Aug 15 2010
The Great Economic Experiment – for all year 2 IB Econ students
Published by Joe Hauet at 8:35 pm under Fiscal Policy,Government,Keynesian Economics,Macroeconomics,Supply-side economics
Dear year 2 IB Economics students,
Welcome back and I hope you enjoyed your time off. Before breaking for summer we were in the midst of our unit on Macroeconomics, just beginning our debate on whether or not government intervention in the economy in order to kick start activity during a deep recession was a good or bad idea. In other words, would the economy correct itself or would government stimulus be necessary to get our economy moving again.
As you all know, exactly a year and a half ago, the US government decided that in order to a avoid a recession as potentially devastating as the Great Depression of the 1930’s, government interaction into the economy was necessary. 787 billion dollars was put aside for government sponsored projects, transfer payments and decreases in taxes. The hope was that this spending would not only help people maintain their current jobs but also create jobs for those who had recently become unemployed. A year and a half later, proponents of the stimulus package, Keynsians if you will, believe that this great experiment has been a success and that if nothing had been done the economy would be in much worse shape. Opponents of the spending believe that the bill has simply postponed the self correcting forces in the economy and has instead created what economists call a double dip recession where the increase in government spending only creates a temporary, unsustainable increase in economic activity. In fact many of these opponents say that we are worse off now as the government is now further in debt due to the spending.
Has the great experiment thought up by John Maynard Keynes over half a century ago been a success or was it a solution that has caused more harm than good, potentially making the recession worse than it would have been? The radio show Plant Money recently dedicated a show to addressing this very issue. In order to get a balanced look, they interviewed two prominent economists, Tyler Cowen, a Professor of Economics at George Mason University and Mark Zandi, Chief Economist at Moody’s Analytics. Cowen, a skeptic of Keynesian spending, believes that we would now be better off if the government had not intervened in the economy. Zandi, on the other hand, is adamant that the US economy would be much worse off if the government had done nothing. Two economists analyzing similar data and coming up with very different conclusions. This is where economics becomes both complex and fascinating.
Click play on the podcast player below, listen to the whole podcast, and then answer the following questions.
Discussion Questions:
- How does an economy “self correct” itself once it has entered a recession?
- What are the arguments put forth by Tyler Cowen and Mark Zandy about the effectiveness of government stimulus? Is one more convincing than the other? Why?
- What are automatic stabilizers and why does Tyler Cowen believe they are better solutions than the government creating new jobs?
- According to Tyler Cowen, why is it dangerous for economists to become “wed to only one theory”?
- What does this podcast teach you about the importance of being able to evaluate economic theory and its effectiveness? Can we ever have an economic theory that is true under any circumstances? Why or why not?
About the author: Raised in Japan, Joe was an international school student throughout his school years. He studied government and religion at William and Mary, and later economics at UNC Asheville. He has taught in North Carolina, Hong Kong and Switzerland. Joe now teaches AP and IB Economics at Zurich International School. Read more posts by this authorRelated posts:
- The Big “C” – America’s crisis of confidence and the Great Recession
- Obama’s stimulus is “the first real test of Keynesian economic policy”
- A 17 year old’s critique of Washington’s “fiscal stimulus” package
- The best Econ rap… EVER!!
- How big is the government spending multiplier in America? Well, it depends on which economist you ask…
In New Zealand the Maori know a completely different set of constellations. Since the Maori constellations were named and plotted only a few centuries ago, as opposed to the multiple-millennia old greek constellations, they are obviously the much more accurate set of constellations.
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1) Recession is called a necessary pain. Households have too much money in that time. In order to correct it, they must calm down. Some of the poeple will be unemployed and some of the people will lose their money. This period can be called self correct. People will save, spend less or lose their jobs in order get over with recession. It is kind of recovery.
2) But self correct does not have to work all the time. It can get worse or stay same which is already a disaster. These are dangerous time. That is why country needs a kicked-get-out by the government. Government has to borrow money which people spend and goernment must use that money for its citizens in order to stimulate the economy. Keynesian fiscal policy is an option for government stimulus. But some people have some doubts about this. Cowen thinks that spending a very huge amount of money with an untested way would be very risky. Also he says that when they looked at their outcomes he has seen that they were not successful about the policy. He also adds that stimulus really works in short-run; he thinks they cannot keep stimulus forever so it is a short term fix, the stimulus did not realy turn the economy. On the other hand, Zandy believes that government stimulus did its job which was recovering the economy. It was provinding its maximum benefit.
3) Cowen believes that automatic stimulus are better than the new jobs government creates. Because, they may not thing better but they can stop things become worse. He thinks that defencive situmulus keeps in place jobs they already have. But federal gevernment can spend a lot of money. And plug out the unemployed resources out there. But automatic stabilizers are more useful because they are well-programmed, they do not need a lot of wisdom to work with. The long and the short of it they are functional and not very difficult to use, so they are better.
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5) Mark Zandy believes that even stimulus works very well, we cannot create a economcic theory and trust its effectiveness. Because economy does not work like that. It changes with developed techonology, globlization or changings in demographics. Unlike physics economist do not deal with laws or already known things. It is chaning in every second. In that poadcast I have learned that there is no exact right or wrong in economics. By using divers resources, we can improve our way of evaluation, after that we can support economic theories.
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