Playing with the Numbers

Those of us not living in caves (a housing situation that will no doubt become more popular in the coming months) may have been shocked at the vast sums of money that are being discussed in the news recently.  The total amount of money that AIG has received so far is estimated (estimated? Doesn’t anyone know how much money we’re giving away?) to be 170 billion dollars.  So far G.M. has asked for about $30 billion while Chrysler has asked for $9 billion (aren’t they ever so frugal). Of course the dreaded stimulus bill will cost about $787 billion. The homeowner bailout will cost about $75 billion if enacted as proposed. These numbers can be intimidating.

The thing with numbers is that they never hide the truth in skillfully manipulated phrasing. If you have the right numbers you have everything you need to understand what you are examining. That said when dealing with economics on a national scale the numbers can be misleading; or rather how we conceptualize the numbers can be misleading.  A million dollars is a lot of money. A billion dollars is one thousand times more money. A trillion dollars is one thousand times more still. If you had pile of one million dollars you would need 170,000 piles to get what AIG has been “loaned” so far.  It gets a little scary.

To bring a little calm to the situation I think it’s important to remember these numbers don’t exist in a vacuum. In 2008 the U.S. economy was estimated to be $14 trillion, which would be 14 million piles of one million dollars. The U.S. Government had a budget of $2.9 trillion dollars in 2008. Now that’s a lot of money.  What I mean to say is that even though we are spending huge sums of money right now in attempt to stop the bleeding, the U.S. economy has the capacity to absorb it, even now.  In fact the dollar has been gaining in value since about the middle of January (I wonder what significant event occurred then).  What we are seeing is what is known as a “flight to quality.” This is the idea that during uncertain financial times investors are willing to sacrifice profit for security. U.S. treasury bonds are seen as the safest investment in the world and the rise in the value of the dollar indicates that people are trading foreign currencies for dollars so that they can buy U.S. bonds.  This is a good thing because there is surely going to be a healthy supply of government debt issued in the next few years.

One has to wonder can the U.S. continue to fund endeavors that may not be essential to its citizens. Foreign aid is a good example. We would really like help people in Africa for instance, but given the crisis we face here is it feasible? In short, yes. In the grand scheme of things the U.S. contribution to foreign aid is a relatively insignificant amount of money when compared to the numbers above. The U.S. government budgeted 20.27 billion dollars for foreign aid in 2008, which is 0.6989% of the federal budget or 0.1448% of the U.S. economy.  Another important thing to note is the composition of the aid. Some of this money is spent abroad in the “War on Drugs”.  Some of this aid is in food, which is quite a boon to U.S. agriculture. A large portion of the money is never actually spent over seas (agriculture programs that buy domestic food and dump it abroad and administrative costs take quite a chunk) and it could be argued that some of the money spent stopping drugs from South America saves money in for the U.S. judicial system.

It is also important to note that the U.S. has much, much higher standards of living than most of the rest of the world, even during economic crises. An unemployed person in the U.S. is inconceivable better off than the bulk of the world’s poor that exist on less than $1 a day. In these uncertain economic times it will likely be harder for poorer nations to attract foreign capital so that they can invest in themselves, making it that much more important for the U.S. to do it.