Unlike some other Nobel Peace Prize winners, the winner for 2006, Muhammad Yunus, began the work for which he won the prize with his own money. In 1976, while an economics professor at Chittagong University in Bangladesh, he loaned local craftsmen $27 to help finance their businesses. This small generous gesture started a large and ultimately successful experiment in microcredit. Many small enterprises in poor countries fail because of the lack of capitalization. Conventional banks are reluctant to make such small loans, considering the poor to be bad credit risks. Part of Yunuss genius was the use of credit groups where impoverished people would help each other in meeting their payments, in effect all members of the credit group act as guarantors of the loans to the credit group. In addition, Yunus focused most of the loans on women, who appeared generally more responsible in using the loans for the general benefit of the family.
Yunuss success in Bangladesh is remarkable especially in contrast to typical foreign aid. Large-scale loans to impoverished countries generally are squandered in ubiquitous corruption. The inherent problem is that the aid gets filtered by governments, that if they were effective in the first place, there would be less need for foreign aid. Microcredit schemes represent an innovative way to bring the benefits of capitalism to the poor themselves. Credit and borrowing are a necessary component to growth. Yunus earned a Nobel Peace Prize for providing an effective modality for providing credit to the poor.
Both microcredit and megacredit made news in the same week. On the megacredit front, we learned that the annual US budget deficit continues its rapid descent as federal tax receipts grow even faster than government spending. The federal budget deficit for this year fell to $248 billion. Microcredit and megacredit are linked by the fact that liquidity and growth depend upon borrowing, whether for a handful of dollars or billions of dollars. Indeed, just as the use of credit is necessary for individuals to create wealth, it good for the US government to maintain a reasonable level of debt. There are two key factors that many on the Left and the Right do not often remember in assessing public debt:
- A nominal budget deficit or surplus value must be normalized for inflation. When inflation is high enough, nominal budget deficits could even represent real surpluses. Even with a real budget deficit, if US growth is robust, the federal debt load can be decreasing.
- A modest debt lubricates the economy and is a necessary requirement for growth.
Consider the current the deficit of $248 billion relative to the total US federal debt of $8.5 trillion. The inflation rate for 2006 is about 3.5%. This means that a nominal deficit of $298 billion would increase the total debt by 3.5%. Hence, for such a deficit there would be no real increase in the debt, or zero real deficit if the nominal deficit were $298 billion. Given the imprecision in computing the inflation rate, it might be too much to claim we are now running a real surplus with a $248 billion deficit, but we are certainly within measurement error of it. The only reason to reduce the deficits further is if we believe the debt load is too high.
The current debt load (the debt-to-gross-national-product ratio) for the United States is about 65%, and should optimally be somewhere between 40% and 80%. Beyond these extremes, economic growth is inhibited. For example, in the 1970s, the debt-to-GDP ratio was lower than 40% and we experienced stagnant growth and high unemployment. Indeed, in the late 1970s, inflation was so high we were really running budget surpluses with nominal deficits and suffered under the twin problems of stagflation.
It would seem that we are now running something close to the optimum yearly federal deficit with the optimum debt load. We should consider further significant reductions in debt carefully. Though we might wish to decrease the federal debt load in anticipation of increase liabilities as baby boomers begin to consume social security and medical benefits, reducing deficits too quickly could ultimately lead to economic stagnation.
This entry was posted on Sunday, October 15th, 2006 at 9:50 am and is filed under Economics, Social Commentary. You can follow any responses to this entry through the RSS 2.0 feed.
You can leave a response, or trackback from your own site.
Microcredit and Megacredit
Unlike some other Nobel Peace Prize winners, the winner for 2006, Muhammad Yunus, began the work for which he won the prize with his own money. In 1976, while an economics professor at Chittagong University in Bangladesh, he loaned local craftsmen $27 to help finance their businesses. This small generous gesture started a large and ultimately successful experiment in microcredit. Many small enterprises in poor countries fail because of the lack of capitalization. Conventional banks are reluctant to make such small loans, considering the poor to be bad credit risks. Part of Yunuss genius was the use of credit groups where impoverished people would help each other in meeting their payments, in effect all members of the credit group act as guarantors of the loans to the credit group. In addition, Yunus focused most of the loans on women, who appeared generally more responsible in using the loans for the general benefit of the family.
Yunuss success in Bangladesh is remarkable especially in contrast to typical foreign aid. Large-scale loans to impoverished countries generally are squandered in ubiquitous corruption. The inherent problem is that the aid gets filtered by governments, that if they were effective in the first place, there would be less need for foreign aid. Microcredit schemes represent an innovative way to bring the benefits of capitalism to the poor themselves. Credit and borrowing are a necessary component to growth. Yunus earned a Nobel Peace Prize for providing an effective modality for providing credit to the poor.
Both microcredit and megacredit made news in the same week. On the megacredit front, we learned that the annual US budget deficit continues its rapid descent as federal tax receipts grow even faster than government spending. The federal budget deficit for this year fell to $248 billion. Microcredit and megacredit are linked by the fact that liquidity and growth depend upon borrowing, whether for a handful of dollars or billions of dollars. Indeed, just as the use of credit is necessary for individuals to create wealth, it good for the US government to maintain a reasonable level of debt. There are two key factors that many on the Left and the Right do not often remember in assessing public debt:
Consider the current the deficit of $248 billion relative to the total US federal debt of $8.5 trillion. The inflation rate for 2006 is about 3.5%. This means that a nominal deficit of $298 billion would increase the total debt by 3.5%. Hence, for such a deficit there would be no real increase in the debt, or zero real deficit if the nominal deficit were $298 billion. Given the imprecision in computing the inflation rate, it might be too much to claim we are now running a real surplus with a $248 billion deficit, but we are certainly within measurement error of it. The only reason to reduce the deficits further is if we believe the debt load is too high.
The current debt load (the debt-to-gross-national-product ratio) for the United States is about 65%, and should optimally be somewhere between 40% and 80%. Beyond these extremes, economic growth is inhibited. For example, in the 1970s, the debt-to-GDP ratio was lower than 40% and we experienced stagnant growth and high unemployment. Indeed, in the late 1970s, inflation was so high we were really running budget surpluses with nominal deficits and suffered under the twin problems of stagflation.
It would seem that we are now running something close to the optimum yearly federal deficit with the optimum debt load. We should consider further significant reductions in debt carefully. Though we might wish to decrease the federal debt load in anticipation of increase liabilities as baby boomers begin to consume social security and medical benefits, reducing deficits too quickly could ultimately lead to economic stagnation.
This entry was posted on Sunday, October 15th, 2006 at 9:50 am and is filed under Economics, Social Commentary. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.