Brad DeLong's Slides

Post-WWII Inflation

A Change in the Rate of Money Growth...

In the Open Economy...

• (Y - C - T) + (T - G) - NX = I
• (1-t-(1-t)C_y)Y* - C_o + (tY*-G) - NX = I_o-I_rr
• (1-(1-t)C_y)Y* - C_o - G - NX= I_o-I_rr
• (1-(1-t)C_y)Y* - C_o - G + IM_yY* - X_fY^f + X_ee = I_o-I_rr
• I_o + C_o - (1+IM_y-(1-t)C_y)Y* + G = I_rr - X_ee
• I_o + C_o - (1+IM_y-(1-t)C_y)Y* + G = I_rr - X_ee_o - X_ee_rr^f + X_ee_rr
• I_o + C_o - (1+IM_y-(1-t)C_y)Y* + G + X_ee_o + X_ee_rr^f = (I_r + X_ee_r)r
• r = [I_o + C_o - (1+IM_y-(1-t)C_y)Y* + G + X_ee_o + X_ee_rr^f]/[I_r+X_ee_r]

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• r = [I_o - {(1-t-(1-t)C_y)Y* - C_o} - {tY* -G} - {IM_yY* -X_ee_o-X_ee_rr^f}]/[I_r+X_ee_r]

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Consider, for the Moment, a Closed Economy...

• (Y - C - T) + (T - G) = I
• -C_o+(1-t-(1-t)C_y)Y* + (tY*-G) = I_o-I_rr
• (1-(1-t)C_y)Y* - G - C_o = I_o-I_rr

• -(1-(1-t)C_y)Y* + G + I_o + C_o = I_rr

• r = [I_o - (1-(1-t)C_y)Y* + G +C _o]/I_r

Look for Equilibrium in the Flow-of-Funds Through Financial Markets

• Y = C + I + G +NX
• Y - C - G - NX = I
• (Y - C - T) + (T - G) - NX = I

• (private saving) + (public saving) + (capital inflow) = (investment)

  • private saving: depends on Y=Y*, t, C₀, C_y
  • public saving: depends on Y=Y*, G, and t
  • investment: depends on I₀, I_r, and r
  • capital inflow: depends on Y=Y*, Y^f, X_f, X_e, and e
    • e depends on e₀, e_r, r^f, and r

• Conclusion: look at r

The Flexible-Price Full-Employment Medium-Run Model: Components of Aggregate Demand

• C = C₀ + C _y(1-t)Y
• I = I₀ - I_rr
• G = G

• NX = X_fY^f + X_ee - IM_yY

• e = e₀ - e_r(r-r^f)

• Y = C + I + G + NX

• Y = Y*

"Classical" Macroeconomics--the Full Employment Assumption

Introduction to the Full-Employment Flexible-Price Model

Real GDP in The United States

The "Great Moderation" in the American Business Cycle

Source: Charles Notzon and Dan Wilson (2008), "Recent Trends in Economic Volatility: Conference Summary" http://www.frbsf.org/publications/economics/letter/2008/el2008-06.pdf

Oatcakes and Living Standards

Source: Jan de Vries lecture, 2/13/2008

• Male laborer wage divided by the cost of 2000 cheap calories

  • rice in China
  • polenta in Milan
  • rye bread in Leipzig
  • oats in Amsterdam and London.

• In 1740 laborers in Leipzig, Beijing, Suzhou, and Milan could barely keep body and soul together

  • if their work was not too strenuous
  • if they did not have too many non-working dependents
  • then they could afford to buy basic calories--and not much more

• By contrast, laborers in London and Amsterdam are different

  • appear to be living the life of Riley
  • only a quarter of their wages needed for basic calories
  • but this is if people in London ate oats
  • and oats were for Scotsmen--and horses: Englishmen ate wheat bread; calories from wheat-based bread were two to three times the cost of calories from oats.

• So were workers in London in 1740 miserably poor, spending most if not all on their income on bare caloric maintenance in the grain typical of their time and place?

• Or were the workers of London relatively rich--and deciding to spend their wealth on the superior taste and mouth feel of yeasty wheat bread
  • and on the associated symbolic declaration that they were proud and free Englishmen
  • not benighted barbarous Scots (or horses)?

Life Under Pressure? HDI Indicators for America

Source: Jan de Vries 2/13/08 lecture

• Life expectancy at 10, and adult male height
• Heightwise, life was much worse for Americans born in 1890 than for Americans born in 1830--four centimeters worse
• Life expectancywise, life was much worse for Americans born in the second half of the nineteenth century than for those born in the era of the American Revolution--fifteen years' worse if you made it to ten.
  • Hard to know how to compare our modern life expectancy at 10--when nearly everybody makes it to 10--to life expectancy back in 1790, when a good 30%-40% did not make it to 10. How much was it "only the strong survive?"

Real Wages of Construction Workers in England

Source: Jan de Vries 2/13/08 lecture, originally from Phelps-Brown and Sheila Hopkins (1956), "Seven Centuries of the Prices of Consumables, Compared with Builders' Wage- Rates," Economica 23:92 (November), pp. 296-314 http://links.jstor.org/sici?sici=0013-0427%28195611%292%3A23%3A92%3C296%3ASCOTPO%3E2.0.CO%3B2-C

• The (delayed) triumph of Malthus:
  • Real wages rise in the late-Plantagenet fourteenth century as the Bubonic Plague and other biomedical disasters raise the land-to-labor ratio.
  • Real wages fall steeply in the Tudor sixteenth century as domestic peace and the attentuation of plagues leads to a demographic boom and a lowering of the land-to-labor ratio.
  • In both cases, however, there are long and variable lags: half a century or so during which customary wage rates war with supply and demand.
  • And in the Tudor years, you also have the ongoing inflation of the "price revolution" driving changes.
• Nevertheless, it was not until 1880 that the purchasing power of English construction workers over "necessities" once again attained its Lancaster-dynasty medieval apogee.
  • But is this a good proxy for standard of living? In 1850 you couldn't buy as much beef and beer and bread as in 1470, but you could take the railroad to Brighton, buy penny-dreadfuls, and put lots of sugar in your tea...

Nominal Wage Rigidity in England in the Long Run

Source: Jan de Vries 2/13/08 lecture, originally from Phelps-Brown and Sheila Hopkins (1956), "Seven Centuries of the Prices of Consumables, Compared with Builders' Wage- Rates," Economica 23:92 (November), pp. 296-314 http://links.jstor.org/sici?sici=0013-0427%28195611%292%3A23%3A92%3C296%3ASCOTPO%3E2.0.CO%3B2-C

• Extraordinarily impressive nominal wage rigidity across long spans of history.
  • Beware, however: the "ancillary" terms of the wage contract could and did vary at a much higher frequency ("we can still only pay you three pence a day, but we'll add a piece of sausage and a mug of beer at lunchtime"--that sort of thing).
• Neverthless, aside from 1932, 1921, and 1333, nominal wages simply do not fall. It doesn't happen.

Jan de Vries 2/13/2008 Lecture: Selected Slides

Post-WWII North Atlantic Convergence

The Productivity Slowdown of the 1970s

• Found in all North Atlantic economies

  • Hence not the fault of the DRHSF--the dirty rotten hippies from San Francisco

• Theories of the productivity slowdown

  • Oil
  • Environmental cleanup
  • Reagan deficits
  • Exhaustion of backlog of technological opportunities opened as a result of the Great Depression
  • Influx of untrained and callow baby boomers into the workforce

• None of these theories is big enough, or coherent enough, or has the right timing

• Productivity slowdown of the 1970s remains a mystery...

• By contrast, productivity speedup of the 1990s has an explanation: Silicon Valley

  • How permanent is the speedup? We don't really know...

From Klenow and Hsieh...

Slides for February 13...

American Economic Growth in One Table

• Resource growth
• Industrial growth
  • Energy and resource-intensive?
• The mid-20th century
• The productivity slowdown and the age of diminished expectations
• The productivity speedup
• Where do we go from here?
  • Economic possibilities for our grandchildren

Growth Theory Questions with Applications

The Government Budget Balance:

• This is one of the reasons that we don't like government deficits: effects of long-run structural government deficits on national saving
  • But: Barrovian "equivalence"
• Other effects:
  • Uncertainty
  • Tax smoothing
    • But: aggregate demand

The Computer Revolution:

• A different kind of economic growth
• One that looks like sustainable and permanent long-run growth for a while--but isn't
  • Unless you have wave upon wave of innovations in producing capital goods...
• Where are we today?

Stimulus Package

• Start with the circular flow of economic activity

• What happens if people try to save more?

  • Prices fall
  • Or inventories pile up

• In the second case, urgent need to get people to save less--temporarily

  • Lower interest rates
  • Government deficits

• Long and variable lags

• Get inside the Federal Reserve's decision making cycle
• $160B in a $1.3T economy
• The wrong $160B...

Circular Flow of Economic Activity

The Invention Transition

• Once Again, the Magnitude and Uneven Spread of the Invention Transition
• Reasons for the Invention Transition that Do Not Explicitly Depend on Profit-Seeking...
• Reasons that Do...

Reasons that Don't:

• Population (n)--two heads are better than one
• Education (f_i)--standing on the shoulders of giants
• Societal openness (l_i)--how many people can you talk to before being "shown the instruments"
• Means of communication--language, writing, printing, etc....
• If these four are hobbled, the pace of invention will be slow
  • Fortunately, no global technological regress (that we remember, at least)
  • Only seven known--and disputed--known examples of "local" technological regress
  • Iron Dark Age, Medieval Dark Age, Medieval Greenland Vikings, Mayan Heartland, Mississippi Mound-Builders, Easter Island, Flinders Island...

Reasons that Do:

• Modes of production--status reasons?
• R&D Systems
• Patent and copyright
• Universities and national labs
• Open-source visionaries
  • Nikola Tesla
  • Bill Joy
  • Eric Schmitt
  • RMS
  • Linus Torvalds
• Optimal innovation

How Did We Escape from the Malthusian Nightmare?

• Something happened to change the pace of innovation
• Something happened to change the dynamics of population growth
• Happened first in France and England:

• Now nearly the whole world is closing in on ZPG
  • Projected world peak population: 9B in 2050
• Why the demographic transition?
  • Economists say wealth
  • Birth control technology?
  • Culture--especially female literacy

*Why the invention transition?

One Sample Path...

The Unveiling of St. John the Theologian

And I saw when the Lamb opened one of the seals, and I heard, as it were the noise of thunder, one of the four beasts saying, Come and see. And I saw, and behold a white horse: and he that sat on him had a bow; and a crown was given unto him: and he went forth conquering, and to conquer.

And when he had opened the second seal, I heard the second beast say, Come and see. And there went out another horse that was red: and power was given to him that sat thereon to take peace from the earth, and that they should kill one another: and there was given unto him a great sword.

And when he had opened the third seal, I heard the third beast say, Come and see. And I beheld, and lo a black horse; and he that sat on him had a pair of balances in his hand. And I heard a voice in the midst of the four beasts say, A measure of wheat for a penny, and three measures of barley for a penny; and see thou hurt not the oil and the wine.

And when he had opened the fourth seal, I heard the voice of the fourth beast say, Come and see. And I looked, and behold a pale horse: and his name that sat on him was Death, and Hell followed with him. And power was given unto them over the fourth part of the earth, to kill with sword, and with hunger, and with death, and with the beasts of the earth.

We Have Our Basic Malthusian Model

• Since--with this production function--nothing we can see depends on the exact form of technological progress, let's make technological progress resource-augmenting only...
• And fix resource stocks at 1.
• And let n be the "background" rate of labor force growth when output per capita is at "subsistence".

Greg Clark's World Economic History in One Picture

The Malthusian Nightmare

• What the world was like back before 1500
• How did we escape
  • Demographic transition
  • Science and technology
• Why didn't we all escape?

The Rate of Growth of Output per Worker

The Steady-State Capital Output Ratio with Resources

Laws of Motion with Resources...

Extending the Growth Model: Natural Resources

• Resources played a big role in the past, they may play a big role in the future
• In the past: Malthus
• In the future: dealing with global warming

Divergence

• The uneven spread of industrial civilization
• Population and savings play a role, yes...
  • But which way does causation run?
• And the big enchilada is technology

Longest-Run Economic Growth Once Again

• The Malthusian Era: 8000 BCE to 1500
• The escape
  • Selective at first
  • Demographic transition
  • Invention and innovation