Sunday, April 25, 2010

Remember Which Way the Finger(s) Point

I find that one of the more enjoyable aspects of teaching macroeconomics is engaging in discussions about current events with students. It can often be enlightening and disenchanting at the same time.

The enlightenment comes from the fact that the students are aware of the problems, and often have a fundamental grasp of the facts. The disenchantment often comes from how they don't grasp basic relationships (how one event can be related to another) or what the event has to do with decisions they make as individuals or that they make as members of a larger community. Students often fail to see how the macro is just the sum total of a whole lot of micro.

I frequently have to remind them that if they see a problem and they think they know where the blame lies, they should point the finger - and remember that when pointing a finger, three are pointing back at them. The idea is that the event (and any economic event) is not random and is not isolated. It is often the accumulation of decisions made, or can be the result of decisions not to choose. This brings me to the subject of today's post.

This article from yesterday's edition of The Washington Post talks about a study from the International Monetary Fund. (I know, that makes it suspect for many of you, but you should read the article at least.) The study basically says that the economic future depends on the developed countries of the world changing some behaviors - significantly.

And while the recommendations seem logical, I wonder to what extent the United States will respond with "Yeah, good idea, I hope the other nations are paying attention."  While I don't think this warrants a lesson before the AP exam, it might be an interesting topic for discussion after the exam is over, when you're trying to fill time between the AP exam and graduation/the end of the school year.

Please share your thoughts on the article and whether you think the U.S. can change its behavior.


Erin Janie said...

Of course as a United States citizen I'm going to react to that article with frustration. Why should the U.S. and other developed countries be the ones to carry the whole world economy on their backs? I know that because of some poor economic decisions we've made the economy has fell, but the whole point of the world economy is that it shouldn't be dependent on one or just a few countries. Shouldn't it be flexible and able to lean away or towards different countries when needed? Should developed countries really be expected to pull not only themselves out but several other countries with them?

Lisa Perfors said...

to Erin,
Mr. L and I had a conversation on this whole China many the value of its money artificially lower. If I understand what you're getting at, it would be beneficial for us have China let the value of its currency naturally rise. This would make our exports bigger which would create more jobs here instead of outsourcing to other countries. So that would be a good thing.
But what I would like to ask. Is it really possible to sustain our economy in the short run with these policies? To me it would seem like these things would make us go into a recession. Much higher taxes will cause less spending, which causes prices to rise umongst other things that will cause prices to rise, which will cause things to be harder to make, which causes unemployment. That combined with more demand for jobs because of the extended retirement age would seem like it would be a lot of people unemployed who can't pay their taxes. Then it seems that it goes into its own spiral of temporary death to the economy.
So is this thinking then logical? What would be the chain of cause and effect of these policies?