Putting Things in Perspective ... Thanksgiving Edition

As we approach year's end and the traditional holiday season, and with the failure of the Supercommittee to achieve anything of substance beyond finger-pointing, here is something courtesy of XKCD to fill those odd classroom moments.

Behavioral Economics and Tax Cuts

Here is a piece from Bloomberg Businessweek (HT Arts & Letters Daily) on how behavioral economists may have shaped a tax policy. The summary of the research is that the plan didn't work. However, the study is based on survey data, which is not as reliable as actual expenditure data. It's a worthwhile read if you are entering the section of fiscal policy or spend time discussing behavioral economics. 

Taxes and Halloween Candy

Here's a funny video (HT Econlog) with a comedian explaining how to use Halloween candy to explain taxes. It's a great visual, although the last line is over the top.

Debt Rap

Regardless of your politics, this contains lots of trigger words to use in your classes. (HT to Carpe Diem)

If You Tax Something,

you get less of it. I seem to remember reading that someplace...oh, yeah. It's in almost every economics principles text.

This article from The Independent in the U.K. (HT to Carpe Diem) could be very useful when you discuss tax wedges. It could also be used when discussing taxes and elasticity, willingness to sell and incentives.

I'm planning on using it. What do you think? Does it have potential for your class?

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.)

This May Not Help...Much

There was a useful article in Monday's edition of The Wall Street Journal (free content at this writing) that discussed a pending deal in Congress. It would trade a temporary extension of the Bush era tax cuts temporarily for an extension of unemployment benefits. On the surface, this would seem to be a great example of classical Keynesian economic policy.

However, there are a number of additional directions you can go with this. One can use the fact that the extension of tax rates is temporary and that people know this. Essentially, they are being told that taxes will go up in the not too distant future. Consequently, what is the likelihood that people will spend the extra money vs. saving it to offset future tax increases? Does it make a difference that we are in a recession? Does the incentive to save differ for those who are still struggling - perhaps with part-time work because they can't find a full-time job? If you're still unsure about your job going forward, how will that impact your decision to spend vs. save?

As for the extension of unemployment benefits, there has been research that indicates the length of time the benefits are available has a connection to duration of unemployment - the longer the benefits period, the longer the duration of unemployment. Other economists believe that people who are unemployed try to seek employment quickly - even at lower wages or positions that would previously have been unattractive.

For either tool, a case can be made that passage will help the economy. And a counterargument can be made that it won't. At the moment, the discussion is basically academic because nothing has been passed. But that makes it a perfect intellectual exercise – lots of room to play. And as neither side is planning on cutting other programs to pay for what being proposed, it will add to the deficit. You can even begin discussion of "crowding out." What do you think?

Some Tools for Teaching Policy Tools

You may already be aware of both of these. But if you're not, it's worth your time to look at them.

The first is a new interactive on The New York Times website. (HT to Econlog.) It's a game on cutting the federal budget. You can cut certain spending categories and or raise certain taxes in effort to bring the Federal Budget back in line. It is rather simplistic and doesn't really show the complexity of the trade-offs, but it’s not bad for the venue. And I think that for a traditional high school economics course, it makes a great introduction.

The second resource is an opinion piece in today's issue of The Wall Street Journal. It's written by Princeton economics professor and former Vice-Chairman of the Federal Reserve Board of Governors, Alan Blinder. Dr. Blinder offers an interesting defense of the Fed and quantitative easing. I would think it would be usable for the monetary policy section in your AP or IB courses.

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.

Two on Fiscal Policy

Here are a couple of resources to go along with the teaching of fiscal policy. First, today's post on Greg Mankiw's blog lifts a bit from Life, the new biography by Rolling Stone Keith Richards. It seems that the members of the group make/made a number of decisions based on the tax effects. Needless to say, this means that they have used resources avoiding taxes that would have been available to governments had the policies been better designed.

Of course, this shouldn’t be a surprise given that Mick was a student at the London School of Economics. I’m sure he learned early on that You Can't Always Get What You Want (scarcity is fundamental).

This next bit is a bit over the top. It's a dark and somewhat disturbing advertisement about the national debt from the 1980s...oh, and it was directed by Ridley Scott, the person who gave us Alien. (HT to Marginal Revolution.)



HT Marginal Revolution

Fiscal Policy

One of Ed Dolan's posts last week discussed Congress's passage of the continuing resolution to fund government operations. In it, he references an interesting paper from the recent Kansas City Fed Jackson Hole conference, and a rare speech on fiscal policy by Fed Chairman Ben Bernanke.

At the end of the post, Ed also provides some useful slides to accompany the artiicles. You might want to give them a look. I think they could be helpful.

Economists Do It with Models

EconGirl (Jodi Beggs) has some great new videos on Economists Do It With Models. They deal with taxes and, in my humble opinion, they are very good. There are two explaining the tax wedge and two explaining general rules about taxes.

I really enjoyed the first two. They provide clear explanation without shifting the supply and demand curves around. I found that makes it much easier for students to understand. I strongly recommend these to you if you need to brush up, or even to give to your AP students if they were absent the day of your stimulating presentation.

EconGirl has a whole series of videos. Check them out.

Trade-offs and Opportunity Costs in Macro

Okay, I'm almost a week behind on my posting. It has not been a good week - too many fires to put out and not enough firemen. But there is one item I definitely want to draw to your attention. It was from last Tuesday's edition of The Wall Street Journal.

The article talks to the issue of entitlements in the budget and asks how an "entitlement" society can hope to bring the federal budget under control. The video and interactive graphics are also interesting. If you teach fiscal policy in AP or in a more traditional survey course (or even in American Government) you will want to check this out.

And please share your thoughts. Are there additional resources you would recommend to bring into the discussion?

Follow-up on Monopoly with Economists

A little more than a week ago, I posted on an NPR broadcast about a game of Monopoly being played by two economists.

Cafe Hayek has this follow-up with one of the players. Russ Roberts discusses the game, how the addition of taxes might affect people's perception, and some of the discussion the original story has since generated. Do any of you use "taxes" when you play?

Debt and Growth

Is there a relationship between debt and growth? If so, what is it? If not, why worry about the level of debt that we or any other countries are accumulating?

To get an answer, we need to look at the impact of both external and internal debt on U.S. growth. And here are a couple of items that address those issues to varying extents.

In the first one, economists at the Federal Reserve Bank of St. Louis, while not looking directly at foreign debt, do look at the correlation of growth rates of major trading partners to the U.S. It shows that our rate of growth has varying correlations with that of some of our trading partners. That means that to varying degrees, their growth affects ours. But is there anything that indicates debt affects growth?

That question takes us to the second item. In a more complex piece on the VoxEU website, economists Carmen Reinhart and Kenneth Rogoff looked at growth rates and debt levels in a number of countries. Their results show that there may be reasons for concern if debt levels get too high. Essentially, very high levels of debt may slow growth. Given the interdependence of a globalized economy, this may explain why many economists are thinking that paring government debt may be helpful in the long run.

I don't think these articles are directly useful for the classroom, but I do think they can provide you with insights to integrate into your discussions and lectures. I welcome your thoughts.

Explaining Tax Cuts

A few days ago, Bryan Caplan at the Library of Economics and Liberty offered a logical explanation for providing cash to consumers as a method of fiscal stimulus.

The standard argument is you can't depend on consumers to spend it. (That's also often a reason that "government" can do it better.) But Bryan's analysis is worth looking at. Even if you think stimulating demand has problems (so does he); his idea of a cushion or comfort zone that needs to be rebuilt before effective demand kicks in is an interesting one.

More on Fiscal Policy

John Taylor has a good post on a recent study by Alan Blinder and Mark Zandi on the effectiveness of fiscal and financial intervention. Dr. Taylor found some faults with the paper. And other reputable blogs have joined the discussion.(HT to Russ Roberts at Cafe Hayek).

There was also a TV debate between Dr. Taylor and Dr. Zandi on PBS.


The debate was informative and showed some areas of agreement as well as disagreement - as most debates are likely to do. Here’s the link if you can’t get the video above.

All of the reading and watching are worthwhile for that unit on fiscal policy. After all, one of the questions you're likely to hear is "does/did it work?"

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.

Keynes vs. Hayek

There's been a lot of discussion in economics resurrecting the Keynesian approach vs. Hayekian approach to the downturn.  And I suspect most of you have seen this video.

(If you're having trouble viewing it on the blog, here's a direct link.)

But you may not have much knowledge of the actual debate these two eminent economists carried on in the newspaper. Thanks to Marginal Revolution, we link to an item on the Coordination Problem blog that includes access to a couple newspaper clippings from the 1930s. In it, the Cambridge economists (led by Keynes) are debating economists from the London School of Economics (led by Hayek).  For policy wonks or for people interested in the history of economics, this is good stuff.