ECO 481:Public Choice TheoryWeek 11 - 1: MacroeconomicInstabilityDr. Dennis Foster

Economic Instability Marx & Keynes - an inherent flaw in capitalism.Schumpeter - inherent, but advantageous.Austrians - not inherent nor advantageous.

Highly valued; rarely seen. Why?Economic ignorance.Self-interest of political decision-makers.

Economic Ignorance Economists are not physicists.Agreement on variables doesnt matter.Data - not current; not complete; uncertain; costly to collect; unreliable.Has stimulus kept Ur under 8%?Macro policy - offer with humility.Can we tell the fool from the demagogue?

Humility Explained, or not

Instability = f (self-interest) Wealth, income, power, status come from:Having more to do. (Getting the job done.)Not getting the job done.Fighting unemployment is esp. rewarding: cut taxes and raise spending!Appear to fight deficits; do so is political suicide.[M]arket fluctuations, in turn, provide rhetorical ammunition for politicians wanting to inject the government still more into economic life.

Political Business Cycles money supply in last 2 years of term.SR gains - reduced unemployment.LR costs - inflation; deal with later.Evidence from U.K. and U.S.Even Keynesian prescriptions are not followed: raise taxes and cut spending during recovery.Is Obama a Keynesian?And, of course, deficits are at all time highs.

Deficits

The Problem w/Macro Policy Ignores micro principles.People make choices & respond to incentives.Macro aggregates ignore the individual.Provide $ to bridge unemployment gap.Now - incentivizes people to stay unemployed.Policies discourage saving/investment.Tax exempt mortgage; crowding out.

A Depression Story

What if we didnt fight recessions?8/1920 - 11/19226/2008 - ???5/1979 - 3/1988

Reducing Deficits Three choices - taxes, spending, MS. Text on dealing with 1986 budget deficit. Current dilemma - $4 b. or $60 b. or $100 b. on a $1.5 trillion deficit? AZ experience - sell & lease; defer payments.

Economic Bill of Rights We cant just elect good people.Constitutional reform . . . 5 proposed amendments: Balance budget Slow MS growth Flat tax Line-item veto Term limits

ECO 481:Public Choice TheoryWeek 11 - 1: MacroeconomicInstabilityDr. Dennis Foster

Here is the chart I showed you last year. It tracks the unemployment rate of these three recession - 1921, 1981 and 2008 - where each one starts at the same rate - 5.6%. How long did it take to get back to 5.6%?

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For the 1921 depression, it took 27 months; so just a little over 2 years

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For the 1981 recession, which really was an extension of the 1979 downturn, it took 106 months - nearly nine years!

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And, how long will it take us? Consider this - years ago, economist Arthur Okun observed a casual relationship between economic growth and unemployment. He noted, as a rough rule of thumb, that it takes about 3 percentage points of growth to knock unemployment down by 1%. As you look at the magnitude of our current problems, thats pretty discouraging. If it takes 2.5% growth just to stay even, then our economy would have to grow by about 5.5% a year for five years in a row to get the unemployment rate down to about 5%. Does anyone think that is even remotely possible? The last time that happened was over the years 1963 to 1968. I dont know of anybody that is so optimistic today. Except maybe the Presidents economic advisors, whoever they happen to be this week.

Let me tell you another story about another Great Depression that youve probably never heard of