Nov 27 2008
Archive for November, 2008
Nov 25 2008
Berkley professor and former Labor Secretary Robert Reich argues that the $300 billion or so of the Treasury’s $700 billion bailout of the financial markets has mostly been squandered, calling it “the worst type of trickle-down economics”. Reich hopes the Treasury will postpone further disbursements of the bailout funds until the new Administration takes office in the hope that it will go into the hands of consumers, not into the pockets of the big banks’ shareholders.
Click the “play” button to listen to Reich’s commentary on NPR’s “Marketplace”:
- What is wrong with the way the banks have used the funds the Treasury has given them? Why hasn’t the bailout worked so far?
- What does Reich mean when he calls the bailout “the worst type of trickle-down economics”?
- Who does Reich think the remainder of the bailout should go towards helping? What does he mean by a “bottom-up bailout”?
Nov 25 2008
Nov 24 2008
Below is the explanation of the “Multiplier effect” from our class wiki, as explained by my Econ students:
- The multiplier effect shows that an initial change in spending can cause a larger change in national income and output.
- The multiplier determines how much larger that change will be; it is the ratio of a change in GDP to the initial change in spending.
- It measures the effect that any change in expenditure (Investment, Government spending, Consumption, or Net exports) will have on GDP
Multiplier = 1/(1-MPC) = 1/MPS
Multiplier = change in real GDP/ initial change in spending
Change in GDP = mutlplier x the initial change in spending
Rationale: The multiplier is explained based on the following facts:
- The economy supports repetitive, continuous flows of expenditures and income
- Any change in income will vary both consumption and saving in the same direction as, and by a fraction of, the change in income
- Initial change in spending will set off a spending chain throughout the economy
- Chain of spending, although of diminishing importance at each successive step, will accumulate and result in a multiple change in GDP
Harvard Economist Gregory Mankiw has applied the concept of the spending multiplier to the proposal coming from Barack Obama’s economic transition team to inject as much as $700 billion of goverment spending into the economy to stimulate aggregate demand and help America escape its recession. Mankiw quotes today’s Washington Post:
Facing an increasingly ominous economic outlook, President-elect Barack Obama and other Democrats are rapidly ratcheting up plans for a massive fiscal stimulus program that could total as much as $700 billion over the next two years….Obama has set a goal of creating or preserving 2.5 million jobs by 2011.
Mankiw, the Econ teacher that he is, applies the basic formula for the Spending Multiplier to the numbers coming from the Obama camp, and finds the following:
Dividing one number by the other, that (the $700b of government spending) works out to $280,000 per job.
What is going on here? Logically, it must be one of three possibilities:
- The fiscal stimulus is going to be much smaller than is being reported.
- The new administration is setting a low bar for itself when it comes to job creation.
- The Obama team believes in very small fiscal policy multipliers.
Let me amplify the last point. The average weekly earnings of production and nonsupervisory workers is about $600, or about $60,000 over a two-year period. Granted, labor income is only about two-thirds of national income, and we have to add a few supervisors into the mix.
So let’s say each job created means $100,000 of extra national income. If we are generating $100,000 of income with $280,000 of government spending, the multiplier is only 100/280, or 0.36. Traditional Keynesian models suggest a multiplier closer to 2.0.
What Mankiw has found, using simple economic analysis understood by anyone who has studied AP or IB Economics, is that if we believe in the numbers given by the Obama camp itself, then government spending package of $700 billion will result in roughly $250 billion of new income for the nation.
How did we find this? Simply by applying the forumula given on our wiki above: Multiplier = change in real GDP/ initial change in spending, and plugging in the numbers calculated by Mankiw:
- Multiplier = 0.36.
- Change in spending = $700b.
- Therefore, the change in national income (or GDP) equals $700b x 0.36 = $252 billion
Perhaps Mr. Obama needs to consider the basic economic principle of the Spending Multiplier before he goes around throwing out numbers about the jobs that will be created or preserved from a new fiscal stimulus package. Clearly, 2.5 million jobs grossing an average of $100,000 each over two years, while SOUNDING good, in reality represents a truly unbelievable squandering of wealth and income by the US government.
Nov 24 2008
Comedian Louis CK puts things into perspective for us in these hard economic times. As he says, “Everything is amazing right now, yet nobody’s happy.”
Louis CK “Everything’s amazing, nobody’s happy”
Much of what Louis jokes about here refers to technologies that members of my generation hardly remember and that my students had never seen. This video did make me think… with all the talk today of the Great Depression, a new period of prolonged economic hardship in America and the world, it is easy to forget just how amazing our innovative economy really is. The impact of technology on our lives is astounding, and the pace of change humans have witnessed in the last 50 years is unprecedented in human history.
Hat tip to Tim Schilling at MV=PQ Blog for the link!