-----ASSESSMENT OF PAUL ROMERS "CHARTER CITY" CONCEPT & ITS APPLICABILITY IN ENDING RP POVERTY-----

“A CLOSER LOOK TO CHARTER CITIES”

“There‘s no impediment, other than a failure of imagination, that will keep us from delivering on a truly global win-win solution.” —Paul Romer

Charter cities are a proposal to build cities from scratch in the world's poorest, outsourcing their design and government to rich countries. According to Romer, "To understand how to alleviate poverty, we must understand growth and progress. Progress comes from new and better ideas. Ideas come in two flavors, technologies and rules. To foster growth and development, the world’s poorest residents need an opportunity to copy existing technologies and existing rules that are known to work well."

Charter cities accelerate the adoption of known good rules, offering a truly global win-win solution by giving people access to better rules and the gains from exchange to reduce poverty. It let people move to a place with rules that provide security, economic opportunity, and improved quality of life. It is also low risk. Charter cities increase access to existing rules and technologies by giving people new options and letting them choose. Charter cities give leaders new options for improving governance, options they do not have in the existing web of bad rules to which they are confined. Choice protects them both from the worst possible outcomes. Choice and the potential to copy existing ideas are a powerful combination.

However, there is no definitive evidence that poverty is always lessened by growth and if charter cities can really promote equality. There are also several disadvantages that goes along with it which includes exposure to legal challenges with respect to what constitutes a “municipal affair” vs. a statewide concern, limited case law in comparison to general law cities from which to evaluate legal exposure when applying charter language, costs associated with charter amendments, and limitations contained within some detailed charter documents restricting local authority beyond that experienced by general law cities.

In applying the concept of Charter cities in the Philippines, I think redistribution from rich to poor has not and cannot solve more than a tiny fraction of the problem. Even if you could perfectly equalize income zero effect on production, the citizens would remain stuck in poverty. On the other hand, charter cities have virtually no downside. A charter city begins on empty land and it can only grow by voluntary migration of people. If no one chooses to relocate, they’re no worse off than they would have been if the charter city had never existed. If efforts to start charter cities fail, at least they won’t harm the very people they’re intended to help. Charter cities are able to customize operations to meet the unique needs of their community and have more control over their use of funds because they do not have to follow many State-required procedures that are costly, and thus they have saved large amounts of local funds. Another is charter cities are able to pass ordinances that work better for their communities, so they are able to better tailor their procedures and ordinances to their particular needs. PEY

Paul Romer’s Charter Cities—An Answer to Ending RP Poverty??

Economist Paul Romer proposes founding many new charter cities in developing countries. Romer suggests that a developing country pass a law that sets aside a tract of land for a new charter city. This charter city would be administered by a developed third-party guarantor government, and citizens from the host country (and maybe other countries) could move in and out as they please. The point of the charter cities idea is to give citizens the choice about where they want to live and to provide the basic rules and amenities required for economic growth.

Ideally, by establishing a city with highly-developed rules and governance in an underdeveloped region, living and working in a charter city may provide a closer and more attractive alternative to moving far away to more developed countries.

In Romer’s conception, there are three main actors in the creation of a charter city. First, there is the developing host country. The host country provides the land, and designates that land as a special reform zone, subject to the foundational set of rules. Second, the developed guarantor country administers the region, perhaps with a board of governors and an appointed chairman like the Federal Reserve System in the United States. Third, the source country will be where the charter city’s residents come from. This may be predominantly from the host country, but there also may be a number of source countries.

To launch new charter cities, he says, poor countries should lease chunks of territory to enlightened foreign powers, which would take charge as though presiding over some imperial protectorate. Romer’s prescription is not merely neo-medieval. It is also neo-colonial.  

For me, a new city with new better laws is not the answer to end poverty. The real solution is on the Filipinos’ hands. We should learn from our past to make our future a better one.AMA

Paul Romer's fundamental idea: THE Charter cities

For many years, the politicians and academics make great effort to look for ideas that can successfully bring prosperity to the developing world. In recent years, and in particular since the publication of the World Bank's World Development Report in 2009, there is a growing consensus that the solution will have to involve more and better cities. The argument goes that the poor world's population would be able to benefit from the benefits of agglomeration.

However, there are many inconveniences that could endanger the prospects for a successful urbanisation in poorer countries, such as:

• A lack of appropriate urban infrastructures to cope with the growing population.
• Rural exodus and the associated loss of agricultural output.
• Steep rise in crime rates.
• The danger of accelerating the spread of infectious diseases due to inappropriate health care systems.

Paul Romer an economist, famous for his work on endogenous growth theory started promoting a controversial idea that in his opinion would help solve many of these issues: “The creation of charter cities”. His idea for the charter cities is that developing countries would give rich nations a portion of their country where the latter would then build cities from scratch, using cutting-edge technology. These cities would be managed by the foreign countries themselves and therefore would not be ruled by locally elected politicians. Furthermore, Romer said that citizens could however vote with their feet, deciding to leave if they were discontented with the way the city was being managed.

Obviously, this idea poses many questions, the fact that this would be a form of new colonialism. This is what Aditya Chakrabortty argues in an op-ed published last July 07, 2010 in the Guardian, with the title “Paul Romer is a brilliant economist – but his idea for charter cities is bad”, that you can read in this site:

http://www.guardian.co.uk/science/2010/jul/27/paul-romers-charter-cities-idea. Another piece on the same topic, with the title “The Politically Incorrect Guide to Ending Poverty”, published in The Atlantic, can be access at: http://www.theatlantic.com/magazine/archive/2010/07/the-politically-incorrect-guide-to-ending-poverty/8134/ . LYN 

Paul Romer’s Charter City Concept

Who is Paul Romer? 
               Paul Romer is an American economist, entrepreneur and an activist known for his work on the field of economic growth. He  earned a B.S. in physics in 1977 and a Ph.D. in economics in 1983, both from the University of Chicago. Moreover, Romer is currently trying to replicate the success of “Charter City” concept for him to use it as a device in studying economic growth. He believes that undeveloped countries can experience better route for growth if they have finer rules and institutions.  

Charter City          
              Charter city is a latest type of special reform zone extending the concept of special economic zone by increasing its size and escalating the scope of its reforms. This concept emphasizes the idea that a nation with good rules (including institutions), millions of people will come together to build a new city and there is a greater chance that economy of that nation will improve. Moreover According to Paul Romer, “A well-run city lets millions of people come together and enjoy the benefit they can get from working together and trading with each other”. He believes that for a nation to grow, citizens must be given more opportunity to transfer to other places, giving them more chance to live a healthy life.  

Applicability in ending RP Poverty      
               In the Philippines, Rules and laws established by the government are often violated and ignored. Other people think that these regulations are irrelevant and it cannot affect the economy as a whole. But Under Charter City Concept, rules and policies are significant factors in improving a nation. Unfortunately, most policies implemented in the Philippines are feeble and insufficient to forbid theft and violence in the country. How can Filipinos live the “good life” if our government is not addressing these issues? One solution is to adopt rules that are useful in boosting the economy and that will give citizens more chance to move to a better place and live a beautiful life. JAM

 “Imagine an alternative process in which people can migrate from a society with bad rules to another society with better rules. In this case, the rules in both places stay the same but people move between them. The process of movement between can be more effective than the process of change from within. Just as important, the presence of movement between creates pressures that speed up change from within.”

                                                                                            - Paul Romer


 Paul Romer, an economist known for his work on economic growth, has a plan to change that and recently resigned his tenured teaching position at Stanford to devote his full energies to the challenge. “Moving from bad rules to better ones may be much harder than most economists have allowed.” Romer’s plan calls for the establishment of Hong Kong-like “charter cities,” special zones within developing countries with better rules and institutions. The project has already attracted quite a bit of attention from both economists and the media. So Romer is a brilliant economist, and he has a new and big idea. And because he is The Great Romer, he gets to present this wheeze to national leaders, high-profile conferences and invitation-only gatherings of policy-makers.   Trouble is, the idea stinks. With little track record in dealing with poor countries, Romer has come up a grand scheme for lifting Africa and Asia out of poverty. What they need to do, he argues, is give up a big chunk of their land to a rich country. Policy experts from Washington can take over a patch of Rwanda, and invite along GM and Microsoft and Gap to come and set up factories. Poor countries give up their sovereignty in return for the promise of greater prosperity.   His big example is Hong Kong. At the end of the first opium war in 1842, the Chinese were marched on board a British warship anchored off Nanjing and forced to sign Hong Kong away to Queen Victoria. Over the next 150 years, the little island turned into Asia's number one capitalist success story. It was an example that Deng Xiaoping ended up copying on the mainland, in coastal provinces such as Guangdong – to explosive economic effect.   China's loss of Hong Kong should not be seen as a national humiliation or great international injustice, Romer has written, but "an intervention" which has "done more to reduce world poverty than all the world's official aid programmes of the 20th century combined — and at a fraction of the cost". What the world needs, the economist argues, is not one but 100 Hong Kongs.   Applicability in ending RP Poverty   The concept of Paul Romer of “charter cities” is actually nice in some parts. I don’t think that Filipinos will be open in the idea of Paul Romer about the charter cities. As a democratic country, many people may object on this concept. For me, I think we can still fight poverty in many other ways. We just need to strengthen the implementation of our laws in order to improve our nation. We do not need to be imperialized just to save our country from poverty. CHA

“COMPLEXITY, EVOLUTION, AND NETWORK SCIENCE”

       César Hidalgo's work focuses on improving the understanding of systems by using and developing concepts of complexity, evolution, and network science. His current research agenda at Harvard University focuses mainly in the study of economic development from the perspective of complexity and network science. In particular, He studies the evolution of countries' productive structures, both empirically and theoretically, by looking at how the development process is shaped by the similarity between a country's products and the capabilities that go into producing them.

       His goal is to help improve understanding of the evolution of prosperity in order to help develop industrial policies that can help countries raise the living standards of their citizens. His areas of application include economic development, systems biology, and social systems. He is a native of Santiago de Chile, Hidalgo holds a PhD in physics from the University of Notre Dame and a bachelor's degree in physics from the Pontificia Universidad Catolica de Chile.LYN

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“Repeated interactions can contribute to the loss of diversity. This is a trade-off that you cannot avoid… Diversity is the key to adaptivity, resilience, and innovation.” (Hidalgo, 2008)

Cesar Hidalgo, stressed the need for awareness of the potential of a “tragedy of the networks,” in which a network’s natural loss of diversity over time incurs a loss of adaptive capacity, resilience, and innovation. He stated a careful brokering of collaboration of key leaders and connector personalities could prevent this, orchestrating change in a manner that optimizes network performance in both supporting diversity and preserving crucial network ties. LYN

The most important unsolved problem of the last century is how to make a rich country out of a poor one. Development economists have many theories about how the trick is done but few proven answers. Thanks to César A. Hidalgo of the M.I.T. Media Lab, we can now visualize the differences between national economies in new ways. Hidalgo is a statistical physicist fascinated by the structure of networks, and along with the Harvard economist Ricardo Hausmann, he has been developing tools designed to study not just economic wealth but also economic structure and sophistication. His works seeks to improve the understanding of systems using and developing concepts of complexity, evolution and network science. These interests, combined with background in and knowledge of graphic design, all contributed to the development of the product space diagram.

Economies that export many types of products are more likely to be sophisticate and products exported only by sophisticated economies are more likely to be complex. However, sophistication and wealth do not always go hand in hand. When economies are relatively sophisticated but relatively poor, they often have the potential for quick growth. Hidalgo together with Hausmann have also mapped the world's "product space" using trade data on 774 product classifications, from cotton undergarments to phenols. The map shows not just the size of the world's economies, but also their interconnectedness and complexity, and the great differences between different types of economy. These product maps formulated by them lead to an uncomfortable conclusion about economic development that is, they hint at how difficult and complex it may be for government planners to kick-start a new industry, while showing that there are new industries that will struggle to get started without help.PEY

In terms of research, Cesar Hidalgo has done some absolutely incredible stuff; applying the new science of networks to the study of global economy (working with colleagues) and mobility within networks and he approaches networks as objects of art. Through his works, it is clear that the boundaries between art and science need not be so rigid.

            According to Hidalgo (and his colleagues), economies grow by upgrading the type of products they produce and export. The technology, capital, institutions and skills needed to make such new products are more easily adapted from some products than others. They study the network of relatedness between products, or product space, finding that most upscale products are located in a densely connected core while lower income products occupy a less connected periphery. He shows that countries tend to move to goods close to those they are currently specialized in, allowing nations located in more connected parts of the product space to upgrade their exports basket more quickly. Most countries can reach the core only if they jump over empirically infrequent distances in the product space. This may help explain why poor countries have trouble developing more competitive exports, failing to converge to the income levels of rich countries. 

            One of his works also shows that the measures of complexity they derive are correlated with a country's level of income, and that deviations from this relationship are predictive of future growth. This suggests that countries tend to converge to the level of income dictated by the complexity of their productive structures, indicating that development efforts should focus on generating the conditions that would allow complexity to emerge in order to generate sustained growth and prosperity. AMA

Who is CESAR HIDALGO?

                Cesar Hidalgo is a Chilean Physicist, a Professor at the MIT Media Laboratory, Assistant Professor at the Massachusetts Institute of Technology (MIT) Media Laboratory and a faculty associate at Harvard's University Center for International Development. He is well-known for his Trans Disciplinal works which focus more on improving the understandings of systems, industrial policy and economic growth by applying new science of networks and mathematical tools which are largely derived from statistical physics. Moreover, he is also developing some industrial policies which are useful to countries in raising the standard of living of their people.

His works

                Cesar hidalgo is definitely different from other physicist since he approaches networks as an art. He is good in applying science of networks in analyzing the global economy. Most of his works are illustrated using trajectories, mobile phone networks, nodes, nematodes and figures. He is currently studying economic development from the view point of complexity and networks science.

                Hidalgo, together with Ricardo Hausmann argues that a country’s production capacity depends on the diversity of its inputs and outputs. They assume that products that require more inputs are more scant. In addition, they mapped a Product Space to explain how difficult for undeveloped countries to create a competitive exports. JAM

           

César A. Hidalgo holds a PhD in Physics from the University of Notre Dame and a Bachelor in Physics from the Pontificia Universidad Catolica de Chile.César A. Hidalgo is the Asahi Broadcast Corporation Career Development Professor at the MIT Media Laboratory, Assistant Professor at the Massachusetts Institute of Technology (MIT) Media Laboratory and a faculty associate at Harvard's University Center for International Development. César worked as an Adjunct Lecturer in Public Policy at the Harvard Kennedy School and a Research Fellow at Harvard's Center for International Development before he joined the MIT. Dr Hidalgo's work focuses on improving the understanding of systems using and developing concepts of complexity, evolution and network science. His areas of application include (i) economic development, where he has pioneered the use of networks to quantify the productive structure of countries and its evolution, (ii) systems biology where he has published work on disease co-morbidity and genetic regulation, and (iii), social systems, where he has worked on human mobility and social network analysis using mobile phone data. Dr. Hidalgo is also a graphic art enthusiast and has published and exposed artwork that uses data collected originally for scientific purposes.

Awards:

-Center for Research Computing award for Computational Sciences and Visualization (2008)

-Outstanding Graduate Student Teacher Award for Excellence in Teaching. Kaneb Center, Notre Dame (2007)

-Selected as an outstanding teaching assistant by the American Association of Physics Teachers (2007)

-Nominated for best student paper at the APS March meeting (2007)

- Hellen Kellogg Institute Supplemental Award. Notre Dame, IN (2004-2008)

-Appeared on Marqui's Who is Who in the world. (2006-2008)

-Companionship Award. British High School. Santiago Chile (1995)

His research focuses on the dynamical aspects of social and biological phenomena. He have specialized in the analysis of large data sets in an empirically driven approach to understand the interplay between the structure and the dynamics of the networks defined by systems as diverse as mobile phone networks, genetic coexpression, TF-promoter binding, disease comorbidity, and economic complexity.

           His current research agenda at Harvard University focuses mainly in the study of economic development from the perspective of complexity and network science. In particular, he study the evolution of countries' productive structures, both empirically and theoretically, by looking at how the development process is shaped by the similarity between a country's products and the capabilities that go into producing them.CHA

US in Crisis! Philippines in....

“PNoy economic team looks at how US debt crisis will impact PHILIPPINE ECONOMY”

President Aquino’s economic team studied the possible impact of the United States debt problem on the Philippine economy. The President wanted to know the possible effects of the US debt crisis and expressed concern about the rising peso and its impact on exporters.

“A lower dollar means that we pay less in terms of our foreign debt. If we were paying P42 to one dollar and the exchange goes down to, say, 40 then we’re actually saving P2 per dollar," he said.

The negative effect, on the other hand, is that Filipino workers in North America may think twice before sending money to the Philippines. If the economy of US weakens and the dollars goes down, the result is that our fellow citizens who reside at North America will be careful. Meaning, they will remit, they could remit less or if they don’t remit less, what they remit will be worth also less. So it will have an impact on consumption.LYN

“Exporters not threatened by US crisis but fear impact on other markets”

It was stated that CEBU, Philippines - The Philippine export industry is not threatened by another economic crisis faced by the United States, unless the financial instability will spread to other major markets such as Europe, China, and Japan.

PhilExport president and chief executive officer (CEO) Sergio Ortiz-Luiz Jr. said that after the recession, the Philippine exports have developed strong connection with other major markets; in fact latest figure showed that the country’s exports to US went down from 34 percent to 12 percent. Surprisingly, Japan is now the number one export market of the Philippines, followed by US and China.

In the year-on-year comparison that Philippine export sector only grew by three percent, a slight shortage of the industry’s projection of growing 10 percent this year. Nevertheless, Ortiz-Luiz said the sector is not downgrading its target of growing 10 percent this year, as the projection in the next few months is seen to be promising.

The PhilExport head said that aside from China, Japan, and Europe, the Philippine export is also getting its confidence from the growing market in Asia. Moreover, the Philippines is now growing its business within the Asian market, and this may offset the decline of orders coming from the US.

Last year, because exporters considered it as “recovery year”, the industry grew by 25 percent, and exceeded the target of 20 percent growth set by the industry players in 2010. Despite the slow pace of growth seen in the first six months this year, Ortiz-Luiz is confident that the 10 percent target growth is achievable, if the positive trend will continue. LYN

“NEDA sees no reasons to be alarmed with US crisis, downplays critics”

“With regards to the impact to the Philippine economy of the US credit rating downgrade , NEDA estimates that it will be minimal, around .11% of the GDP (gross domestic products). And that is too small,”
                                                      - Ruperto Majuca(NEDA Assistant Director General)                                         

The National Economic and Development Authority (NEDA) sees no enough reason to be alarmed despite the prevailing economic crisis in Western countries, particularly the United States. NEDA Assistant Director General Ruperto Majuca reiterated the government’s stand amidst continuous speculations that the US’ downgrade and economic crisis will greatly affect the local economy.

However, Majuca said that the government must do necessary measures “to calm the market so that the indirect effects will not happen”, also referring to future effects of the crisis.

Lower exports in trade channels, slower flows in remittance channel as well as in foreign direct investments are among the most likely effects of the US credit downgrade to the Philippines. But he noted that the people should not be alarmed with these.

“Our people should not be alarmed because this (US crisis) has only small effects. The (US) economy has already experienced the slow down before, and there we’re just additional points on the slow down today. So, it would just possibly hit through the trade channel and the remittance channel,” Majuca said during the media briefing.

Among other economic issues, which confronted the Philippine economy this year included the slowdown of the economies of US and other European countries, political turmoil in the Middle East countries, and supply-chain destruction brought by disasters in countries like Japan.

However, Majuca emphasized that despite of all the recent events affecting the local market, the economy showed remarkable resiliency.

“The 2011 1st quarter was buffeted by so many shocks… but despite of all these things, with the many shocks, the economy shows remarkable resiliency…. We can expect brighter numbers, rosier numbers for Q3 and Q4,” he ended. CHA

“PESO is strengthening despite the US Crisis”

The Philippine peso on Monday closed at a three-year high at 41. 925 pesos against U.S. dollar, its strongest finish since April 30, 2008 when it closed at 42.17 pesos against U.S. dollar.

The Philippine Stock Exchange (PSE) also hit a new all-time high of 4,550.53, surpassing the previous peak hit on July 20.

Finance Secretary Cesar Purisima said in an interview that the Philippines is glad that the unthinkable did not happen. "We are breathing a sigh of relief that they (U.S.) had finally resolved it."

According to Governor Amando Tetangco of the Bangko Sentral ng Pilipinas (BSP), the country's central bank, while there is no guarantee that the United States would not lose its triple-A rating, the Philippine economy would be able to sustain its growth although "the loss of its (U.S.) credit rating would temporarily heighten local market volatility."

International financial institutions have forecast the Philippine economy to grow by 5-6 percent this year. The Philippine government, however, said that it is aiming for a 7-8 percent growth in 2011.

Tetangco said that the peso would continue to strengthen as foreign investors would opt to keep flocking to emerging economies like the Philippines as the United States and some industrialized countries in Europe are plagued by worsening debt problems.

He also assured the public that the domestic banking sector is prepared to weather any short-term shocks in the financial market, adding that while a downgrade would undermine the assets of banks, particularly those that hold U.S. debts, local banks remained “well capitalized."

The Philippines' GIR, considered healthy under international standards, was beefed up by remittances and foreign investments in business process outsourcing and portfolio instruments. CHA

“Value of investments in this country will not change despite the US Crisis”

The U.S economy is experiencing financial crisis since 2008 which can be evidenced by the decline of its rate profit and the downgraded of its credit rating from AAA to AA+ by the Credit Rating Agency Standard and Poor’s. According to Former Secretary of State Otto Reich,  U.S debt crisis have indescribable global economic consequences since United States produces and consumes almost a quarter of all products sold globally and if this crisis continues, its global effects could deepen. It can lead to a recession, higher interest rate and higher rate of unemployment.

        In the Philippines, President Aquino declared that the weakening economy of U.S will not have a negative impact on the Philippines Investment Sector. “The value of investments in this country will not change with what is transpiring in America and if foreign investors continues to see it profitable to continue doing business in the Philippines, then they will remain in the Philippines” he said.

        In contrast to what President Aquino has said, “the US’ debt crisis will inevitably affect the economy of the Philippines and the outlook is not good” Bayan secretary general Renato Reyes Jr. said. According to him, Aquino administration should change and reverse some of the economic policies that make Philippine economic growth dependent on US investments.

       On the other hand, the Philippine export industry is not threatened by the crisis faced by US but since its economy is large enough to affect other countries like China, Japan and Europe, they must continue monitoring the impact of US Crisis. JAM

“US Crisis will cause low remittances of OFWs”

OFWs are the major contributors to the country's economy. The largest number of OFWs can be found in the United States, United Kingdom and Middle East. Remittances from these overseas workers help drive the Philippine economy and account for at least 10% of the country's GDP.

However, with the US recession bringing down the global economy, the jobs of overseas Filipino workers have also become at risk resulting to a decrease in remittances. Low remittances had caused the families of some OFWs to suffer because of less money they receive. There was also less help for economic growth and aid to sustain the development of the country. Another effect of US crisis is the decline in exports as a result of weak demand in the US and other parts of the world. AMA

US in crisis???

“Major Economic Problems Facing the United States”

The United States is facing economic disaster on a scale few nations have ever experienced.

--They have quietly become a second-class country in many respects.--

They can no longer produce what they need to sustain theirselves.

--They import much more than they export, and they are selling off their assets and taking on massive debts to sustain a standard of living they can no longer afford.--

They are failing even to acknowledge predatory foreign trade practices.

--They encourage U.S. manufacturers to design, engineer, and produce in third world markets like Mexico and China.—

“Trade Deficit Widens to Three-Year High”

It was reported that America’s trade deficit in June rose to the highest level since October 2008, according to the U.S. Commerce Department. The deficit rose 4.4 percent during the month, to $53.1 billion as exports fell to their lowest level in more than two years. Economists had expected the trade deficit to be around $48 billion for the month.

Exports fell 2.3 percent to $170.9 billion. Imports fell 0.8 percent to $223.9 billion, largely due to the falling cost of crude oil products.

The drop in exports is a major concern for American manufacturers who were driving much of the economic growth in months past. “The real weakness was in exports and that’s consistent with slower growth in the rest of the world,” Jay Bryson, a global economist at Wells Fargo Securities, told Bloomberg News. “The contribution of exports is going to be a little shakier.” Now, however, global markets are grinding to a standstill, which could endanger any economic recovery in America.

America’s trade deficit with the European Union rose 12.2 percent to $9.8 billion. That is the largest trade imbalance America has held with the EU since 2008.

America’s most politically sensitive trade deficit, the one it holds with China, rose 6.8 percent to $26.7 billion. Since China entered the World Trade Organization in 2001, it has consistently been able to game the system through mercantilist practices and gain an unfair advantage against American competitors. That not only leads to trade deficits, but massive jobs losses and the offshoring of entire manufacturing operations.

OVERALL, America’s trade deficit on the year is 15.3 percent to $576.6 billion. LYN (email sent for the error in her code)

"The market's already been shaken out," -Harvey Neiman, a portfolio manager of the Neiman Large Cap Value Fund "The United States deserves to have this happen,because of its clumsy handling of fiscal policy.” - Peter Morici, a University of Maryland business economist.

The credit rating agency Standard & Poor’s, lowered the US AAA rating for the first time since granting it in 1917. The move came less than a week after a gridlocked Congress finally agreed to spending cuts that would reduce the debt by more than $2 trillion -- a turbulent process that contributed to convulsions in financial markets. The agreed cuts were not enough to satisfy Standard & Poor.

The drop in the rating by one notch to AA-plus was telegraphed as a possibility back in April. The three main credit agencies, which also include Moody's Investor Service and Fitch, had warned during the budget fight that if Congress did not cut spending far enough, the country faced a downgrade. Moody's said it was keeping its AAA rating on the nation's debt, but that it might still lower it. But any losses might be short-lived. The threat of a downgrade is likely already reflected in the plunge in stocks said.

One fear in the market has been that a downgrade would scare buyers away from U.S. debt. If that were to happen, the interest rate paid on U.S. bonds, notes and bills would have to rise to attract buyers. And that could lead to higher borrowing rates for consumers, since the rates on mortgages and other loans are pegged to the yield on Treasury securities. However, even without an AAA rating from S&P, U.S. debt is seen as one of the safest investments in the world. And investors clearly weren't scared away this week. While stocks were plunging, investors were buying Treasuries and driving up their prices.

A study by JPMorgan Chase found that there has been a slight rise in rates when countries lost an AAA rating. The government fought the downgrade. Administration sources familiar with the discussions said the S&P analysis was fundamentally flawed. S&P said that in addition to the downgrade, it is issuing a negative outlook, meaning that there was a chance it will lower the rating further within the next two years. It said such a downgrade, to AA, would occur if the agency sees smaller reductions in spending than Congress and the administration have agreed to make, higher interest rates or new fiscal pressures during this period. CHA

The U.S. economy is currently experiencing its worst crisis since the Great Depression. One of the underlying causes of the current crisis can be traced to the decline of the rate of profit.

The most important cause of the subpar performance of the U.S. economy in recent decades is a very significant decline in the rate of profit for the economy as a whole. This significant decline in the rate of profit appears to have been part of a general worldwide trend during this period, affecting all capitalist nations. According to Marxist theory, this very significant decline in the rate of profit was the main cause of the “twin evils” of higher unemployment and higher inflation and also of lower real wages, experienced in recent decades. As in past periods of depression, the decline in the rate of profit reduced business investment, which in turn resulted in slower growth and higher rates of unemployment. An important factor in the postwar period was that many governments in the 1970s attempted to reduce unemployment by adopting expansionary fiscal and monetary policies (more government spending, lower taxes, and lower interest rates). However, these policies generally resulted in higher rates of inflation, as capitalist firms responded to the government stimulation of demand by rapidly raising prices in order to restore the rate of profit, rather than by increasing output and employment.

Financial capitalists revolted against these higher rates of inflation, and generally forced governments to adopt restrictive policies, especially tight monetary policy. The result was less inflation and a return to higher unemployment. These facts demonstrate that government policies have affected the particular combination of unemployment and inflation at particular times, but nevertheless the fundamental cause of both of these “twin evils” has been the decline in the rate of profit. AMA

The Current Crisis

The housing bubble started to burst in 2006, and the decline accelerated in 2007 and 2008. Housing prices stopped increasing in 2006, started to decrease in 2007, and have fallen about 25 percent from the peak so far. The decline in prices meant that homeowners could no longer refinance when their mortgage rates were reset, which caused delinquencies and defaults of mortgages to increase sharply. The American dream of owning your own home is turning into an American nightmare for millions of families.  A total of about 6 million mortgages either have already been foreclosed, are in foreclosure, or are close to foreclosure. Six million mortgages are about 12 percent of all the mortgages in the United States. The situation could get a lot worse in the months ahead, due to the worsening recession and lost jobs and income, unless the government adopts stronger policies to reduce foreclosures. Defaults and foreclosures on mortgages mean losses for lenders. Estimates of losses on mortgages keep increasing and there will also be losses on other types of loans, due to the weakness of the economy. Therefore, total losses for the financial sector as a whole could be as high as $2 trillion. The losses for the banking sector could be as high as $1 trillion and losses of this magnitude would wipe out two-thirds of the total capital in U.S. banks. This would obviously be a severe blow, not just to the banks, but also to the U.S. economy as a whole.

The blow to the rest of the economy would happen because the rest of the economy is dependent on banks for loans. Bank losses result in a reduction in bank capital, which in turn requires a reduction in bank lending (a credit crunch), in order to maintain acceptable loan to capital ratios. According to this rule of thumb, even the low estimate of bank losses of $1 trillion would result in a reduction of bank lending of $10 trillion! This would be a severe blow to the economy and would cause a severe recession. In addition to the credit crunch, consumer spending will be further depressed in the months ahead due to the following factors: decreasing household wealth; the end of mortgage equity withdrawals and declining jobs and incomes. All in all, it is shaping up to be a very severe recession.

Bank losses may be offset to some extent by “recapitalization,” i.e., by new capital being invested in banks from other sources. However, it is becoming more difficult for banks to raise new capital from foreign investors, because their prior investments have already suffered significant losses. PEY

August 2011- Credit Rating agency Standard & Poor’s downgraded the US Credit rating from AAA to AA+ which took place because of the negative outlook on the long term rating. First, let’s define what credit rating is. Credit Rating assess the credit worthiness of a business enterprise such as a corporation or a government who is an issuer of a particular debt. Credit rating agencies like S&P use this to measure the ability of a particular entity to pay its short and long term maturing obligations. A weak credit rating denotes that the company has a high tendency of non-payments of its maturing debts.

        The demote of the US credit rating indicates the lack of trust of other firms in the government of US to pay its maturing obligation. Since this can lead to an increase in interest rate of Treasury debts, US government may tend to borrow more money and increase its taxes. The rates for credit cards, car loans, student and other debt may also increase. In addition, the downgraded of credit rating of US will result to a higher mortgage rate.

        Since it can affect the economy of United States, the government must stabilize its loans and debts by controlling its expenditures and meeting all its obligations on time. JAM