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September 21

September 21. Real Clear Politics Robert Samuelson Regulation Review complexity Obamanomics. The Development of Modern Economic Theory. Classical Keynesian Monetarism Rational Expectations Now what?. Keynesian Economics. John Maynard Keynes

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September 21

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  1. September 21 • Real Clear Politics • Robert Samuelson • Regulation • Review • complexity • Obamanomics

  2. The Development of Modern Economic Theory • Classical • Keynesian • Monetarism • Rational Expectations • Now what?

  3. Keynesian Economics • John Maynard Keynes • 1936 General Theory of Employment, Interest and Money • Beginning of macroeconomics (term first used in 1945) • Prices and wages do not fall when there is unemployment or a surplus • Unemployment can persist for a long time • “In the long run, we are all dead”

  4. Keynesian Economics • Unemployment is due to low aggregate demand • Fiscal and monetary policy should be used to reduce unemployment • But primary reliance is on fiscal policy • Monetary policy is of limited value in reducing unemployment (pushing on a string)

  5. Critique of Keynesianism 1 • Does not work well • Political reality prevents effective policy • Changes in policy change behavior, thus difficult to predict impact • Is economics a science? • Cannot explain events since 1970 • Stagflation • Reaganomics • Samuelson et.al. wrong in 1981

  6. Critique 2: Supply Side Economics • Not all spending has same impact • Tax rates affect incentives to supply (work, invest, entrepreneurial activity)

  7. Critique 3: Monetarism • Quantity theory of money • Steady, slow growth of the money supply is the key to economic growth and controlling inflation • Stimulative fiscal policy ineffective due to “crowding out” • How can taking money from one person to give to another increase employment? • Barro, “Keynesian Economics vs. Regular Economics”

  8. Critique 4: G, T and I • Different impacts of government spending, taxes and private investment

  9. Critique 5: Rational Expectations • Markets clear if left alone • Fiscal and monetary policies cannot stimulate the economy • Such policies cause inflationary expectations and are self-defeating

  10. Salt Water v. Fresh Water Economists • Salt Water: Keynesian • Fresh Water: Rational Expectations, Monetarism

  11. Policy since 2009 1 • Low interest rates, quantitative easing • $825 B stimulus package • Public Private Investment Partnership (PPIP) • Buy toxic assets from banks • Cash for clunkers • Record spending and deficits • Auto bailouts • Numerous lifelines to Fannie Mae and Freddie Mac • Five versions of foreclosure relief

  12. Policy since 2009 2 • Increased financial regulation (Dodd Frank) • Health care reform • Increased EPA regulation • Energy subsidies, mandates and moratoria • Activist NLRB • Supported card check • No action on trade agreements • Calls for higher taxes on high incomes • Constant attacks on motivations of those who disagree

  13. Records Set since 2009 1 • US debt downgraded for first time • Federal spending (25% of GDP) highest since WWII • Budget deficit (10% of GDP) highest since WWII • Federal debt (67% 0f GDP) highest since just after WWII • Employment rate (58%) lowest since 1983 • Long-term unemployment (46% of total) highest since 1930’s

  14. Records set since 2009 2 • Increase in non-farm payroll employment (0.5%) since recovery began 26 months ago: slowest job growth after a severe recession since WWII • Home-ownership rate (59.7%) lowest since 1965 • Percentage of taxpayers paying income tax(49%) lowest in modern era • Government dependency (47%), percentage of persons receiving federal benefit payments (not wages); highest in American history

  15. Did the Stimulus Succeed? 1 • Administration claims 3M jobs created or saved • Really? Soviet type accounting • Even if accurate, $280,000 per job • Auto bailout • Maybe • Better alternative was available • Put UAW ahead of creditors • Cash for clunkers • Destroyed capital stock • Basically accelerated car purchases a few months

  16. Did the Stimulus Succeed? 2 • Studies by Jones and Rothschild surveyed 85 projects • “As is often the case when economic models are transferred from the blackboard to actual public policy, there was a gap between theory and practice.” • Stimulus was poorly targeted • One example: contractor was told to use smaller, non-standard tiles in order to increase the cost of the project so government could show money was being spent rapidly (use teaspoons instead of shovels or machinery to dig)

  17. Did Stimulus Succeed? 3 • Another example: Budget shortfall forced city to lay off 185 workers. City received $4M grant to improve municipal energy efficiency. Had to use it to buy a crane and forklift • 42% of recipients used funds to hire unemployed people. Instead they poached funds from competitors. • Not all projects were so wasteful, but “this suggests how hard it is for Keynesian job creation to work in a modern expertise-based economy”

  18. Regular vs. Keynesian Economics • No theoretical or empirical support for the Keynesian position that there is a multiplier for government transfer payments • Regular economics says an increase in transfer payments will decrease GDP • Regular economics involves incentives as the drivers of economic activity • Increased transfers decrease recipients’ incentives to work • Taxes to pay for transfers also reduce incentives

  19. Expansion and Growth • Expansion • Short run • Growth • Long rub

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