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Prison Planent -- [|50 Facts About the Economy]

The link is forwarded to me by Carl Herman.

Joesph Stiglitz on Inequality

Mr. Stiglitz won the Nobel Prize in economics. His take on the Occupy Wall Street deserves review. His article on Slate is [|here.] Rent seeking is a term that refers to activities that keeps resources captured because of monopoly power. Also money buys political influence and favors. Markets don't always work perfectly but free markets are better than government controlled markets even if there is inequality.

Occupy

With so many protests such as occupy Wall Street and occupy Main Street, one has to wonder what point the protestors are making. Are they disgruntled about income inequality, wealth inequality, inequality to resources, inequality of opportunity, or equality of rights? When news reporters interview occupy demonstrators, they fail to arrive at a consensus at the reasons for their demonstrations.

Every year I start my classes with high expectations and enthusiasm that this year will be the year. Each student comes in with a fresh start. All students begin the year with the same grade that was equally distributed. All students line up at the same starting line. Within three weeks, I notice that there are students who leading the pack while there are others who haven’t even warmed up yet. They all start at the same time, but don’t stay together throughout the semester. Would it be fair to take Angie’s points that she earned and give it to Bert who doesn’t have any because Bert has been playing on Facebook, playing football, or busy with outside activities?

We all have different abilities, interests, goals and the like. Over time, these differences manifest themselves in differences in income and wealth. Where we start at in a race does matter as anyone who runs the Bix knows. But why should we arbitrarily redistribute income right now? Would this redistribution help the economy grow and give equal opportunity to all members of the United States? If this would revive the health of the economy, then I would agree with it. But before you quickly dismiss this issue, consider the next point.

For anyone who thinks the 99% are right should consider this. Suppose the 5% of American earners who earn 95% of the income in the world have to give the income to the rest of the citizens in the states who don’t earn as much. Would this be fair? For those of you who think this is fair, then you should know that citizens in the United States are richer than 95% of the rest of the world so give your wealth to the Ghana, India, and Vietnam. How many of you would be willing to share your income with the rest of the world? If that isn’t persuasive enough, then try this. For one day, please come over to my house and work and I’ll pay you. But after you get paid, please give your income to United Way, Salvation Army, or another charity. Then you will understand my argument.

When people consider the redistribution of wealth, they only look at a situation that improves their situation. It makes sense to me that if 95% of the world is hungry, that there would be so many protestors occupying Wall Street. If they are right, for how long?

Does Government Spending Work?

The Huffington Post has an article about the 3 trillion that the fed loaned over 21,000 institutions [|here].

Please read this blog post. The Post is noted as a reputable source.

Debt as a Percentage of GDP

[|This is a very cool radial map].

Mr. Harford is a brilliant writer whose book, The Undercover Economist" was a best seller. Here's part of a blog he wrote for the Financial Times. Should the government hire people to bury banknotes down disused mine shafts, thus stimulating the private sector to dig them up again? Keynes argued that there were circumstances in which even government spending as wasteful as this could be economically worthwhile, and ever since he did, people have been tying themselves in knots about how fiscal stimulus actually works.
 * Tim Harford on the Multiplier and Government Spending**

The link i**s here.**
 * The Budget**

http://www.nytimes.com/roomfordebate/2010/11/14/16-ways-to-cut-the-deficit

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This is an interactive deficit puzzle that is OUTSTANDING. []




 * Classical Economics**

If you're a classical economist, you want the government to keep their hands off the economy. Here's a quote from humorist, Will Rogers. "I don't make jokes. I just watch the government and report the facts."

Here's a joke about government logic.

Once upon a time the government had a vast scrap yard in the middle of a desert. Congress said,"Someone may steal from it at night." So they created a night watchman position and hired a person for the job. Then Congress said,"How does the watchman do his job without instruction?" So they created a planning department and hired two people, one person to write the instructions, and one person to do time studies. Then Congress said,"How will we know the night watchman is doing the tasks correctly?" So they created a Quality Control department and hired two people. One to do the studies and one to write the reports. Then Congress said,"How are these people going to get paid?" So they created the following positions, a time keeper, and a payroll officer, then hired two people. Then Congress said,"Who will be accountable for all of these people?" So they created an administrative section and hired three people, an Administrative Officer, Assistant Administrative Officer, and a Legal Secretary. Then Congress said,"We have had this command in operation for one year and we are $18,000 over budget, we must cutback overall cost." So they laid off the night watchman.

I invite you to add your own jokes.



Keynes would agree with this don't you agree?


 * Does Math Pay?**



This article was "taken" from the Wall Street Journal. I post this for two reasons. One reason is to show that economics does have value. The other reason is to show where an English major fits into the relative wage. English is important so why does it fall so low on the payday list? The down and dirty answer is that there are a lot of students who go into this area. Whenever there are a lot of people crowded into a field, the wages are low. Look at the English Department at MHS. How many English teachers are women? There's a tendency for women to enter this field and this is one reason why women's pay lags behind men's.


 * How Does Real Wages Change with the Price Level**

Your real wages are the amounts of goods you can buy with inflation removed. Economists divide the nominal wage by the price leve. Thus, NWage/Pl equals real Wages. For example, if Juan makes $20 per hour and the price level is 1, his wages buy $20 of real goods. If the price level raises to 2, his real wage is $10. Economics predicts that employers will demand more workers when the real wage is lower.



For Beth,

I can't get the images to load. [|Here's a link] to the whole blog with the images. There are two concepts about the nominal interest rate, i that you should know. One concept describes the slope of the AD curve and the other, a shift in AD. I will show how the interest rate, i, describes the slope first, and then describe a shift.

One major concept of economics is scarcity. What happens when a good becomes scare? Economists say that the “price” of the good increases. The price of money is the nominal interest rate. The supply of money is fixed, so when people demand more money, the price rises. Here’s an example. Suppose that when the price level is 1.23 the nominal interest rate, i, is 3% and the quantity of money to use to make purchases is 10 Billion. The graph would look like this:
 * The Slope of AD**

At 3%, the market clears and 10 billion dollars is used to consumer GDP. So what would happen is inflation suddenly made the price level rise to 1.28?

People still want to buy a fixed market basket of goods, so they demand more money to make transactions. When the demand increases, the MD curves shifts to the right and the nominal interest rate, i, rises. This is shown in the graph below. In this example, demand for money increases, to that the nominal interest rate increases to 3.5%. Consumers find that at the higher price level and higher interest rate that they can’t consume durables and their loans have become more expensive. Businesses find that they can’t invest in new residential housing, inventory, or capital goods. So the AD has a downward slope that reflects the higher cost of borrowing when the price level changes.

What would cause the MS curve to shift? The price level can’t change because that would move you along the curve. Something else has to change. The something else that changes is the money supply, or MS. Suppose that the money supply increases. This will move the MS curve to the right. The nominal interest rate drops, and borrowing for durables and investing becomes cheaper. When something becomes cheaper, people do more of it. So the AD curve shifts to the right as the graph below shows.
 * Shifts in the AD**

Perhaps the money supply increases to 12 billion. Now money is not as scare. People spend it. Businesses invest it.

Check your understanding by answer the following question. What would happen to the AD curve if the money supply was reduced?

October 19, 2010. Yesterday, I made a remark about the value of macroeconomics. [|Here is the article]in which Nobel winner, Paul Krugman, writes that macroeconomics has contributed nothing for the last 60 years. [|Here is a reply]to Paul's comment. I think areas where macro has contributed to understanding the economy is in banking and international trade.

When a job becomes obsolete because of structural changes in the workforce, those workers are "structurally" unemployed. [|Here is a cliche list of jobs]in which technology has replaced workers. Remember that structural unemployment is good since it means that the economy is creating jobs and destroying the inefficient ones. If you are worried about technology taking your job, remember that technology is a complementary good to a skilled labor force and a substititue for an unskilled. Keep investing in your human capital so that technology is a complement to your skills. I recommend that you study art, music, and design.

Can the government legislate wages and prices? [|Here's what happened in 1971] when President Richard M. Nixon froze wages and prices? In was an 8th grade at the time and applauded this move. Click on the link below to see how much the government can control the economy. When Mr. Nixon resigned, I felt a loss of hope as Nixon was a man I admired. From his resignation I have always been distrustful of big government. If you ever have time to watch Frost/Nixon, you will see the man I looked up to.

Kenny, Here's link to FRED data series, [|FGCEA], Government Consumption and Gross Investment. From 2007 to 2008, GS increased 10.61149%. From 2008 to 2009, GS increased 5.528%. The absolute spending increased from 976.3 billion to 1139.6 billion over this period. What happened to the unemployment rate? Using FRED data series, [|UNRATE], the unemployment rate increased from 4.6% on January 1, 2007 to 9.6% on September 1, 2010. If the government can increase income, GDP, and employment by spending, how come unemployment increase by 5%? Now from just a plain logical viewpoint, if government spending worked, would it matter who we elected? Couldn't the government use a computer to automatically increase government spending? Also, where does the government get the money to spend?

Erica, [|AMOSweb].com is the best place to go to when I can't answer a question with the usual models. Friday, you asked about the role of the interest rate in moving along the AD curve and in shifting the AD curve. Click on this link to see what [|AMOSweb.com] has to say. To answer your question, I think the textbook makes a very muddled difference between a rise in the interest rate when the price level rises and a rise in the interest rate caused by another factor not related to the price level. For example, If the Federal Reserve Bank, decreases the money supply, interest rates will rise and the AD will shift to the left. On the other hand, if the price level rises because of an increase in the price level, then consumers demand more money at the current quantity of money supply, and the interest rate rises. This causes a movement along the AD curve because the money supply remained constant. Please click on the link above and see if you agree. (AD is the most complex curve I've even had to think about. One point on the AD curve represents equilibrium in the product market and the financial market. Both of those markets have several variables. In this class, you don't see two other curves, LM and IS that explain interest rate movements.)

Can the governmenet "spend" its way out of a recession? Can a politican "create" jobs? I don't think so. Perhaps related to this discussion is the national debt. [|This Newsweek article]explains the national debt as a political lever that is being used to tilt the Novemeber elections. If government spending does create jobs, then why isn't the massive spending from the current administration creating wealth? Why do we have to elect a certain politician to eliminate unemployment? Can't anyone just be given the government credit card and spend, spend spend? The classical economists, of which I'm one, say that government spending "crowds out" private spending. I think they are right because resources are scare and there are trade offs among alternatives. When a choice is made, opportunity cost is incurred. So when the government spends, the opportunity cost is less private investment. (Posted Saturday, October 15, 2010).

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Evan, this is joke you might like. This is my response to your question today about taxing the rich. I wish I would have wrote this. Flad

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this: So, that's what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20."
 * The first four men (the poorest) would pay nothing.
 * The fifth would pay $1.
 * The sixth would pay $3.
 * The seventh would pay $7.
 * The eighth would pay $12.
 * The ninth would pay $18.
 * The tenth man (the richest) would pay $59.

Drinks for the ten now cost just $80
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?' They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being __ paid to __ drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay! And so... Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings. "I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man, "but he got $10!" "Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than I!" "That's true!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!" "Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!" The nine men surrounded the tenth and beat him up. The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough __ money __ between all of them for even half of the bill! And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier. David R. Kamerschen, Ph.D. Professor of Economics, __ University of Georgia __
 * The fifth man, like the first four, now paid nothing (100% __ savings __ ).
 * The sixth now paid $2 instead of $3 (33%savings).
 * The seventh now paid $5 instead of $7 (28%savings).
 * The eighth now paid $9 instead of $12 (25% savings).
 * The ninth now paid $14 instead of $18 (22% savings).
 * The tenth now paid $49 instead of $59 (16% savings).

This post is for Kenny. This is Federal Reserve data for the monetary base which equals reserves plus currency. Basically, reserves are checking account deposits plus currency. Notice how the reserves sky rocketed for Sept 01 to Oct 01. Huge amounts of reserves were pumped into the banking system. So did consumption increase? 2008-04-01 852.793 2008-05-01 859.890 2008-06-01 862.713 2008-07-01 872.629 2008-08-01 871.916 2008-09-01 936.414 2008-10-01 1135.759 2008-11-01 1481.937 2008-12-01 1692.547 2009-01-01 1737.543 2009-02-01 1582.872 2009-03-01 1661.577 2009-04-01 1781.800 2009-05-01 1797.638 2009-06-01 1701.745 2009-07-01 1695.711 2009-08-01 1727.430 2009-09-01 1819.653 2009-10-01 1964.321 2009-11-01 2046.343 2009-12-01 2045.484 2010-01-01 2018.697 2010-02-01 2141.067 2010-03-01 2097.814 2010-04-01 2037.561 2010-05-01 2032.769 2010-06-01 2021.326 2010-07-01 2017.565 2010-08-01 2013.820 2010-09-01 1981.023 Here's the consumption data, Personal Consumption Expenditures.
 * Welcome.**
 * This page is intended to extend discussion in class. Please post questions, comments, and items for discussion on this page. As a class, we can answer and both grow. When posting a comment or replying to another's comment or post, please use you reference initials to identify yourself. Please no name calling or personal attacks.**

2008-08-01 10209.7 2008-09-01 10165.6 2008-10-01 10084.7 2008-11-01 9960.6 2008-12-01 9856.4 Looks like consumption fell. How do you explain that?

(Data taken from the FRED data base at stlouisfed.org. Series PCE and [|BOGAMBNS] )

I write this to show how consumers are not optimistic and banks are failing to loan. So an increase in the monetary base did not spur aggregate demand as it should have. That's maco. Flad dog