The Economic Way of Thinking

More on the PIGS (or is it PIIGS?)

Here's a recent summary of the European PIGS that are in trouble and how their politicians are responding; this summary added Ireland and its 115% of GDP debt ratio to the list to make Europe's problem one involving big PIIGS.

Here's an article from the popular blog, OANDA, that invokes Milton Friedman in the discussion and asks whether or not the EU is on its way out. 

Hey, at Least It's Not November 23rd

Here's a 120 day chart showing the price of a dollar in Euros:

Here's a 30 day chart:

If you don't believe in strict PPP, the steady decline of the dollar (relative to the Euro) in recent years has meant that travel to Europe for Americans--in both nominal and real terms--has gotten more expensive.  But, thanks in part to concerns about debt problems in the PIGS (Portugal, Italy, Greece, and Spain), the last month has seen a bit of an improvement for the dollar.  

I like the idea of PPP in the long-run, but I'll gladly take the 30-day chart above in advance of any trip abroad. 

Does Modern Macro Explain the Recession?

Scott Sumner thinks so in this insightful post; Arnold Kling disagrees.  I'm with Kling on Sumner's argument being "too circular."  Kling also questions whether inflation expectations can be read in the TIPS market and says,

Take right now, for instance.  The TIPS market is saying that inflation is going to be low.  But is that what the people who are buying gold believe?  I don't think so.

Along with concurring with Kling's concerns, I'll add that Sumner's analysis is too ex post for my taste.

Black Boxes

When discussing the Solow model in class yesterday, the term "black box" came up.  One of my students asked me if I was talking about the thing left on planes after they crash.  I was not.  Here's a good Wikipedia entry for black boxes that captures what I was getting at. 

Here's one of my favorite books on black boxes.  I read it as an undergad and still think it's a great book for students with a keen interest in growth theory. 

The ABCs Of ABCT Bleg

Next week I will begin two full weeks of Austrian business cycle theory (ABCT) in my Intermediate Macro class.  To date, we have gone through all of the major schools of macroeconomic thought, and we're saving the best (and most correct) for last.  As any good Int. Macro class should be, it's been a course of macroeconomic nihilism with construction (i.e., "Here's the model") immediately followed by destruction (i.e, "Here's why the model stinks...").

Since this is my first time teaching Int. Macro and ABC theory, what two or three articles (20-30 pages max), book chapters, etc. about ABC theory would you hand out to students?

What's Really Behind The Latest 3.5% GDP Growth

 Economist Mario Rizzo provides an enlightening discussion.

Laws And Economics

It turns out Dave's a great dubber.  Many years ago, he wrote an essay titled "Praxeology" for the Elgar Companion to Austrian Economics.  In the essay he introduced readers to something he called "the Caldwell Question," which I'm pretty sure is a term he created.  (The Caldwell Question, according to Dave, asks people interested in methodology to consider the following: "How does one choose between rival systems of thought that also claim to be deduced from absolutely true axioms?"). 

In a recent blog discussion, Dave attempts to create another new term, which he calls "the Horwitz Rule."  According to the comment section, The Horwitz Rule would "allow the Fed to adjust the money supply whenever money demand changes so as to maintain monetary equilibrium."

What do you all think of Horwitz's Rule vis-a-vis Friedman's Rule?   

Anatomy Of A Crisis

Most economists and policymakers looking for crises similar to the 2008 financial crisis have looked back to America's Great Depression for lessons on what was done then and what should be done now.  As long as the interpretations of the past are correct, studying events like the Great Depression to better understand the present makes good sense.  Our studies shouldn't be limited solely to the Depression, however, if other crises provide information to us as well.

For example, the Asian financial crisis of 1998 is one such crisis that seems to have largely been ignored by policymakers rushing to call 2008 the 21st century Great Depression.  In 1997-1998, banks in Latin and South America, the former Soviet Union, and East Asia were highly leveraged; the banks were also lacking transparency and were tangled up in complicated assets.  Like the US in the early 2000s through 2008, consumption and government spending in many of the countries affected by the "contagion" was deemed "too high" by experts and many warning signs were present in advance of the crisis.     

Instead of recommending easy money and fiscal stimulus, Western policymakers responded to the crisis by recommending transparent banking, controlled government spending, and higher interest rates.  In other words, the recommendations for Asia was for tighter restraints on monetary and fiscal policy--the exact opposite of what has been recommended this time around.  For people interested, here's a time-line of the 1997-99 events produced by Frontline.  Here is a list of the policy positions taken by major players involved in the crisis.

The easy way to dismiss comparisons of the Asian crisis to the present is to say (1) the scale of the crisis is much larger this time; and (2) the crisis originated in a big country (i.e., the US).  When you look more closely at the past, however, the similarities of the Asian financial crisis to the present are striking and cause one to wonder about the wild divergence in policy recommendations by experts then compared to now.   

Library Economics

I'm on the road a lot.  To pass the time I sometimes listen to books on CD.  Here's a question related to books on CD for our readers that I think economic theory can probably answer: Why, when I check out books on CD from the library do I only get them for one week? 

I can understand the need for quickly turning over movies, but I doubt the same kind of need for quick returns is present in the books on CD market.  I also doubt that it's an issue of expense because many books are far more expensive than books on CD.  Given that listening to 20 disks on House of Cards will take me a lot longer than reading the book, why is the library insisting that I bring the set of disks back once per week to renew?

How We Got Into This Mess

Here's a nice lecture by our friend Steve Horwitz on the causes of the current recession.

Guess Tonight's Topic

"A drunk man will find his way home, but a drunk bird may get lost forever." 

From the above quote, does anyone want to guess one of the main topics we're covering tonight in MBA Macro?  It's one of my favorites (both the quote and tonight's topic)... 

Family And Friends Want To Know

I started out as a double major in chemistry and water science, and after my first EC 101 course, switched without hesitation to economics.  My family didn't quite understand.  I tried to explain it to them, which leads to the question for our own readers:  why do you study economics?

A Picture's Worth Approximately 5 Cents

While preparing for my macroeconomics class this morning, I came across this blog post on the declining purchasing power of major world currencies (in terms of silver).  Here's the picture for the US:

 

The blog, which is called Dollar Daze, has a number of other good posts on monetary economics and the current crisis.  Here's a good one on North America's first experience with money. 

Question for Students

Suppose you were given $10,000 and told that you may spend it on 1500 A.D.-quality goods and services at 1500 A.D. prices or on 2009-quality goods at 2009 prices.  Which option would you choose?

Does your choice tell us anything about the implied rate of "inflation" between 1500 and 2009?

For Intermediate Macro Students: Go Forth And Multiply

I just posted this over at The Austrian Economists blog:

The simplest of simple Keynesian economics on a napkin:

Let 0<b<1, where b is a constant, the marginal propensity to consume.  Specifically, let b = 0.9

The government spending multiplier is 1/(1-b), therefore = 10

The tax multiplier, -b/(1-b) is therefore = -9

For ease, break the current stimulus policy down to $450 billion in new government spending, and $300 billion in new tax cuts.  Using our multipliers, and other things constant, then the stimulus package would, in the limit, generate an additional

$4.5 trillion + 2.7 trillion = $7.2 trillion dollars.

Stones into bread.  Some $750 billion stimulus package can increase aggregate demand up to $7.2 trillion.

2008 nominal GDP was $14.3 trillion.  The administration's Keynesian economists are acting as if, without the stimulus, 2009 nominal GDP would fall 50%.

But, with the intervention, our economy should be on track by the end of the year.

So, Congressmen and women, go forth and multiply.