Macro Foundations

The following links (Macroeconomics by Paul Krugman and Krugman and the New York Times) coincide well with our recent and upcoming classroom topics regarding the Classical/Keynesian debate, and also represents a nice conclusion to our course.

War on Welfare

It should come as no surprise that the latest macroeconomic policy issue seems to be the "War on Welfare".  Though the following quote was written during the 1960's "War on Poverty", in my opinion, it applies equally well in today's circumstances.

"The modern conservative is engaged in one of man's oldest exercises in moral philosophy; that is, the search for a moral justification for selfishness."
                                                                -- John Kenneth Gaibraith

It's fascinating that the increase in transfer payments (e.g., on welfare, food stamps, unemployment compensation as well as student grants, farm subsidies, corporate bailouts, etc.) is a direct result of a poorly-functioning economy, though somehow the perception of the "deserving" vs. "undeserving" poor has always existed, and serves to differentiate the legitimacy of the transfer payment categories above.

Why?

Self-fulfilling Prophecy?

Interesting article on math ability as a self-fulfilling prophecy since the same thing seems to happen to beginning economics students.

Probability & Equilibrium

The "special case" referred to in my previous post relates to a macroeconomic concept known as "full-employment equilibrium".  Something to consider:

If there are an infinite number of possible equilibrium situations, but only one full-employment equilibrium outcome, what is the probability of the economy successfully achieving that full-employment equilibrium, as well as maintaining it?

                                                                      Source:  Google Images

Chapter One of Keynes' TGT

The paragraph quote below is the entire chapter one of Keynes' most famous book, The General Theory. Though written approximately 75 years ago, this introductory message could just as easily be directed at government policy-makers today.  Note, especially, the last sentence and reference to "...the characteristics of the special case..." (Keynes 3).  It is imperative for any economics scholar to understand that Keynes, by this concluding statement, is describing not only the whole premise of his theory, but also the purpose of the title, TGT.

That "special case" is literally a situation so rare, that it shouldn't be a basis for policy-making whether in the 1930's, or today.

                                                                     Source:  Google Images

                                   Chapter One of The General Theory

"I have called this book, The General Theory of Employment, Interest and Money, placing the emphasis on the prefix general.  The object of such a title is to contrast the character of my arguments and conclusions with those of the classical theory of the subject, upon which I was brought up and which dominates the economic thought, both practical and theoretical, of the governing and academic classes of this generation, as it has for a hundred years past.  I shall argue that the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium.  Moreover, the characteristics of the special case assumed by the classical theory happen not to be those of the economic society which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience."
                                                                      -- John Maynard Keynes

WOW!!!

Janet Yellen was nominated on Wednesday to the Fed Chair position.  Though less significant than a Hillary win in 2016, still very historical for our nation.  Yes, WOW!!!

                                                                      Source:  Google Images


                              Below are the "official" nomination speeches ...

                              The President's statement, followed by Yellen's

                              Yellen's statement

Bob Dole on Healthcare

Bob Dole (the Republican presidential candidate in 1996 who ran unsuccessfully against incumbent President Bill Clinton) made a comment about the U.S. healthcare industry during that 1996 campaign.  His advice was simple --- "Don't get sick!".

Sadly, that attitude seems to sum up the U.S. market for healthcare, at least prior to the Affordable Care Act (pre-Obamacare), and with respect to the uninsured.  If you had a preexisting condition, a low-paying or part-time job without benefits, were self-employed, etc., access to affordable healthcare was difficult and often impossible.  As a result, it was estimated that 47 million employed, nonelderly Americans (i.e., approximately one-third of all U.S. workers) did not have medical coverage in 2012.

Janet Yellen, the next Fed Chair?

Speaking of creating one's own brand .....

Here's a link to an article about Janet Yellen, current Vice-Chairperson for the Federal Reserve System, and a second link describing the difference between Hawks and Doves regarding monetary policy (thanks Nancy, for bringing those terms up in class!).  Ms. Yellen seems especially qualified for this potential Fed appointment, and certainly displays the highly-desired characteristics of intelligence, integrity, and class --- qualities necessary and associated with the world's most powerful banker.

Strengths -- Your Unique Talent and Skills!

What other less obvious "skills" do you bring to the labor market, other than education, experience, and job-specific training?  Are you good communicator, do you get along well with people, are you a natural leader, extremely organized, good with computers, or numbers, detail-oriented, creative, trustworthy, musically-gifted, willing to take risks, etc.?  What I was alluding to in my 9/14/13 post was that everyone has certain talents and gifts that they were born with.  When you think about what you enjoy doing, but also what you're extremely good at (these characteristics do tend to go hand-in-hand), you'll have a sense of what unique talent and skills you can offer an employer.  In a word, what are your strengths?

The best part of finding employment that utilizes your strengths, and doesn't just offer a paycheck, your job will never seem like "work"!  Difficult to figure out what your strengths are?  Think about what you loved doing when you were 9-10 years old. Knowing this will point you in the right direction.

                        "Be yourself.  The world worships the original."    
                                                                     -- Ingrid Bergman

Marketing Your Strengths

Once you have a good idea what your strengths are --- think about how those strengths are unique to only you.  This is your chance to create your own brand, similar to what businesses do for products and services.  And just like businesses, what you can do doesn't have to be radically different than someone else, it just has to be perceived that way.  Though, if what you can offer is truly superior, never, never hesitate to point that out.

                                                  

                                                                  Source:  Google Images

HC Investment

Not satisfied with the value of your HC?

Though we can't control, in a general sense, what employers are willing to pay, including benefits, we can control what we bring to the negotiation table.  Human capital (HC) "investment" is the increase and growth in the value of your HC, over time.  Certainly, education, experience, and job-specific training represent the most important aspects of one's personal HC investment, but other less obvious "skills" count too.  Use your imagination in determining what these might be.

Human Capital Defined

This topic has been on my mind lately, and since Labor Day was recently celebrated (Monday, 9/2/13), I think HC and HC Investment is an appropriate direction for the next few posts.  First, a definition.  Human Capital is a set of knowledge, skills, and talent that can potentially be "sold" in the marketplace.

                                               

                                                                             Source: Google Images

Might there be a way to determine the current value of your human capital?  Yes, absolutely!  Just figure out what you'd be able to earn in the labor market by "selling" your knowledge, skills, and talent.  Be realistic in your HC estimate, but don't underestimate yourself:  How much money would a potential employer pay for what you can offer them, right now?

Videos for the Macro class .....

For more information on the following economic concepts, click on the links below.

    Scarcity, Choice, Rational Self-Interest, etc.

    Macroeconomics vs. Microeconomics 

    Positive vs. Normative Economics

    Graphs

    Individual PPF

    Opportunity Cost
Just a short note about the definition of "full cost" shown in the Opportunity Cost video.  It should read:  Opportunity Cost = Direct (or Explicit) Cost + Indirect (or Implicit) Cost

    Law of Demand 

    Demand vs. Quantity Demanded

    Law of Supply

    Market Equilibrium

    Price Floors & Price Ceilings

 Refer to chapters 6, 7, 8, and 9 for more information about the topics below.

    GDP

    Real GDP

    Economic Growth

    Business Cycles  

    Inflation and Price Indexes 

    Real Income

    Unemployment

    Types of Unemployment

Refer to chapters 9, 10, 11, 12, and 13 for more information about the topics below.

    Krugman regarding John Maynard Keynes

    Krugman's advice to Econ Students

    AD & AS

    Macroeconomic Viewpoints 

    Fiscal Policy

The next two videos are a bit technical .....

    Should we use Fiscal Policy? --- Crowding Out & Lags

    Taxes & Budget 

Refer to chapters 14 and 15 for more information about the topics below.

  What is Money?

  Creating Money 

  The Fed

  Monetary Policy 

                                                                                Source: YouTube

Benefits of unemployment

Certainly, there are benefits that result from unemployment too.  If the unemployment is frictional, meaning voluntary, then the time away from work allows the individual to search for a better job.  In the longer run, and once employed again, the worker will (hopefully) be happier and more productive, meaning everyone benefits.

If unemployment is involuntary and structural, there are still some benefits.  An active job search forces an individual to become better trained, to work on their resume and job search skills, get better at networking, etc., allowing them to become more effective overall.

Does the above also apply to involuntary and cyclical unemployment, i.e., the type of unemployment that rises during a recession?  Perhaps or perhaps not.  One thing is certain ... there will always be individuals that favor the "tough-love" approach and who will argue that what doesn't kill you will indeed make you stronger.

Lost HC Investment

The idea of a loss in the growth rate of one's human capital (resulting from the unemployment rate) should concern young people, especially.

https://www.youtube.com/watch?v=-3XsHMOEQGc

Costs of Unemployment

In the last post, I mentioned some negative effects from unemployment on individuals, households, and society.  To be more specific, these costs can be broken down into three major categories:

Economic Costs:
In terms of the entire economic system, unemployed resources result in a loss of output (real GDP), income, and talent.  The output/income gap (difference between actual GDP and full-employment GDP) widens as unemployment rises --- recall Okun's Law.

Social Costs:
An indirect effect of unemployment is represented by the poverty rate, the crime rate, the murder rate, the suicide rate, the divorce rate, the admission rate to mental hospitals, etc., all of which have been shown to be positively correlated with the unemployment rate.  

Individual & Household Costs:
Idle resources can always be put back to work lowering the output gap, but for the individual, the loss is much more damaging and long-lasting.  It's not just income, or confidence that's sacrificed, but valuable work experience!  On average, the experience* that's foregone while the individual is idle or even underemployed will never be recovered.

* Another way of thinking about this foregone experience is that the opportunity cost of unemployment  represents the loss of one's potential human capital investment. 

JOBS!!!

What's the most important idea that's tied to the economic growth rate --- JOBS!!!

                                                                                 Source:  Google Images

If we lived in a more "self-sufficient" economy, then not being part of the labor force would be somewhat manageable.  However, given that we can't just "live off the land" -- though many of us would probably find that lifestyle fascinating -- if you want to be able to participate in a modern economy, then you must work.

Therefore, anything that prevents individuals from having a job (whether it's cyclical, frictional, structural, etc.) so that they can provide for their families is a critical issue for individuals, households, and society.

Name that Graph!

With respect to individuals and communities, stabilization policy is not only a kinder approach, but the goal is to "smooth out" business cycles, make recessions less severe and that not only helps private citizens, but businesses too!

So, if deficits increase automatically during recessions, along with the unemployment rate (and a host of other problems such as the poverty rate, the crime rate, the suicide rate, etc.) then the opposite should happen during times of economic growth.  So, in your opinion, how do we encourage growth?

Some of you might recall the following graph:


                                                          Source:  Google Images

Stabilization Policy

The "stabilization programs" mentioned in the 8/4/13 post (i.e., taxes and transfer payments, especially on programs such as unemployment compensation) are meant to prevent consumption from falling dramatically during recessions as a result of increased unemployment.  The rationale is basically this:  If aggregate demand can be stabilized (via consumption) then households won't experience as much uncertainty and stress, as they would in the absence of stabilization policy, the recession won't be as severe, etc., etc., etc..  

However, this type of nondiscretionary, stabilization policy, does automatically expand deficits as well as the national debt but the trade-off is perhaps a more balanced approach towards our nation and communities than with a free-market, laissez-faire, "survival of the fittest" philosophy.

* Deficits Rising Automatically?

How and why does the federal budget deficit automatically rise during a recession?

1.  Unemployment rises during recessions.

2.  With more people unemployed, there are less taxpayers and less tax revenues collected by government.

3.  Transfer payments rise on government programs such as unemployment insurance, welfare, student grants, etc.


Need an example?  Just google why Detroit is going bankrupt.

Paradox times 2

Referring to the Jerry Seinfeld quote below, how is the economy any different?

Think back to the Paradox of Thrift mentioned in the 7/14/13 post on "Effective Demand" .....
The paradox implies that more saving will actually hurt the economy, causing national income to fall, and ensuring that households (in the aggregate) will earn less and thus, save less. The intent to save more (i.e., consume less, pay off debt, etc.) means that aggregate saving falls so people, in general, end up saving less, thus the paradox.

It's the same story with austerity programs. The intent to reduce the deficit (by raising taxes, lowering government spending, or a combination of both) will reduce aggregate demand/spending and hurt the economy by causing national income (and output) to fall. Since deficits automatically rise during recessions*, policies to reduce deficits and debt will actually cause the deficit to rise.  Same paradox!

* see post above

Jerry Seinfeld

"We're all just kinda going along with this 'paper has value' scam."
                                     
                                                                                 -- Jerry Seinfeld

Embedding has been disabled for this video but I highly recommend that you watch 

the preview above, and then follow the link below for the full video.  

The Seinfeld quote above is at 4:01.

http://comediansincarsgettingcoffee.com/seth-meyers-really

Krugman and Unemployment

Excellent presentation on how unemployment is measured.  Link is from the Krugman blog.

There Is No “True” Unemployment Rate

Effective demand

If your answer was "b" to the last post, you're correct!  Answers a, c, and e are equivalent, and all will equal more saving.  More saving (less spending) will hurt the economy.  If you're not sure why, just google the "Paradox of Thift" concept, and see the "aside" below.

Keynes is well-known for the belief that spending drives an economy, and is the reason for my use of his quote in the 7/7/13 post below.  Any type of spending --- household, business, government, or foreign --- will all work, though certain types of spending might have a larger ultimate effect.

Though Keynes is often credited with advocating government spending, in fact, he proposed that private sector spending (mostly household + business) was/is preferable for reducing unemployment.  The point is that, in his opinion, spending (i.e., effective demand) is what moves the economy the most.

An aside:
Do keep in mind that I'm talking about the entire economy from a macro perspective, not whether a household should or shouldn't have saving and debt-reduction goals.  Saving is indeed good for an individual household, but if all households decide to save more, the economy will suffer as a result. 

Multiple Choice

In your opinion, which of the following will boost the U.S. economy the most?

a.  saving
b.  spending
c.  buying stock
d.  foreign travel
e.  debt reduction

Keynes

Recall the famous John Maynard Keynes quote from The General Theory of Employment, Interest, and Money that refers to unemployment, "If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again ... there need be no more unemployment [emphasis is mine] and ... the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is.  It would indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing."                          

                               

                                                                            Source:  Google Images

Unemployment, U.S. vs. Europe

Sometimes, a picture is worth a thousand words, and other times, numbers are. Consider the following:

                         
      Unemployment rate                              U.S.                    Europe


              4/2010                                        9.9%                    10.1%

              4/2011                                        9.0%                    10.2%

              4/2012                                        8.1%                    11.4%

              4/2013                                        7.5%                    12.2%

                                                                                           Source:  BLS data

Food for Thought

"The problem is that the Americans and the European leaders continue to define what produces growth in different ways --- differences that have a parallel in the domestic debate between Mr. Obama and Republican lawmakers.  Ms. Merkel [German Chancellor] and Mr. Cameron [British Prime Minister] say that reducing deficits and debt to reassure lenders eventually will bring growth.  The Americans say that the United States' recovery shows that, in a crisis, stimulus should come first and deficit reduction can follow once growth is restored."
                                                         
                                                             -- British Day economy article, 6/16/13

                                                                            Source:  Google Images

Austerity

How does the policy of "austerity" fit in with anything that I've mentioned below? What is it, who's in favor of it, what nations are pursuing it, and why?  First, a definition.  The policy of austerity simply means lower deficits via either higher taxes, lower government spending, or some combination of both.

   

                                                            Source:  Google Images

Macroeconomic Goals

There are three main macroeconomic goals in our society:

1. Full employment
2. Stable prices
3. Economic Growth

First, full employment means that the nation's unemployment rate is no higher than about 5-7%, what's often referred to as the "natural rate" of unemployment or the "full employment rate" of unemployment.  Second, stable prices mean that the inflation rate should be relatively low and non-erratic, but a number as to exactly how low isn't typically mentioned.  Finally, economic growth should at least exceed the average growth rate over the last century, which has been about 3% per year. Essentially, all three goals leave some room for variation, and that's a good thing. Remember the topic about "confidence" below (see 6/17/13 entry).

Do the goals above seem like reasonable goals for a nation?  Should there be more goals, such as lower deficits and debt?  Are any of the above goals "mutually exclusive", meaning you can't achieve two or more goals at the same time (example -- lower deficits along with economic growth)?

Economic growth

So, how does a nation restore confidence in order to create economic growth?  The photo below is from 1929, but there are plenty of modern versions of this on street corners today.

                                                                   Source:  Google Images

Erosion of Confidence

Let's apply this type of thinking (overall confidence, or rather lack of) to the Great Depression and also to our most recent downturn (i.e., recession) of 2007-2008.

The Great Depression wasn't caused by one single event; however, the 1929 stock market crash certainly started off the downward spiral.  Though other factors contributed to the GDP decline, that one event (the stock market crash) began the overall erosion of confidence that individuals had in the U.S. economic system.

Compare that confidence erosion during the fall of 1929 with what happened to our recent economy in 2007-2008.  Our economic downturn was also given a name --- the "worst recession since the Great Depression"; thus, contributing to an even greater confidence deflator.

Belief = Performance!

The economy's overall performance can be compared to an individual, and their overall performance.  It's well-known that the total "output" of an individual is positively correlated with the confidence they possess.  What a person believes deep down about their ability and their chances of success will ultimately determine what they can and will become.

                                          Belief = Performance!

The economy is driven by a similar set of circumstances.  If the general belief is that the economy is doing well, and people (at least, collectively) have enough confidence in it, then, just like a self-fulfilling prophecy, the economy will end up doing well.

What do YOU believe about today's economy?  Is it doing well or not, and why?

Recession and spending

Someone recently said to me, "You can't spend your way out of a recession.".  I thought this line was interesting and curious, and maybe you do too.  If you eliminate spending as a cure for a depressed economy, what are some reasonable alternatives?