Final paper

For the final paper, you will produce a policy primer, policy analysis, or position paper that, first of all, argues for a particular policy or for a way of understanding policy. Feel free to adopt a broad understanding of what constitutes public policy. You don't necessarily need to write about economics in the narrowest sense. You could investigate some of the moral or political issues involved in a topic, you could analyze or investigate a case study (a famous musician, company, person, film, etc. etc.) of interest to you, or you could explore the history of a particular concept, notion, cultural trend, etc., that is part of our everyday life. In other words, don't feel overly limited. All that I ask is that you explore your topic in detail, do meticulous research, and examine the significance of the issue you are considering. In short, explore some of the drier, more seemingly abstruse aspects of something that we experience in our day to day lives--the more seemingly boring, reasoned side of life can be interesting in and of itself if we can relate it to things that matter for our daily concerns. Your key task as a policy writer is to be able to translate from the boring to the interesting and back, showing how these two perspectives, which may seem unrelated, ultimately are intimately linked to one another. Any piece that does this is in a broad sense a policy analysis, and these are the important skills that you should take from this course and apply to your future writing. 


Make sure that you are pursuing a topic of interest to you, something that allows you to produce an informative, interesting, and analytically incisive essay: in a relatively short space, it should clarify the most important aspects of an issue, compare some of the different ideas/perspectives on the topic, reveal the merits and demerits of those policies (or the perspectives you are considering on your topic), and most importantly, convincingly establish why we should lean toward a specific policy (or if the paper is less about advocating and more about analyzing, why we should lean toward a specific way of understanding a policy or topic.)

The paper is due Thursday, April 26th, by 5pm. It should be 7-10 pages long, double spaced, in 12 point, Times New Roman font, with 1 inch margins, and it should contain 7+ sources.

TBA readings for 3.28

Some readings about Keystone XL here and here. Reading about oil prices here.

TBA Readings for 3.21: Worker Productivity and Occupy March Madness

For more on March Madness from a slightly different perspective, check out the articles here and here. Think about the following question: what set of policy choices make this time of year possible? What combination of private institutional choices, laws, regulations, subsidies, and tax incentives create the madness?

Update: some optional readings and more about our discussion last Wednesday.

I see that there's some interest in inflation, so I thought I'd post a few additional links for those who want to read up on the subject of monetary policy. First, a clarification: we do not necessarily want inflation, but inflation will probably occur as the level of spending in the economy increases (this is what the SRAS curve indicates). Spending is the fuel for a modern monetary economy like our own in the same way that food is fuel for people. If we feed a starving person, they may gain a little bit of fat, but they will mostly gain muscle. If we stimulate a depressed economy, a little bit of inflation might occur, but mostly this will produce real economic growth. Right now many people are saying that we need to keep spending low despite the depressed economy because of the risk of inflation. This is a bit like saying we should not feed a starving patient because it is always and everywhere bad to gain fat.

The infuriating irony is that the Fed helped to create a lot of the hysteria over inflation by mismanaging policy. They decided the problem was lack of liquidity in the financial markets, not a weak overall economy, and they then injected so much liquidity that it risked hyperinflation to let it circulate as money. Arguably, this tightened money for the economy as a whole as a result. This article from back during the heights of the crisis shows how the Fed had to sacrifice stimulating the economy and thus allowing a bit of inflation in order to pursue its policy of assisting financial markets (or "bank bailouts" if you will). This article shows that even a bit earlier people already realized that there were problems with the chosen policy. This article explains the progress of the various asset purchasing programs that came to be known as Quantitative Easing, round 1 (QE1), and it shows how once the Fed realized it needed to do more, it basically kept going with the same formula: inject huge sums of liquidity that won't actually circulate as money. Finally, for an article sympathetic to Bernanke, check out this piece.

Update update: This link provides a cool interactive graph that lets you see how the Fed's balance sheet (basically, a list of the assets it buys with the liquidity it creates) has evolved over time. It "pays" for these by issuing liabilities. Usually these liabilities consist of Federal Reserve Notes--hard currency--or reserves that can be easily converted into currency. This stimulates the economy when it is depressed by having more money circulate. However, they created so much liquidity that they couldn't "afford" to allow that money to stimulate the economy, so they had the Treasury borrow it back and also paid banks to keep much of the money on deposit at the Fed. The obvious question: why not just create less liquidity and pay for it by stimulating the economy, rather than creating a laughable amount of liquidity and paying for it by borrowing money?

Clarifying current policy failure

Check out this blog post if you are interested in how the Fed can "print money" like crazy (actually, most of the electronically-created money is never turned into printed hard currency) while inflation stays low and the economy depressed.

One more thing to remember as we prepare for Wednesday: the ultimate goal of our policy studies is to help learn the skill of constructing arguments. Public policy is of course a worthwhile study in itself, but it is also an immensely effective context--and the Freshman Seminar is supposed to provide an introduction to argumentation in "a content-rich environment"--for advancing this end, as it forces us to translate complicated ideas, ideas that we may not even have the capacity to fully grasp on a purely technical level, into coherent and clear sets of arguments that emphasize why these technical details matter for the bigger picture. That is, public policy by its very nature forces us to state what matters about complex issues, which is precisely what a good argument does. So don't get bogged down in details--stay focused on the big picture. If you can do this with a complicated post like the above, you can do it with anything.

Update: I see no one has yet posted questions/links--no doubt this is because you are thinking so deeply about questions that you haven't had the time :)

Anyway, just to make it a bit easier and perhaps more fun, I just wanted to suggest some other ways to approach the assignment. I asked folks to post a question and, if they had one, a link that helped them answer that question. But it may be better if folks posted a question and then a link that helped them understand a different topic--after all, presumably that link has already answered the initial question. That way, we can get a sense of what is still murky and then have some resources available that might have helped folks answer some other questions. No doubt it will turn out that some of you end up answering the questions of others. And if you only have a question or a good link but can't think of both, that's fine as well.

The "Oil Theory" of the recession we discussed the other day, as distorted by the GOP primary

Here's a bit more to keep you busy on Friday. Check out this article, which explains how there is a type of truth in what Rick Santorum said about the recession recently, namely that rising gas prices contributed to it. Now, Santorum was arguing that Obama magically caused high gas prices even though he wasn't President yet, and that this caused people to default on their mortgages. The first part is absurd, and the timing does not support the second part, as much of the decline in housing already had happened before mid-2008 when gas prices spiked. But Santorum may accidentally have hit on a truth, in that high gas prices could have caused monetary policy to respond less aggressively than needed, thus helping to fuel the vicious cycle that turned an ordinary recession into The Great Recession.

Essay 3 - and the Greed Study

The goal of Essay #3 is to take us one step closer to producing our final term paper by going a little bit deeper into an issue of interest to you. In the last essay, we produced an informative argument that attempted to clarify misconceptions and highlight the most important aspects of an issue. Basically, you created a framework to help an intelligent layperson approach an issue in a general way. In this essay, we will focus less on explaining the broad outlines of a topic and instead provide an account of different positions on an issue and how those differences come about. In this assignment, you will provide a framework to help an intelligent layperson understand how different assumptions about what facts are most important, what values are most pressing, and what outcomes are most desirable lead to different proposals regarding one and the same issue. Your opening paragraph should clearly define the issue you are discussing and the various positions you will compare; your thesis should provide a precise account of how those positions differ and what accounts for those differences.

For example: if we were comparing/contrasting proposals to reform Social Security by instituting personal accounts, on the one hand, and by eliminating the payroll tax and replacing it with a more progressive tax, on the other, we might argue the following: "This dispute arises from a different understanding of what Social Security is and should be: whereas proponents of private accounts see Social Security as akin to an investment in a private retirement account, and thus have no problem with the system leading to radically different payouts to beneficiaries depending on the performance of those accounts, proponents of changing merely the financing of Social Security see the program as part of the safety net designed to provide a minimum standard of retirement income regardless of how much an individual may have paid into the system before retirement." As you can see, once again it is best to focus on 2-3 proposals that are as specific as possible, which will make it easier to clearly define the reasons for those differences. The proposals need not be from radically different ideological camps as in the above example; instead, it would be perfectly acceptable to demonstrate how the same ideology can also lead to different policy prescriptions as a result of subtler differences.

Bring a rough draft of the paper to class on Friday, March 16 and Friday, March 23. The final paper will be due Tuesday, March 27 by 5pm. The final draft should be 4-6 pages in 12 point Times New Roman Font with 1 inch margins. Use MLA to cite your sources (you'll probably need at least 3-5 sources to really start to get a handle on your topic). 


For those interested in the topic of greed, you might check out this study, which produced an experiment similar to the ones described by Niko. 

TBA discussion for 2.22 -- Keynes, Brazil, and American Exceptionalism

Oops, I forgot to have us vote on a specific topic today. But I realized that this may present us with an opportunity to practice a useful research skill: mastering a lot of material in a short time. In college, you will no doubt eventually encounter a period in which you simply have more reading than you can possibly do. In such moments, you need to deploy strategic reading, in which you try to create a conceptual map of the arguments and ideas that are at stake without painstakingly reading every word. This is also an important research skill, as it will enable you to quickly locate your place regarding topics that have a lot of information available.

When confronted with a great deal of information on a given topic that would otherwise be unmanageable, read primarily to get the overall argument while paying less attention to details. So for this task, I'm going to have you try to get a sense of the broader issues at stake without spending too much time on it: aim to spend less than one hour on all of the following links:

John blogged about Keynes, and I thought we might talk a bit about his ideas. Check out articles here and here.

Shelby linked to two articles on poverty programs. Check them out here.

(This may seem like a lot, but it is really just about 5-6 pages of reading--you probably will actually have time to read all completely, but in any case it is a good example of how an amount of reading that in other contexts would seem manageable can suddenly seem overwhelming. You only can be overwhelmed if you let yourself be!)

Last but not least, Rachel brought us some more videos, including a Stossel. These are a bit longer, but you can probably get the gist in a few minutes.

Again, this may seem a lot, but you can easily pull it all off in less than an hour if you use your time efficiently.

For Friday, 2.17 (and my own weekly post)

We'll be meeting again in room 041 to start research on our papers. Don't worry about bringing a rough draft for this week. We'll do peer editing next week after people have had some more time to conduct some research.

Thanks for the fun discussion today. After thinking about the two topics in tandem, it occurred to me that monetary policy--see here for more information on what Japan did today--is also a good example of framing bias in action: using phrases like "printing money" or "inflating the money supply" sends people from all over the political spectrum into a tizzy. Marxists see an attempt by the central bank to pump money into the hands of rich people without creating any jobs (see here and here); a certain strain of libertarian sees the government trying to steal the hard earned dollars of savers (see here and here).

However, in other contexts, the very same Marxists, as well as a different stripe of libertarian, are perfectly willing to see increasing aggregate demand as the solution to recessions caused by declines in spending. So while these individuals may be all against "printing money" and will decry the tyranny of the Federal Reserve--either for stealing wealth or for concentrating it in the hands of the rich--they are all for increasing aggregate demand. (By the way, the Fed does not actually print money, but rather uses open market operations to increase the money supply by purchasing government bonds, which are credited instantly and electronically to the bank account of the seller--doing it this way ensures the Fed is not just creating money recklessly as they now have an asset, and they can sell those same bonds in the future and withdraw the same money from circulation when the time comes).

The problem is that in a monetary economy--that is, in all modern advanced economies--these are one and the same thing. Increasing the money supply is how the level of aggregate demand adjusts.

Indeed, the very scary prospect of "printing money" is at the same time the rather dry and straightforward concept of controlling demand to produce full employment. This is symbolized by Y* in the graph below, the point after which more demand produces higher prices rather than more output because the economy simply can't produce more goods--thus additional demand just bids up the price of the current supply. (Think of it this way: Let's say there's a town where everyone is working half as hard as they woud like to be working. Businesses are only doing half the business they could be doing. Factories are only producing half the products they could be making. One day, a bunch of rich people from out of town moves in and starts buying more things. Suddenly everyone is working as much as they can. Factories are producing as much as they can. Restaurants are filled at all hours of the day. But then suddenly more rich people move in and start spending money. Until new factories and new businesses open up (which does not happen overnight), all that extra spending will do is drive up the prices of current output as more rich people compete for the same number of things--tables at restaurants, goods produced by factories, labor for their homes, etc.)

Right now almost everyone is for more aggregate demand (although they may disagree over why there is a shortfall); and yet many people who consider themselves mainstream and possessed of sensible and temperate views on economics are publicly falling into dyspeptic rages denouncing the madmen at the Fed. 

As one economist has pointed out, something about money just drives people batty. Ultimately, perhaps it is Marx who best explains why this is: even when it is in the form of gold, money somehow symbolizes the great trust that we have to put in our fellow humans in a complex modern society with an intricate economic system. This makes radical individualist types nervous. On the other hand, just as for some it symbolizes the inherently social nature of value--Robinson Crusoe found that money was useless on his island--it also symbolizes the seemingly unfortunate need to alienate and reify this underlying social cooperation in the form of a financial instrument--something that makes radical communitarian types nervous. 

But money is necessary because some general store of value is necessary for the economy--otherwise, we fall back into the inefficiencies of a barter economy. Indeed, Barter is so inefficient that some have even challenged the notion that there was a stage of human development before money, claiming instead that bartering never existed on a mass scale--people may fall into barter during certain times of economic necessity like hyperinflation or in places like prison, but it's never been widespread according to this view (and indeed, even in such circumstances a money-like object will often come into existence--think of the role of cigarettes in films about prison). 

As for the evolution of the monetary system itself, both Marxist and libertarians are often convinced that the Federal Reserve is some evil plot on the part of a shadowy, plutocratic elite. However, it turns out that there are good reasons why we first developed gold as the primary form of money and then moved on past it, and they are anything but conspiratorial. Rather, it is chemistry and basic macroeconomics that explains this evolution. Money has to be stable, compact and solid, and rare in order to serve its social function as a store of value, a medium of exchange, and a unit of account--if it quickly degenerated, was too bulky or heavy, or was extremely common, it would be difficult to carry about or to control the supply and thus fix its value. Most elements are either unstable, bulky, or hard to handle (in some cases because they are gases), even some modern precious metals like platinum have such high melting points that they are difficult to refine. So gold became money (for more on this, check out this podcast). This was a fine arrangement as long as the gold supply was expanding at a quick enough rate to support economic development. Once that stopped being the case, gold was no longer convenient. For an economy in which output was expanding at a faster rate than gold to remain on the gold standard, the price of everything at once would have to fall. The problem is that this is difficult for an economy. So instead of this happening, some prices fall, while there is just less demand for other things, leading to reduced output and unemployment. 

To counteract this problem, we just invented our own synthetic money--people were used to the government issuing certificates for gold, so why not just have them issue certificates that were very elaborate and hard to copy. These certificates met the same requirements as gold itself. They were stable and compact, but most importantly, the exact scarcity of these things could be controlled so that prices for stuff keep rising at a minimal but steady rate. This avoids periods of deflation and the recessions related thereto. Of course, then we have to trust the government not to make too much of the stuff. But even under the gold standard, we had to trust the government when it said that it had gold in its vaults. We have to trust the government to keep the price of gold stable. Indeed, in a manner of speaking we might think of this as a form of government intervention into the market--the ideal price system lets the cost of everything fluctuate rather than fixing the cost of some items. Again, this is framing bias in action: most libertarians would vociferously denounce a government plan to set the price of milk, and yet some trust the government to set the price of gold! 

So if we are going to have to trust the government no matter what currency system we adopt, shouldn't we at least pick the system that allows markets to operate freely and efficiently while avoiding periodic severe depressions? Under a gold standard--or a milk standard, or a gasoline standard, or a platinum standard, or a college tuition standard, or a yoga lessons standard, or any standard in which the government guarantees the value of money in terms of one particular good or service--we not only have to trust the government to keep enough gold around, but we still have to trust them not to print too much money relative to the amount of gold they are holding. Is having to trust the government to do two things instead of just one really worth a less efficient price system and the threat of depressions? Once again it's the problem of framing bias: everyone wants full employment and everyone wants stable prices. And while a gold standard sounds like the best way to do this, and while inflation targeting sounds like a terrible way to do this, it is really only with the advent of the latter system that we have been able to maintain stable prices and full employment for any significant period of time.