Sometimes local governments invest in projects with risk and this can lead to controversy. Find a recent project that your local government (or one nearby) has undertaken. It could be government spending of any kind that is related to economic growth. How was it done? Was everyone in favor of it?

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Chika IlonahLv10

29 Sep 2019

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1. Why Niall Ferguson thought that the expansionary fiscal policy (or government deficit) could produce crowding-out effect? You can explain by using the IS-LM model or you can use the logic of loanable funds theory.

Niall Ferguson believed that expansionary fiscal policy could produce a crowding-out effect. Ferguson believed that if the government tried to increase demand during the crisis it would cause the real interest rate to increase. He theorized that if the government tried to boost the economy through deficit spending it would cause the interest rate to rise, which in turn would crowd-out investors and consumers. The interest in the deficit would lead to an increase in the demand for loanable funds, which would lead to an increase in interest rates. Ferguson stated "The lesson of economic growth is very clear. Economic growth does not come from state-led infrastructure investment. It comes from technological innovation, and gains in productivity, and these things come from private sector, not from the state."

2. Why Paul Krugman thinks that Niall Ferguson was wrong and thought that government deficit could not produce a crowding-out effect? In other words, please explain Krugman's Liquidity trap .

Paul Krugman disagreed with Ferguson and believed that the government deficit could not produce a crowding out effect. Krugman's liquidity trap: Private demand is so low that even if the short-term interest rate is 0% spending is less that what is needed for full employment. Normal monetary policy of the central bank purchasing short-term debts with new money is ineffective. Krugman argues that a major issue during the crisis was people wanting to save money combined with the private sector being far less likely to invest. He referred to this a "savings glut". It was argued that the federal reserve was playing the part that the private banking system through buying private securities and the federal government was playing the roll that business wasn't by engaging in investment. Due to the liquidity trap excess demand for savings is not going to drive interest rates up. Krugman stated " Government borrowing gives some of those excess saving a place to go and in the process expands overall demand, and hence GDP. It does not crowd out private spending, at least not until the excess supply of savings has been sopped up, which is the same thing as saying not until the economy has escaped from the liquidity trap."

3. In the discussion, other discussants such as George Soros and Robin Wells pointed out some interesting issues. Please provide at least one thing that you agree and one thing that you disagree. Discuss in details why you think so.

I agree with Soros view that the publics view of the financial markets has been forever changed. " Financial markets namely that they tend toward equilibrium, and that equilibrium is disturbed by extraneous forces, outside shocks. But the finical system collapsed of its own weight." I feel like this is a situation in which it takes a very long time to build trust, but that trust can be lost instantly. The crash has challenged the felling of security that people once felt in the banking system. The idea of the market regulating itself is fading, it wasn't until the government stepped that people felt reassured in the banking system. I believe this will lead to a period of government regulation that wouldn't have arose without this change in view. I disagree with robin Wells' view that the US needs to shift towards protectionism. I believe that free trade is good for everyone as long as there is a comparative advantage. If the US moves toward protections as a result of the deficit it will slow economic growth and place us at a disadvantage compared to countries with free trade. Not to mention consumers in the US will be placed with the burden of higher prices on goods.

Please make comments to the discussion I provided above(at least 300 words). And you can start with "I agree with you on some points... But I disagree with you on some points".

Few fields of empirical economic research offer virtual unanimity of findings. Yet, independent work on the economic impact of stadiums and arenas has uniformly found that there is no statistically significant positive correlation between sports facility construction and economic development (Baade and Dye, 1990; Baim, 1992; Rosentraub, 1994; Baade, 1996; Noll and Zimbalist, 1997; Waldon, 1997; Coates and Humphreys, 1999). These results stand in distinct contrast to the promotional studies that are typically done by consulting firms under the hire of teams or local chambers of commerce supporting facility development. Typically, such promotional studies project future impact and almost inevitably adopt unrealistic assumptions regarding local value-added, new spending, and associated multipliers. They often use a regional input-output model that depends on outdated technical coefficients which are treated as invariant to shifts in supply and demand (Center for Economic and Management Research, 1991; Deloitte & Touche, 1994, 1996; KPMG, 1996; Economic Research Associates, 1996; KPMG, 1998; C.H. Johnson Consulting, 1999). The academic work on the economic impact of sports facilities and teams does not rely upon projection. Rather, it compares the local economic performance of areas with and without stadiums, arenas, and teams, controlling for other variables that affect local economic conditions. Among cross-section studies, for example, Baade (1994) found no significant difference in personal income growth from 1958 to 1987 between 36 metropolitan areas that hosted a team in one of the four premier professional sports leagues and 12 otherwise comparable areas that did not. Looking at 46 cities over the 1990-94 periods, Waldon (1997) found that higher high school graduation rates and more spending on police are what encouraged economic growth, while the presence of a major league sports team actually put a drag on the local economy. Both Baade and Waldon controlled for other factors affecting underlying trends in economic growth. Time-series studies confirm the cross-section results. Baade and Sanderson (1997), for example, found no perceptible net increase in economic activity or employment in 10 cities that acquired new sports teams between 1958 and 1993 after factoring out other economic trends affecting each area. They did observe a reordering of leisure expenditures within the cities that acquired new teams, but there was no evidence that the new sports teams brought output or employment growth to the local area. A more recent study, by Coates and Humphreys (1999), finds that new stadiums and sports teams actually reduce per capita income in the host communities. This result is consistent with a higher (negative) multiplier for the displaced leisure expenditures than for the expenditures on a new team or in a new stadium because the latter likely involve substantial leakages from the local economy to the remote residential locations of some players and team owners. The conclusion that sports teams and facilities do not stimulate economic growth is surprising to many people. With live telecasting of games, daily coverage on television news and in the sports sections of newspapers, professional sports play a huge role in U.S. culture. Yet sports teams are small businesses. Yearly average team revenues in 1999 are around $55 million in the NHL, $75 million in the NBA, $85 million in MLB and $100 million in the NFL. For a medium-sized city like St. Louis, the baseball team accounts for less than 0.3 percent of local economic activity; for a large city like New York, a baseball team contributes less than 0.03 percent of economic output. Sports teams typically employ between 70 and 130 people in their front offices. Beyond this, they hire approximately 1000-1500 day-of-game personnel who work in unskilled, low wage, temporary, part-time jobs. An NFL team is assured of playing 10 home games a year (including preseason games). At four hours of work per game, an NFL team provides day-of-game employment for the equivalent of 20 to 30 full-time, year-round jobs. As we shall see, however, it is problematic to attribute even these jobs to the sports team. Of course, the controversy about the economic impact of professional sports teams on their local economy is not just about the teams themselves, but also about how specific local restaurants, hotels, and other businesses might be affected. However, even if one assumes, optimistically, that on average people spend as much outside the sports facility as they do inside, the economic impact of sports teams in proportion to a typical metropolitan economy is diminutive. Apart from their relatively small size, there are three key reasons why professional sports teams do not promote economic development: the substitution effect; extensive leakages; and the likely negative effect on local government budgets. The analysis of these three effects that follows describes the situation when a team or a facility is new to an area. Of course, in many cases, the choice is whether or not to build a facility for a team that is already there. In such a case the incremental consumer surplus, external benefits or new spending will be considerably less. From the city's perspective, however, the opportunity cost of not building a facility with public funds may be perceived to be the loss of the team and all of its attendant benefits.

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1. . The authors discuss the role of leakages in determining the impact of sports teams on the local economy. What are they talking about? Be specific so as to convince me that you read the article carefully