Econ 2: Spring 2014: UC Berkeley: Wednesday April 23, 2014 Office Hours Today POSTPONED to 1-3 PM Because of (a) Oral Exams and (b) Piketty Day...
Over at the Washignton Center for Equitable Growth: The slides from the talks I was giving as 2008 turned into 2009. The huge hole in them is the lack on my part of any consideration of the possibility that we might not do what was necessary--that we might fail to use fiscal and banking policy on a large-enough scale to rebalance aggregate demand at full employment in a short-run of two to three years...
I simply assumed that the political and economic logic would work together: the political logic was that all incumbents of whatever party were at grave risk in the next election if unemployment was still high in 2010 and even more so in 2012, and that the economic logic behind using expansionary fiscal policy to get spending up to potential output was crystal-clear. I thought it obvious:
These all seemed to me to be barely worth noting, or not even worth noting.
Silly me... READ MOAR
Finish Essentials, chapter 14 "Aggregate Demand and Aggregate Supply", 15 "Fiscal Policy”. Start chapters 16 and 17: “Money, Banking, and the Federal Reserve” and “Monetary Policy”
M Apr. 14: The Lesser Depression:
W Apr 16: The Lesser Depression/The Government Budget
Final Exam: Friday May 16, 8-11 AM, Hearst Gymnasium
Reread Essentials, chapter 15 "Fiscal Policy”. Read chapters 18 and 19: “Crises and Consequence” and “The International Economy”
M Apr. 14: The Lesser Depression
W Apr 16: The Government and Its Budget
Problem Set 6 out later in the week…
I am very sorry that I am missing this:
But I am very glad I am attending this:
Jack Greenberg: "Pursuing the Dreams of Brown and the Civil Rights Act": Pierson Auditorium, UMKC
Read Essentials, chapter 16 "Money, Banking, and the Federal Reserve System", chapter 17 "Monetary Policy), chapter 18 "Crisis and Consequence"
M Apr 7: Lecture: Aggregate Demand and Aggregate Supply
W Apr 9: Lecture; The Greater Crash and the Lesser Depression
This File: Econ 2: Spring 2014: U.C. Berkeley: Week 11: Inflation, Monetary Policy, Crises, etc...: http://delong.typepad.com/sdj/2014/04/econ-2-spring-2014-uc-berkeley-week-11-inflation-monetary-policy-crises-etc.html
...the University of California’s decision to hire former Homeland Security Secretary Janet Napolitano as its president.... But sometimes her perspective is rather refreshing. Her latest comments come in reaction to the ambiguous plans of California Governor Jerry Brown to improve the state’s public universities through impersonal, computer-based college. At the most recent meeting of the UC Board of Regents he apparently argued that the university system’s administration needed to develop:
online education requiring no human interaction whatsoever.”
A.Suppose that it is December 2020, current forecasts are for a year-2022 level of real GDP of $19.5 trillion without policy changes. Suppose further that you have just moved to Washington to work for the newly-chosen President-Elect as Special Assistant to the Chief Economist of the Office of Management and Budget. Suppose still further that the short-term safe interest rates the Federal Reserve controls are still very close to zero and that the Federal Reserve has promised to keep them very close to zero until at least 2023. Suppose still further that risk spreads on interest rates of different assets are at normal levels.
Read Essentials, chapter 14 "Aggregate Demand and Aggregate Supply", 15 "Fiscal Policy"
M Mar 31: Aggregate Supply and Aggregate Demand
W Apr 2: Getting to Where We Are:
Further Further Reading:
Nelson Polsby (1934-2007) was one of the more powerful reasons that Berkeley punched and still punches well above its financial weight among universities...
Dan Tompkins's notes on Polsby and McCarthy:
Dan Tompkins: Nelson Polsby's breakout essay: Getting McCarthy Wrong:
This may interest only a few of you. I threw it together for my own purposes and found enough to make it worth exposing to others.
Two Berkeley political scientists, Nelson Polsby and Michael Rogin, did very good analytic work on the question, "who supported McCarthy." Rogin and Polsby are now both, sadly, deceased. Both, each in his own way, took on the established political scientists who blamed McCarthyism on particular social groups. Rogin focused on elite notions that McCarthy had a "mass" or "populist movement." He's very worth reading, but what follows mainly concerns Polsby, who at age 26 published "Towards an Explanation of McCarthyism" in the journal Political Studies 8 (1960).
: Letter from Niccolo Machiavelli to Francesco Vettori: "10 December 1513: Magnificent Ambassador: 'Never late were favors divine.'
I say this because I seemed to have lost--no, rather mislaid--your good will; you had not written to me for a long time, and I was wondering what the reason could be. And of all those that came into my mind I took little account, except of one only, when I feared that you had stopped writing because somebody had written to you that I was not a good guardian of your letters, and I knew that, except Filippo and Pagolo, nobody by my doing had seen them. I have found it again through your last letter of the twenty-third of the past month, from which I learn with pleasure how regularly and quietly you carry on this public office, and I encourage you to continue so, because he who gives up his own convenience for the convenience of others, only loses his own and from them gets no gratitude.
Amina Khan: Gravitational waves from just after Big Bang show how universe grew: "Nearly 14 billion years ago, in a tiny fraction of a second after the Big Bang,
the universe suddenly expanded from smaller than an atom to 100 trillion trillion times its original size, faster than the speed of light. This mysterious period, known as cosmic inflation, had been theorized but never confirmed. But now, scientists using telescopes at the South Pole say they have discovered the first direct evidence for this incredible growth, in the signature of gravitational waves. “It’s amazing,” said experimental cosmologist John Carlstrom of the University of Chicago, who leads the competing South Pole Telescope project. “Everyone in my field, what we’re thinking of doing in the future, we have to all rethink. This is an amazing milestone."...
Read Essentials, chs. 10, 11, 12, and 14 before spring vacation
Suppose that, on and near the U.C. Sunnydale campus, the weekly supply curve for lattes is given by the equation Q = max(1000 P - 2000, 0) : nobody makes any lattes unless the price is above $2/latte, and for each $1 the price is above $2 an extra 1000 lattes are made.
Suppose that customers have $10,000/week to spend on lattes. Draw the supply curve and the demand curve.
What is the equilibrium price of lattes? What is the equilibrium quantity of lattes?
Suppose we have students going to Railroad Monopoly University who spend their money on only two things all semester: vacations in Cabo San Lucas (V) and renting BMWs for the weekend (R). And suppose that their utility function is the Cobb-Douglas function with θ = 1/3, and suppose that a student named Jonah H. takes vacations in Cabo on three weekends and rents a BMW for the other 15 weekends of the semester.
What, for that consumption pattern, is Jonah’s marginal rate of substitution between Cabo vacations and renting BMWs? That is, if he takes an additional vacation, by how many BMW rentals could he cut back his BMW renting and still be as happy, still be on the same indifference curve?
Suppose that Channing T. is also a student at Railroad Monopoly University, with the same utility function as Jonah. But suppose that Channing takes vacations in Cabo on six weekends and rents a BMW for six weekends of the semester. What, for that consumption pattern, is Channing’s marginal rate of substitution between Cabo vacations and renting BMWs—that is, if he takes an additional vacation, by how many BMW rentals per average semester could he cut back his BMW-renting and still be as happy, still be on the same indifference curve?
Suppose that renting a BMW costs $50 a weekend and taking a vacation in Cabo costs $500, and that Jonah has $2250 to spend and Channing $3300. Is either Channing or Jonah making a mistake in choosing their consumption pattern? If only one is, which one is making a mistake? Why are they making a mistake?
Explain to either Channing or Jonah—whichever one you think is making a mistake, or both— how they could make themselves happier (or at least more dissipated) if they changed their consumption pattern. In what direction do you think they should change their consumption pattern(s)? How far do you think they should change their consumption pattern(s)? (Or, if you think neither is making a mistake, explain why you think both are doing what they ought to do.
Brie, with only $1100 per semester to spend, has different tastes and preferences. Her utility function has θ=5/6. If Cabo vacations cost $500 and BMW rentals cost $50, is she happiest buying 0, 1, or 2 vacations and spending the rest of her money on BMW rentals? Explain why her optimal ratio of vacations to rentals is different than the optimal ratio for Channing and Jonah.
Suppose that there is a BMW shortage. BMWs now rent for not $50 a weekend but $500 a weekend. And suppose that Jonah, Channing, and Brie have $2500, $3500, and $1000 to spend, respectively. How should each of the three spend his or her money? Explain your reasoning
Suppose Phil and Chris notice that neither Channing nor Jonah actually likes riding around in BMWs. What they like, instead, is impressing each other by renting more BMWs than their co- star—and they feel unhappy when their co-star rents more BMWs than they do. That is, the utility function for Jonah and Channing are actually: Uj = (Vj)θ(Rj/Rc)(1-θ) and Uc = (Vc)θ(Rc/Rj)(1-θ). Phil and Chris calculate how many vacations and BMW rentals, if BMW rentals cost $50 and Cabo vacations cost $500, Channing and Jonah should spend their money on to collectively make them the happiest. What do they conclude? Explain your reasoning. (Hint: suppose Phil and Chris decide to calculate the geometric mean of Channing’s and Jonah’s utility, and then to try to make that product as large as possible...)
Suppose that Phil and Chris are right, that you are in charge of Railroad Monopoly PDC, and that you try to make both Channing and Jonah happier by imposing a tax on BMW rentals. How high a tax do you think you should impose? Explain your reasoning.
Websurf your way over to the Congressional Budget Office’s most recent Long-Term Budget Outlook at http://www.cbo.gov/ftpdocs/115xx/doc11579/06-30-LTBO.pdf. Read it.
What is federal health care spending currently as a percentage of GDP?
What does the CBO think that federal health care spending—Medicare, Medicaid, CHIP, and Exchange Subsidies—is likely to be as a percentage of GDP in 2035?
What does the CBO say that Social Security spending currently is as a percentage of GDP?
What does the CBO think that Social Security spending is likely to be as a percentage of GDP by 2035? In 2035, CBO projects it to be 6.2%
Why, in your own words, does the CBO believe that the share of GDP the federal government spends on its major “mandatory” programs is going to rise between now and 2035?
What does the Congressional Budget Office project that the federal debt held by the public will be, as a share of GDP, in 2035, if congress and the president either adhere to the “baseline” of current federal programs or if they hold to PAYGO— that is, cut one program or raise taxes by the amount by which they raise another program? What, in your own words, is the logic behind this projection?
What does the Congressional Budget Office project that the federal debt held by the public will be, as a share of GDP, in 2035, if congress and the president continue to do business more- or-less as they have done business since 1980? What, in your own words, is the logic behind this projection?
In 8300 BC there were roughly 5 million people in the world—with an average standard of living of about $500/year. In 1700 there were roughly 640 million people in the world—with an average standard of living of about $500/year. In 1900 there were roughly 1.6 billion people—with an average standard of living of about $565/year. Today there are roughy 7.2 billion people— with an average material standard of living of $8035 dollars per year.
Use the Rule of 72 to calculate the average population growth rate and the average global real GDP growth rate between 8300 BC and 1700 AD.
Use the Rule of 72 to calculate the average global real GDP growth rate between 1700 and 1900 AD.
Use the Rule of 72 to calculate the average global real GDP growth rate between 1900 and 2012.
How much faster has global real GDP growth been over 1900-2012 than it was over 8300 BC-1700 AD?
How much faster has global real GDP growth been over 1900-2012 than it was over 1700-1900?
What would global real GDP be in 2100 if it were to grow as rapidly between now and 2100 as it grew from 1900-2012?
If there are 10 billion people in the world in 2100 and if global real GDP be in 2100 if it were to grow as rapidly between now and 2100 as it grew from 1900-2012, what would average living standards be in 2100?
Why do they call it the “Industrial Revolution”?
In the Phillips Curve framework in which:
π = E(π) + β(u* - u)
the inflation rate π equals the previously- expected inflation rate E(π) plus the “slope” β times the difference between the natural rate of unemployment u* and the actual rate of unemployment u—and in which this year’s expected inflation E(π) is last year’s actual inflation, calculate the rate of inflation π:
In the first year, if the starting E(π)=2% per year, β = 1⁄2,u*=5%, and u=5%
In the second year, if E(π) is what inflation was the previous year—that is, if E(π) is your answer to part a—β = 1⁄2, u = 5%, but structural changes in the economy raise u* to 7%
In the third year, if E(π) is what inflation was the previous year—that is, if E(π) is your answer to part b—β = 1⁄2, u = 5%, but structural changes in the economy keep u* at 7%
In the fourth year, if E(π) is what inflation was the previous year—that is, if E(π) is your answer to part c—β = 1⁄2, u = 5%, but structural changes in the economy keep u* at 7%.
What should the government and central bank do if they want to keep inflation from rising?
Consider a toy economy with six producing workers—Arya, Bran, Tegan, Taylor, Sarah, and Zedd--that produces two commodities: lattes (large, vanilla-caramel, half-caf, sweetened, made half with skim milk and half with half-and-half), and yoga lessons.
In an hour the six workers could each teach at most the following number of yoga students: Arya 10; Bran 6; Tegan 4; Taylor 4; Sarah 2; and Zedd 0. In an hour the six workers could prepare at most the following number of lattes: Arya 60; Bran 10; Tegan 20; Taylor 30; Sarah 30; and Zedd 60.
Suppose that some central planner—Mao Zedong, say—grabs three people at random and says “you are making lattes” and tells the other three “you are teaching yoga students”. How many lattes do you expect Mao’s allocation to make in an hour? How many yoga students do you expect Mao’s allocation to teach an an hour?
If you allow the market system to work, what price of yoga lessons £Y would have the economy teaching as many students as you expect to get in Mao’s economy? How many lattes would that market economy produce? How much better off would consumers be as a result?
If you allow the market system to work, at what price of yoga lessons £Y would the economy make as many lattes as you expect to get in Mao’s economy? How many yoga lessons would that market economy teach? How much better off would consumers be as a result?
Write a paragraph, 400 words at most, in which you make your argument to Mao Zedong that he should decontrol the Chinese economy and let it revert back to a market economy. For extra credit, in an appropriate and sensible place, quote Deng Xiaoping: “It is not important whether a cat is red or white; it is important whether a cat catches mice!”
What do you think Mao would say and do in answer to your attempt to convince him to reverse his economic policy course?