 2019, www.economicshelp.org/blog/390/inflation/hyper- inflation-in-zimbabwe/. Google Image Result for Https://Qph.fs.quoracdn.net/Main-Qimg- 14f7f88b63c1130859d685628e2ff0a5, Google, www.google.com/imgres? imgurl=https://qph.fs.quoracdn.net/main-qimg- 14f7f88b63c1130859d685628e2ff0a5&imgrefurl=https://www.quora.com/ What-is-the-inflation-rate-in- Zimbabwe&docid=WCYSl1uomHKIaM&tbnid=OCbIvU5eUZbuUM:&vet=1& w=602&h=663&source=sh/x/im. \"The future belongs to those who believe in the beauty of their dreams.\" -Eleanor Roosevelt.

FEBRUARY 2020 VOL. 4 EROSIVE VIRUS TABLE OF CONTENTS VMA Economist ISSUE & EFFECTS The reason why the new virus would inflict heavy losses on catering industry is the SOLUTION & LIMITATIONS rupture of the business cycle. There is basically lacking individuals’ demanding in FUTURE EXPECTATION the catering industry but the business are still need to pay the cost of labors due to the How does the new country’s policy. The cash flow is only coronavirus affect Chinese steaming out of the business but no cash catering industry? come in, in this case, case the crisis in the catering industry. From the perspective of by Krystaltina Liu & Roxy He employment, this case is special. I think the labors can be classified as unemployed The Lunar New Year in 2020 is different workers now, and this is the reflection of from any of the past due to the outbreak of the criticism of the unemployment rate. the new inertial virus. This virus caused a Labors now are now seeking for more hours tremendous influence in China, in every working but can’t get them. If we take these aspects. Because of the strong infectiousness part of labors into the account of of the new virus, all people are ordered to unemployment, the unemployment rate stay at home all time to avoid more case of would have had increased during the last illness. This policy unavoidable affect few months significantly. From a broad Chinese economy strongly especially the perspective, this virus also caused a catering industry because most of the inflation due to the limited food and service catering industry are based on the storefront supply, and this make the catering industry profit. Most of their cash flow are stop become more difficult owing to the higher steaming now due to no profit are made. resources price. What’s more, the GDP is Even the leading company of catering affected a lot as well which in a not desired trend. Catering industry have been played as ，industry——XiBei the CEO of it has one of the important role in the component of consumer spending while the sharp cutoff announced that Xibei is barely survived will affect a lot. It may directly cause the through this epidemic situation owing to no GDP to decrease. enough cash in account to pay the labor’s salaries. PAGE 1

FIGURE 1 eventually have a certain degree of negative influence on GDP. Also, it will be a challenge to the government either due to the cutoff of the tax from the catering industry. Hitting hard to the catering service will have In order to solve the economic stagnation, various effects on different perspectives. we have few solutions. Firstly, Chinese government can provide more subsidy to The citizens will have less option in the these catering services, providing market to choose and consume, which may restaurants profits. Similarly, government cause the phenomenon of their demand can’t can also decrease the taxation on food be satisfied. Then, less option might cause corporations, thus giving them less less spending and even less export because economic burden for service or managing, catering industry of China is well-known in and it can also recover the huge loss of the international market, limited supply may money in catering sectors now. Moreover, not meet the tremendous demand from the these two solutions can also increase supply global. What’s more, it will also have in market and increase GDP, the influence on the resource market such as the recessionary gap will be smaller(Shown as supplier of rice, chicken and vegetables. A the figure 2). However, these two solutions deduction of the company in catering are idealistic. That is because government’s industry will directly decrease their demand deposit and economy is also hurt, money are and increase their storage. In addition, these spent to produce remedy devices, so it may surplus will also affect our environment be hard for government to give up the problem due to the suppliers need to deal nation’s revenues to give large subsidy or with the corpse of the large amount of fowl reduce taxation for profits of only catering and wasted vegetables. If by any chance, it service. There is suitable solution to address will cause some other viruses’ appear. All of these above will directly affect the consumer FIGURE 2 spending and aggregate demand due to the large proportion of the catering industry occupy in the third industry which has increased about 10 percent from 2003 to 2019 (shown as the figure 1), and now is occupying more than half of the proportion during Chinese three major industries. Thus, it will PAGE 2

this issue: bank loan. For Xibei restaurants, when the health problems caused by new the example mentioned above, gained 1200 virus are weakened, we can expect that the million loans from bank, which providing whole economy of catering service will temporary allowance for it, helping this rebound again. People have been away from restaurants to avoid bankrupt. Therefore, eating outside for long time, thus they will bank can provide loans to other catering demand more for the food canteens after services to recover their huge loss. illness is controlled. Increasing demand will Nevertheless, bank loan is also a short run increase the price level and quantity of solution for food service, it cannot address output, the food may have a certain degree the bankrupt problem completely, instead it inflation in the future. According to the can only delay and weaken this process. That Phillips Curve, when is a higher inflation, is because, catering service, meanwhile, the unemployment rate will decrease. As a offer salaries for workers without profiting result, many unemployed people can find jobs enough revenues, and many restaurants will in catering sectors. However, people may be in a positions of liabilities, which may expect the inflation in the future, therefore, exaggerate the burden in the future because workers may demand higher wage, which they cannot ensure they will have enough will decrease short run aggregate supply in profits to repay the loans to bank. Also, the future. In the long run, the price level there are numerous restaurants having will turn to be stable and reach equilibrium economic burden, and bank cannot provide again. enough loans to so many restaurants needing help, so this solution has limitation that it For now, the most effective solution to only aim at a small number of food business. address the loss of food catering, including other business, is control the virus, thus Due to the loss of nation’s economy and business can have opportunity to rebound catering services, Chinese government their profits in the future. should address the spread of virus immediately. Since the virus is not a long term issue for China, so when we pass this period, we can expect that the national economy will return back to usual. If the bank lend loans to many restaurants, in the future, the economy of certain restaurants indeed will improve. However, it will not improve a lot, the incoming trouble of bankrupt will only be postponed in two or three months. Also we cannot predict Citation whether the whole economy of catering https://baijiahao.baidu.com/s? sector will improve in the future with the id=1658126707388654299&wfr=spider&for=p help of loans, because bank cannot loan to https://www.buzzle.com/images/diagrams/graphs/using -expansionary-policy.jpg all the restaurants. However, in the future, PAGE 3