Dual Mandate

There is a very good short essay by Dan Altman over at Big Think.

It deals with the dual mandate faced by the Federal Reserve. For those of you who are unfamiliar with the term, the Federal Reserve is obliged by law to consider “maximum employment, stable prices, and moderate long-term interest rates.” The kicker is that first part. Many other central banks around the world are focused on stable prices only. This makes sense if you subscribe to the idea that money is neutral and understand the relationship in the equation of exchange M * V = P * Q  (or P * Y as many prefer).

But the author points out that it complicates monetary policy when fiscal policy is ineffective.  I even wonder if fiscal policy-makers are generally unwilling to face hard choices, hoping that monetary policy can solve the problem alone. If true, the tools in the monetary policy toolbox may not offer the solution that is being sought.  This is not the time to use the old adage, “when all you have is hammer, treat everything like a nail.”

I look forward to your comments.

Soderbergh's "King of the Hill"

The employment situation in our economy is like nothing we've seen since the Great Depression, both in terms of long term unemployment and median duration. Things are staggeringly bad, but we can try to find bright spots where we can.

One such bright spot is that one of my favorite directors, Steven Soderbergh, has just released a new movie, Contagion. Back in 1993, Soderbergh made a film of one of my favorite books, "King of the Hill", A.E. Hotchner's account of being a schoolboy in 1933 in St. Louis. I missed the film in the theaters, and have searched in vain for it in any format since. However, Amazon has just made it available through their new "Amazon Instant Video" feather. You can find it here.

It's a heartbreaking story of a family struggling to survive the Great Depression. It begins with Hotchner's family way behind on their rent in a single room occupancy hotel, with his father having to travel to scramble for work and his mother's health failing. Hotchner eventually has to stay as a squatter in their apartment so that they can't be evicted, while he plays mind-games with himself to deal with starvation. But through it all, he is a kid, and plays marbles and does other kid things, while trying to hide from his school friends how desperately poor he is.

We have a better social safety net these days, but with poverty at rising rates, I wonder about how many people I interact with each week who are quietly suffering like Hotchner did as a boy.

Business Cycles and Recession Measures

One thing we do either in our macro courses or in our survey courses is discuss briefly the business cycle.

Many of us, along with some textbooks, fall back on the "two consecutive quarters of negative GDP growth" definition. We should all be directing our students to the indicators used by the National Bureau of Economic Research (NBER) definition.

Here is an interesting post from Calculated Risk (HT to Econlog) that speaks to the NBER definition. It also provides a sobering view of where we are in the current cycle. While we can definitely see we're past the trough, we still have a considerable amount of ground to cover to get back to the previous peak.

Housing Prices as a Roller Coaster

Here is the Case-Schiller Home Price Index depicted as a roller-coaster. 

The data is inflation-adjusted and runs from 1890 to 2010. It's a redo of the original one that was developed in 2007. (HT to ChartPorn.)

The Krugman

Here's something for those of you seeking a link between Keynesian macroeconomics and a classic piece of American literature.

And for those of you who don't fit into the category, you might want to look at anyway. It’s fun and imaginative and might offer a springboard to introduce fiscal policy. (HT to Economics & Ethics.)

The Great Stagnation - A Review

Tyler Cowen of George Mason University has a new book out titled The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better.

As this review in The Wall Street Journal explains, this is not likely to be the definitive explanation of the current economic downturn, but it could be among the most significant.

Cowen points out that the amazing success of the United States over the past 300 years (that includes a considerable period before we were the United States - I know) has been due to a unique mix of circumstances that he calls "low-hanging fruit". These were aspects that provided easy and quick return for the most part. They were easy to "pluck" and benefit from.  But Cowen points out that the easy stuff may be gone, and the sooner we realize that the sooner we can begin to benefit from the harder stuff by finding ways to get at it. That is what will bring renewed economic growth.

There are numerous reviews of this book elsewhere. Many of them echo the evaluation of the

Journal, this can be an important and a good read.  I'm adding it to my reading list and my carousel at left. I hope you'll be moved to purchase it. From what I can tell, it is currently only available in a Kindle edition.

Structural Unemployment and the Beveridge Curve

One of the more interesting aspects of unemployment is how policy-makers choose to address it. But what many don't know is that the remedy needs to match the unemployment. That means you can't effectively address structural unemployment with programs mean to address cyclical unemployment.

This brings us to an interesting article from the Federal Reserve Bank of San Francisco. While it introduces a topic you probably don't cover, even in AP Macroeconomics - the Beveridge Curve - it provides a lot of information to help you through the section on unemployment.

Playing with Numbers

And for those of you who like to discuss how positive data can be used to support normative statements (on either side of the aisle) here's a very useful and interesting video (HT to Greg Mankiw).



I think this can be used a number of ways. But the most important lesson I would offer your students is "what data isn't being shown (on either side) and why?" Too often we (teachers and students) get caught up in an idea and neglect some aspect of the data that may enlighten. And just as often we add data that muddies the water. As always, I welcome your observations.

Teaching Economics

There's a very engaging discussion in The Economist. The question is "How has the crisis changed the teaching of economics?" The answers are provided by some very well-known names in the profession. And while it really doesn't address what is done in the high school as much as it addresses the collegiate and graduate level, it still makes for good reading. I find it particularly interesting that many of the respondents think there should be renewed emphasis on economic history as a component in collegiate studies.

At the very least, I suspect it's made high school students a bit more curious about what happened and why; and perhaps more interested in the course. Is that your experience?

Hayek vs. Keynes

When the most recent downturn was a few month old, and it was not going to be followed by a quick rebound, interest in the theories of John Maynard Keynes and the role of stimulus started to rise.

But as the recovery has drawn out, and some would even say begin to falter; people are looking for other explanations. Among the names mentioned of late, Friederich Hayek is gaining popularity. And leading the wave is George Mason economist Dr. Peter Boettke.

There is a good introduction to Dr. Boettke and simplistic explanation of the Austrian School in yesterday's edition of The Wall Street Journal. (Subscriber content, but put the headline in your browser, I'm willing to bet you find something.)

You'll find it an interesting expose of an economist and ideas worth knowing more about. Please share your thoughts.

Unemployment

I know many of you won't "officially" get to this issue until second semester when you address macro, but others will get to it sooner. Some might be teaching macro first, others may be teaching a survey course and get a chance to address unemployment as part of the survey. Regardless, here's an article from The Economist that you will want have available.

The article addresses the unemployment problem in the U.S., and why it doesn't seem to be responding to traditional Keynesian stimulus. The short answer is “this isn't just about weak demand.”

As the article points out, there are issues of structural change (the role of manufacturing and construction in the economy), institutional issues (dual income families are harder to move), and incentives (the impact of extended unemployment benefits). I would suggest uncertainty over future government policy may also be a factor.

There's a related article here.

What are your thoughts?

An Interesting, Albeit Sobering, Graphic

There is an interactive on the Associated Press web site (HT to Chartporn) that you can use in your macro sections. But it might also be useful in micro as a kickoff to the year. You can zero in on your state, and even your county to get a statistical reading. Then you can discuss whether it "feels" better or worse. You can also discuss the change rates.

Do you think you can use this in class? Please share any additional ideas.

Luxury Goods

A short piece from a recent edition of The New York Times, is titled "Is Environmentalism a Luxury Good?"  The piece points to a paper out of the National Bureau of Economic Research that seems to indicate that when times are tough, many of us put issues like the environment behind things like paying the bills.

This really shouldn't be surprising. People make choices on how to use scarce resources. Their immediate short-term wants tend to take time preference over longer-term wants. I've often told students that issues like the environment, arts and culture, and social justice have a better chance of being addressed when the economy is humming along than when we are afraid for our livelihood. Thus to connect to my other post…the sooner the economy gets back on track, the more likely we’ll start worrying about things other than the economy.

I'd welcome your thoughts.

Business Cycle Measurement

When we teach macro, we spend time on business cycles. One of the issues that comes up is the definition of the various components, and who gets to "make the call" on the turning points. Hopefully you're successful in dismissing the "two consecutive quarters of negative GDP growth" rule of thumb.

But the Federal Reserve Bank of St. Louis has just published an informative article on business cycle measurement in its Economic Synopsis publication. It examines a couple of alternative measures that are interesting. Truthfully, both of the measures discussed seem to indicate that things turned around in late 2008. And this topic may only be of esoteric interest. Nevertheless, it can help students understand that calling the turn is not as simples as "two consecutive quarters...".

Institutions and Incentives

This article from the summer 2010 issue of City Journal (HT to Cafe Hayek)is a sobering reminder that much of what happens in any economic system can be explained as a logical reaction to incentives. What is particularly arresting is that the incentives were often created by government in an attempt to manage economic growth and decision-making.

If we remember that incentives are the result of institutions, the rules and beliefs that guide our decision-making, it is harder to discount the effect of the institutions that have been put in place over the last quarter to half-century.

That is not to say that the rules were put in place to move the nation toward a financial crisis of the type and at the time of the the one recently incurred. However, one can say that efforts to promote certain activities (whether home-buying or derivative-trading) by distorting or transferring risk, should be seen for what they may result in - the attempted disguising of risk and postponed imposition of market discipline.

I hope you take a few minutes to read the article, think about it and then consider sharing your thoughts.

Education, Skill Sets and Recovery

The Federal Reserve Bank of Cleveland has an interesting article in the recent issue of Economic Trends (see page 14). The author asks whether a mismatch between worker skills and job skills may be a factor in the slow job creation growth.

On the surface, this is a logical question. Recessions are often seen as a time for factors of production to be reallocated. This applies to labor. Certainly, as companies retrench they will look to increase productivity among existing workers before bringing on new ones. Indeed, one lesson we teach is that rising prices increase supply, partially because higher prices allow less productive resources to come into the process. Workers with weaker skill sets may, indeed, face a period where their skills don't match demand.

But I'm not sure I agree with one aspect of the article's conclusion. The author talks about lower productivity and higher unemployment. I would think that the retrenchment would lead to higher productivity. To that point I would point at the long-term trend, as illustrated here by Mark Perry on Carpe Diem. Mark's data is longer-term. And granted, the past does not guarantee the future, but I think it would be logical to expect increased productivity from the existing workforce, at least in the near-term. If there is a skills mismatch, growth will have to come from higher productivity. And that increase in productivity may change the larger economic landscape, establishing a higher premium for certain skills, while those with lesser skills could face an uncertain job market. Recent productivity data would be helpful in this respect.

This brings me to a post by Greg Mankiw. Greg asks whether the current average duration of unemployment may indicate the Non-Accelerating Inflation Rate of Unemployment (referred to as NAIRU or "the natural rate of unemployment" by some) may be increasing. If the economic structure has fundamentally changed, say by requiring more skilled and more productive workers, one could see how this would be possible. However, as has been pointed out here and in other places, the duration of unemployment could be a result, in part, of extended unemployment benefits providing a skewed incentive. I'm not sure I totally buy that explanation, but I do understand it. I think Greg is right in saying we may not have the answer to the question for some time.

To summarize this post, I don't know whether we are undergoing a major structural reorganization of the economy. A skill mismatch would certainly contribute to that, and changing productivity would certainly be expected in such a circumstance. If these issues are tied together, it would indicate a need for a different approach to economic policy than what is being tried. But I find all three links interesting and worth your time. I certainly welcome comments.

Debt Issues...Micro and Macro

I've been busy with my online courses and I hope to get busier. 

Nevertheless, here is a comic that, in my opinion, offers all kinds of possibilities as a discussion starter.


The first and third panels carry the weight. 

The first panel can be related to expectations, the business cycle, and employment. (For those of you unfamiliar with the strip, Gene is the soon-to-graduate college age son of the couple you see.)

The third panel can be used to illustrate credit, debt & deficits, normative statements, business cycle, animal spirits, expectations, and behavioral economics.  And those just hit me in the first minute.  Do you see other possibilities?  If so, please share.

Keynes vs. Hayek (continued)

Last Sunday (July 4), I posted on a pair of recently discovered newspaper clippings that featured a real time debate between John Maynard Keynes and Friederich Hayek on the nature of the biggest problem of that time - the Great Depression.

Now here's a follow-up. It's an article that appeared in both The Wall Street Journal and on the Cato Institute web site. (HT to Cafe Hayek for the pointer). In the article, by former Dallas Fed vice-president Gerold O'Driscoll, Keynes and Hayek debate the nature of savings, particularly in a downturn. According to the article (and the clippings), Keynes thought a dollar spent was a dollar spent. Therefore, prime the pump and let the spending do the work. Hayek was actually a bit pickier. He believed some dollars - those spent on investment - as more powerful.

There are a couple of other points Hayek and his colleagues made, but these countering views have much to suggest to us about "proper" (whatever that is) fiscal policy in the current environment - at least as Keynes and Hayek might have seen it.

What's Policy Supposed to Do?

When we teach monetary policy, we tell students that counter-cyclical policy would be to expand the money supply as a recession or panic hits, and these off as the economy turns the corner to recovery. And while we haven't heard anything official on the end of the most recent recession, many economists think the economy turned the corner in summer 2009.

Marginal Revolution provides an interesting link to the Shadowstats website. The charts show growth data for the monetary base, M1, M2 and what appears to be a proxy M3 measure (M3 is no longer officially recorded), beginning in 2006. (Please note, the charts in the explanatory links from the Federal Reserve Bank of St. Louis cover a longer period than the charts on Shadowstats.) There is a clear uptick as the financial crisis kicks in 2008. (The Fed clearly learned something from 1929.) And growth, while still accommodative, has fallen from the higher levels of 2009. These could be useful in teaching those chapters on monetary policy, if you want to illustrate what accommodative policy during a financial crisis looks like.

Is It Different?

There is an excellent article in the July 4 issue of The New York Times. It's about Dr. Carmen Reinhart and Dr. Kenneth Rogoff and the work they've done studying financial panics, the lessons learned, and the lessons not learned. Their research culminated in their book This Time Is Different.

Now, before you dismiss it as "just another theory of what caused this recession", you need to read the article (and maybe the book). Although the work is relevant to the current situation, it is more about the way smart people (including economists) continually make mistakes and repeatedly fail to see the next big disaster. It's not as much about poor theory as it is about human nature. We tend to think we're immune to "the same mistakes", to believe "this time is different". But it often isn't really that different.

I would also recommend a couple of things to accompany the review. The first is this long interview (over an hour) with Dr. Reinhart by Russ Roberts on EconTalk. The second is this shorter interview with Dr. Rogoff by Kai Ryssdal of Marketplace. And finally, here is a transcript of an appearance by both Dr. Reinhart and Dr. Rogoff at the Carnegie Council.

All in all, this is good material for your Saturday or Sunday morning coffee.