Sunday, September 25, 2011

TBA reading for 9.30 - and some Barbara Streisand

To prepare for the library day, read my previous post, which presents a version of an informative argument. Also read Krugman and Sumner, which both do the same.

It occurs to me that one way of understanding what the Fed usually does, and what it is failing to do, is through this song:

Ordinarily changes in economic conditions are marginal. In a case when there's a slight increase in the desire to hold money, or money-like assets (such as short term, safe debt), the Fed move to lower or raise interest rates makes it a bit cheaper to get money, and that counteracts the sudden desire to be slightly more liquid, that is, to want a bit more liquid assets like money or things easily convertible into money. But it also says, in effect, "Hey, why did we change like this? Let's go back to the way we were. It was better." People notice that the Fed's actions are probably sufficient to return things to the way they were. So they start acting in the way they used to act. The Fed implicitly set a goal for its policy, and everyone got the message and acted.

What's happening now is that there was a large increase in the desire for liquidity which has not really changed. When the Fed says it wants to raise or lower longer term interest rates a bit, it is saying that it wants to lower that desire for liquidity a bit. But the desire for liquidity did not increase a bit--it increased a whole helluva lot. So to return things to the way they were, it's necessary for the Fed to do something that effectively signals that their goal is to return things to the way they were. Everyone sees the Fed as the bulwark against inflation. A bit of inflation--the good kind that raises wages and thus reduces debt burdens, increasing real income--would have to happen in the short run for the economy to recover, as some of the increase in demand will show up in the form of higher prices. So the Fed should say that they will allow some higher than average inflation as part of a period of higher than average economic growth. Not only is that good because it would help raise real income, but it would also be a signal to the general population that the Fed is thinking about the way we were and growing nostalgic.

Update: OK, just one more. You won't regret it as it's really short. Read here about the Trillion dollar coin idea, and click on the first embedded link for a discussion of its legality.

Thesis statements in the news - and my own informative argument

You might check out Saturday's episode of Weekend All Things Considered on NPR. It is a good example of how a popular discussion of economics can easily miss what is right under its nose, solely because it lacks an adequate informative argument. One way to understand a thesis statement is as an answer to the question: "What is the reality of X"? That's a different question from "tell me what you think about X" or "what are the facts about X"? There was nothing necessarily inaccurate, factually speaking, about what they were saying on this broadcast. It is their argument, their answer to the reality question, that ends up creating a highly misleading picture.

What we need is a different informative argument, that is, a different way of framing what is important about this issue. And with that, I present to you my own brief informative argument:

At one point in the NPR broadcast, the reporter says something to the effect of "why aren't economists providing us with answers about how to get out of the crisis"? But we know from our readings that they are--it's simply that the people asking such questions don't seem actually to want to hear the answers; they just want to keep asking the question. The reporters were continually framing monetary policy in terms of affecting interest rates, but they also noted that even in normal times, this is not a very good account of how to understand what the Fed does.

Of course, you already know that the statement "economists don't really understand why using interest rates works in ordinary times" is inaccurate. Our monetarists would already argue that it works because the Fed is actually increasing NGDP, and that interest rates are a secondary effect not really worth paying attention to. Our Keynesians would argue that it works because it changes inflation. Our moderate Marxists (think Joan Robinson) would argue, in a way that is not dissimilar to the Keynesians, that it reduces the hoarding of financial assets and money, and that in turn constitutes a sign to the capitalists that they will miss out on profiting from the coming boom if they don't start investing and hiring. Our radical Marxists would argue that the real problem is the use of money, and so instead of reducing the hoarding of money, they would say we should just move to a barter economy. The last prescription is a bit absurd, but notice that in terms of its explanation of the crisis, it is actually more accurate than the standard "the Fed only has one tool--raising and lowering interest rates" type of explanation. And unlike the interest rate story, all of the other arguments actually apply to the current situation, when interest rates on safe investments are already quite low.

The problem with the interest rate story is that the Fed's real goal is to lower the price of money, not to lower the price of borrowing money (credit). The first is akin to buying a house, the second is akin to renting one--the two are different markets which have a connection to each other, but it is not hard and fast (right now, rental prices for houses and apartments are shooting up even as home prices are continuing to fall). To achieve the goal of lowering the price of money, the Fed tries to get more money into circulation. But they cannot just give it away, as they would quickly lose all control over the supply and therefore the price of money. They need a way to signal that they can withdraw the newly created money at a moment's notice if the price of money starts dropping too quickly (more on this below). So what they do is buy government bonds, in effect making a loan to a very safe borrower--the government. That means that there is almost no risk that they won't be able to sell the bonds to someone else in the future at around the same price, and thus maintain control over the supply of money.

In normal times, buying government bonds increases the supply of safe credit, which in turn lowers its price. However, the most important effect of this is to increase the supply of money in circulation and to lower its price as safe borrowers begin to borrow more and thus to spend more. In effect, people are now "selling" a lot more money, thus lowering its price. In the current situation, however, loaning money to safe borrowers like the government does not lead to a growth in the supply of money in circulation. As we see in the case of the government, they are already taking advantage of low rates by borrowing a great deal, and thus are reluctant to borrow much more. This is because the price of safe credit is already extremely low, and cannot go much lower. Crucially, it cannot go negative--although who knows if the Congress would approve new borrowing even if the rate went negative (indeed, the inflation adjusted returns on some forms of government debt is already slightly negative).  So there is already more than enough credit available for safe borrowers, and indeed those who lend out money to them are just holding on to dollars as a store of value, not as something that they could loan out to borrowers who want to spend or invest.

One part of the problem is that the bad economy makes it so that there are far fewer safe borrowers, and so a very big increase in the amount of money loaned to safe borrowers leads to a very small increase in the supply of money in circulation. This is the phenomenon of hoarding--what the Keynesians call "the liquidity trap" and monetarists call "an excess demand for money." At this point, the interest story makes even less sense, because the real problem is that safe borrowers are not spending. First of all, there are far fewer of them due to the bad economy caused by the high price of money. Secondly, those few genuine safe borrowers know that the economy is bad because of the high price of money (which is different from the price of borrowing money--credit) and so they are reluctant to take on more debt, in case the price of money starts increasing again. If they knew that the price of money would fall, they would probably reconsider their decision. However, they need to hear this directly from the government. The Fed needs to come straight out and tell everyone that they want to lower the price of money. They are not saying this. The result is that high unemployment continues, because the price of money is not dropping.

We know that a recession is actually a pretty simple process. Money is a commodity not unlike gas. Gas is a necessity for almost all market transactions. Money is a necessity for all economic transactions. If suddenly the price of both goes way up (as happened in 2008), then people will have a hard time conducting business. That will put many people out of business. A recession happens.

The hard part of understanding this simple phenomenon is to imagine a notion like "the price of money." The price of a necessary commodity like gas is easy to measure: in terms of money. But how then do we measure the "price" of money? Well, we want to measure whether it is becoming easier or harder to turn one's labor into money. Monetarists measure this using NGDP growth rates. Keynesians measure this with the concept of inflation. Moderate Marxists use the concepts of unemployment and real incomes--whether or not people can find jobs and whether they can buy more things with their salaries after deducting the costs of servicing their debts.

Now obviously, we would want the price of gas to be as low as can be. There's no limit to how low we would want it to go. The reason for this is that sudden increases in prices of necessary goods not accompanied by sudden increases in wages mean that we have fewer resources at our disposal to buy things with. Rising prices but stagnant wages = :(

The same is basically true of money, with an additional caveat. In the case of gas, big increases in price are generally bad, and big decreases are generally good. Money, however, serves a very different function, and thus changes in its price work somewhat differently. It is still generally true that prices going down is better than prices going up. However, the strange thing is that even small increases in its price are very, very bad, while small decreases are good. However, big decreases can also be pretty bad, although perhaps not as bad as big increases. The reason for this odd asymmetry can be traced back to Hobbes and social contract theory. The function of money is to bring a kind of sovereign order to economic interaction. It allows us to measure the value of goods and services, and it allows us to make contracts, such as employment contracts, using a common measure of value. But there are many instances in which we don't build inflation into a contract.

One example is a mortgage. When we take out a loan, we have to pay back a fixed amount of money over time, and this is not adjusted for inflation or deflation. If deflation occurs--if the price of money rises--then, in a sense, the home buyer now must sell his money to the bank at the original price (a home of a certain size and value) even though it is now worth more (i.e., would buy a bigger or nicer house). This may seem selfish; however, the home buyer turns around and acts in just the same fashion. Because the money the worker owes is worth more, she wants to ensure that her employer does not lower her wages. In effect, she wants to keep the employer selling her money at the cheaper price; or to put it another way, she wants to keep the employer paying more for her labor, not in fixed dollar terms, but in inflation adjusted terms. This is because informal employment contracts generally do not adjust for the price of money--for inflation. If every worker would agree to sell his or her labor for money at the original price, there would be no problem. But because the worker is being squeezed by the bank and the credit card company, she cannot do this. So in turn, the employer has to choose which employees to keep on the payroll. They have to fire some workers. One result is an increase in productivity, as suddenly one worker is doing the job of all the fired employees. This is exactly what happened during the recent slump. And this is why even small increases in the price of money, i.e. deflation, is very, very bad.

Small decreases in the price of money, however, don't have this effect. If prices in general are going up, employers can simply charge more, and use this to pay their workers more, while their debts actually stay the same--so their real (inflation adjusted) income actually goes up. If prices in general are going down, then employers have to charge less, but they cannot pay less on debts that aren't inflation indexed, and they cannot pay less to workers, because the workers in turn are stuck in the same situation, unable to renegotiate their debts. So they lay people off, which then leads to another round of the same problem. This is why slight unexpected increases in inflation have a positive effect. Most people are debtors rather than creditors, so most people experience an increase in real wages during mild inflation because their debt burdens go down as their wages or incomes go up. The only downside is that there may be a slight lag between when prices rise and when a worker or business can increase their wages or prices. But this will eventually be made up by lowering debt burdens. With deflation, not only do businesses have to lower prices, but their debt burden goes up, and to make matters worse, they have a hard time lowering their employees salaries. In general, then, as with gas or other commodities, it is good for the price of money to go down and bad for it to go up. The only exception were if the price of money were dropping so fast that we could not count on it to retain the vast majority of its value in the very short run, say within the period of a few months, a few weeks, or even in extreme cases, a few days or hours (hyperinflation). This would be bad, because people would be reluctant to accept money, and we would return to some of the inefficiencies of a barter economy. It would become harder to save and to invest, and people would start to be hurt more and more by the lag between the increase in the prices they pay and the wages they receive. As long as that lag does not present a significant risk, then inflation is running at an acceptable level.

As you can see, there is no real mystery about recessions. Economists can explain them to those who will listen. And the explanation is simple. Recessions have to do with the price of a specific asset of prime importance--money. The ideal case is for the price of money, this one very special asset that alone has the property of being necessary to conduct any economic transaction whatsoever, to be falling at a steady and predictable rate. If it increases in value, businesses may pay lower prices, but they will also have less money to pay back their debts and pay their workers. As a result, real incomes go down. On the whole more people are losing than gaining, and this is detrimental to the overall health of the economy. This leads to a pessimistic outlook, which in turn further depresses spending and therefore prices. In the case of increases in prices, employers can pass on price increases to balance out their own increasing costs while their debt burdens stay the same. As a result, real incomes go up. Thus individuals and businesses have more money, and they also do not have to pay more to service their debt, which balances out the fact that they may have to pay higher prices. On the whole, more people are gaining rather than losing, and as most feel they have a slight advantage in this situation, they feel more confident, which in turn leads to more economic activity.

In monetarist terms: recessions occur because of a fall in NGDP, which leads to falling real incomes.

In Keynesian terms: recessions occur because of deflation, which increases debt burdens and lowers real incomes.

In Marxist terms (also similar to Keynesian terms): recessions occur because the creditor class attempts to benefit at the expense of the debtor class, which harms the overall economy.

In my terms: recessions happen because people have the wrong thesis statements about economic policy.

Thursday, September 22, 2011

Essay #2

We'll be meeting in the library this Wednesday, Sept. 28, in room 041, to prepare for the next essay, which will be due Friday, Oct. 7th.

Our eventual goal in the class is to produce a term paper that offers a detailed policy analysis of a particular topic of interest to you and which is informed by the classical economists we have read.

In preparation for this, our next paper will aim at producing an analytical summary of a particular policy issue. For this assignment, I want you to design an argumentative paper that explains and informs a general reader about your particular policy. Do not list disjointed pieces of information about the subject, but rather make an informative argument about what people often misunderstand about your issue, how it is possible to clear up those misperceptions, and what is most important to know about your issue in order to understand it most accurately. In other words, you want to explore the argumentative potential of informational modes of discourse, rather than just list facts.

Do not feel that you are stuck with whatever topic you choose. In fact, I want us to use this assignment as an opportunity for teaching each other about various different policies. After we turn in this paper, I want us to briefly share our findings with the class through short, informal, 5-10 minute presentations. Just prepare a small handout that distills your findings and then present it to the class. Hopefully, this will serve as a kind of "topics fair" that allows the class to explore a wide variety of different subjects that might be of interest to them.

For this paper, I'll ask that you include at least two academic sources (books, journal articles). You can of course use the blogs we have been reading or other similar websites, but avoid using online encyclopedias or informational websites (, for example) as a source from now on. You can read these for background information, but don't cite them as sources. The paper should be in the neighborhood of 4-5 pages double spaced, in 12 point Times New Roman Font, with one inch margins all around.

Finally, remember that the more specific you can be, the better. Medicare is a better topic than health insurance in general; the Medicare Independent Payment Advisory Board (IPAB) is a better topic than Medicare in general; and comparisons of two specific cost-reduction schemes associated with IPAB is a better topic than IPAB in general.

Wednesday, September 21, 2011

Monday, September 19, 2011

TBA reading for 9.21

To give you a sense of the variety of opinions over why there is not a bigger response to the economic crisis, take a look at these two articles. In reality, the divide between members of the "dovish" camp we read about is often just as big as that between them and the hawks.


I just noticed this other Krugman article, which goes into detail on the question of inflation we have talked about: Could be helpful.

Update to the Update:

Ok, one more libertarian post just to balance out the liberal post. But this one is really funny, and with the Federal Reserve meeting coming up this week, it is very timely. Also, the Bernanke's nickname is "Helicopter Ben." This article explains a little bit about the notion behind that name:

Monday, September 12, 2011

TBA reading for 9.14

For Wednesday:

1. Read this. Respond to it in the comments section below this post.

2. Finish online library quizzes.

3. Start following this blog if you haven't, and start your own blog for next week. In the future, we will post responses on our own blogs, and I'll have you respond to at least two other people's posts as well.

Wednesday, September 7, 2011

A quick run down on concepts from today...

Hey Gang,

Great work today sifting through a lot of complicated information. Here's a quick guide to some of the concepts we discussed.

Gold standard: In a gold standard, the government maintains a constant price for gold, either by agreeing to always buy and sell gold at that price, or by intervening in the gold market such that the price does not go above or below that figure (it was $20.67/ounce in 1933 when the U.S. left the gold standard).

Fiat money regime: a monetary system in which the government maintains the value of currency only through its "full faith and credit," that is, by guaranteeing to restrain money growth such that only a tiny amount of inflation can occur. In other words, the government guarantees to maintain a modest but upward growth in the level of prices overall, rather than maintaining a specific price for gold or some other metal.

Nominal Gross Domestic Product (NGDP): the current-dollar value of all goods and services produced. Another way to say this is that NGDP is the total level of spending on all goods and services measured in dollars NOT adjusted for inflation. So NGDP = Real GDP + inflation. NGPD is currently far below the pre-2008 trend level of growth. A period of above pre-crisis average growth would be required to return NGDP to the trajectory it was on.

Real Gross Domestic Product (RGDP): The total value of all goods and services produced, adjusted for inflation (i.e., in constant, rather than current, dollars). To arrive at this number, economists apply a "deflator" to NGDP. When people speak of a "price deflator," they are talking about a measure of inflation, for this is the amount we have to deflate NGDP to arrive at RGDP.

Inflation targeting: the current method used by most central banks to conduct monetary policy. The central bank limits the growth in prices to a certain range. Currently, the Federal Reserve (the U.S. central bank) targets between 1 and 2 percent inflation (a lower rate than before the crisis, when the target was usually 2-3 percent). In practice, central banks often use short term interest rates as a way of gauging how stimulative their policies are. When commentators speak of the Fed "lowering" or "raising" interest rates, what this means is that the government is creating more money and uses certain interest rates to measure the impact this action is having. They never directly raise or lower interest rates. By the same token, although people often speak of the government "printing" money, they don't directly print it either, but rather transfer it electronically by purchasing government bonds. By law, the government must exchange the money they create for a safe financial asset, usually government bonds. This ensures that they cannot really "print money" in the sense of creating new currency to finance the government itself, but must buy assets which in turn can be sold in order to withdraw new money from circulation.

Level targeting: a system in which the central bank targets a specific growth rate of either inflation or NGDP, but makes up for past undershooting or overshooting of the target. For example, if a central bank is targeting a 2% level of inflation, and in a particular year inflation is 1 percent, in the following year the central bank will aim for slightly above 3% inflation to return to the previous trend. Before 2008, NGDP generally grew around 5% a year. If, as happened in 2008, NGDP fell about 8% below its average growth rate, it would take a little over 17 percent growth to return to trend.

Quasi-monetarism: a generally libertarian philosophy derived from the work of the right-wing Milton Friedman. Quasi-monetarists argue that Central Banks should stabilize the level of NGDP, targeting a specific rate of growth, and making up for overshooting or undershooting. 

New Keynesianism: similar to quasi-monetarism, but traces its roots back to the more left-wing John Maynard Keynes. New Keynesians favor interest rate targeting until short term rates hit zero, at which point they favor level targeting of inflation (i.e., targeting a specific rate of increase in prices, but making up for overshooting or undershooting).

Here is a good graph of NGDP over the past few years, from an article in which one blogger from our list discusses another blogger from our list talking about a third blogger (not from our list). The article discusses the difference between a level target (which makes up for overshoots and undershoots) and a rate-of-growth target (which doesn't).

Update: Libertarian-leaning David Beckworth (the blogger cited in the post above by Delong) here lays out a simple method by which monetary policy could have a major positive effect on the economy. 

Tuesday, September 6, 2011

TBA reading for 9.7

Check out the following NY Times piece, which discusses views on The Federal Reserve. In the future, I'll try to post the Wednesday reading before Monday's class to give everyone time to do their own blog post (remember to start a blog on this site and follow our classes page!) and to respond to two other blog posts. For now, though, just leave a quick comment on this post. Somewhere in your response, provide a provocative, thesis-like statement that we can discuss tomorrow.

Thursday, September 1, 2011

MLA and Baker

For more information on MLA, see here.

For more information on the new Dean Baker book, see here.

Basic summary of MLA: It consists of a Works Cited list starting on the top of a separate page at the end of the paper, which contains all the various sources you refer to in the body of the paper whether in paraphrasing or in quoting, and of in-text citations in parentheses. To cite paraphrases, just place the author's last name and the page number at the end of the sentence in parentheses, with the period outside the parentheses [example (Freud 8)]. For quotes, just add in quotation marks around the direct quotation and place the citation again in parentheses at the end of the sentence. If you refer to the author in the sentence and are not referencing a specific page, then you do not need an in-text citation beyond the mention of the name.

The basic rule-of-thumb for MLA is to give as much information in the Works Cited as needed so that a reader can find your source (author, title, publisher, date of publication, title of publication if the work appears in a journal or magazine or newspaper, translator, etc.); for the in-text citations, list only as much information as needed to find the source in the list at the end of the paper. The custom is to start with author's last name and page number, then add a shortened version of the title, and finally a first initial if there is still confusion.

So: (Freud 8), (Freud, Dreams 8), and (S. Freud, Dreams 8)

Essay 1

Essay 1: Finding our way between Ethics and Economics

For this first essay, we will compose a short (3-4) page essay focused primarily on developing a thesis and supporting it. We will focus more on research later; for now, let’s just practice developing a claim and supporting it. For this essay, you can write about almost anything that has something of a connection to our readings or to our class discussions. Here’s some general topics you might consider writing about:

1. Compare and contrast the ideas of two different theorists we have read, and develop a thesis that shows how their different assumptions about ethics leads to different ideas about economics. Don’t worry about explaining everything about their ideas. This isn’t a report, but rather a paper focused on developing your own argument. An easy way to approach this paper would be to pick a quote from each writer and focus your paper entirely on showing the important differences that develop from the different ideas each writer expresses in those quotes.

2. Apply some of the ideas we have been discussing to current events. Pick an idea or two from a writer or two and attempt to explain what these show about a contemporary debate in current affairs. What would Hobbes say about the way we finance pharmaceutical research, for example. What would Mandeville think of restrictions on immigration? These are just a few examples of what you could write about. You could also combine this with option 1 and write about differences in how classical theorists might explain contemporary events.

3. Pick a provocative quote from one writer we have read and explain some of its larger implications about the relationship between ethics and economics. If you had a strong reaction to something one of the writers we read said, try to formulate in a more formal, analytic language what that is and then explain the nature of your reaction. What larger implications does this quote present?

4. Take a look at the new Dean Baker book, which IS available for free online. Here Baker goes into a lot more detail about some of his claims. Evaluate some of Baker’s more detailed analyses. Explain or define the relationship between this more extensive presentation and what we read earlier. Rather than just agreeing or disagreeing with Baker, try instead to demonstrate how things become more complicated as the details become more specific.

Whatever option you pick, or whether or not you pick one of the above options, try to avoid falling into the twin dangers of offering a book report or a harsh polemic. Avoid opinionated language like “I think,” “I believe,” “is wrong,” “is right,” “is good,” “is bad,” “contradicts him/herself,” etc. Also avoid summarizing or listing a series of facts without connecting them back to your thesis or explaining why they are important. The easiest way to do this is to present a clear thesis that sympathetically approaches your subject matter without becoming overly enamored of it.

I’ll primarily be looking for three things: a clearly defined and argumentative thesis; formal, analytic language; and a detailed analysis of the thesis and its implications. For citations, use MLA style (a works cited list with in-text citations). Bring a rough draft of ~2 pages for 9/9. The final is due 9/16.

Download the Word file here.