Daily Review

Here is Wayne McCaffery’s excellent take on the Phillips Curve for AP instruction.

This is saved as a Google document so download it to see it perfectly. If you just view it, the document will appear juggled. My EconEdLink lesson on the Phillips Curve is here. After reading the links, answer this question.

> According to the long-run Phillips curve, which of the following is true?
> A. Unemployment increases with an increase in inflation.
> B. Unemployment decreases with an increase in inflation
> C. Increased automation will lead to lower levels of structural unemployment in the long run.
> D. Changes in composition of the overall demand for labor tend to be deflationary in the long-run.
> E. The natural rate of unemployment is independent of monetary and fiscal policy changes that affect aggregate demand.

Your answer should be “E”. If you answered “B” then you correctly understood the relationship of the Short-run PC. But the LR is a vertical line is independent of monetary and fiscal policies.

LUddite

 A Luddite is someone who is afraid of technology.  Technology scares people because they don’t know how to use it.  In addition, workers fear that they will be replaced.  The latter is true if the technology allows the employer to produce more will less workers.  Sometimes a new innovation will allow a producer to produce more with the same amount.  In this case technology enhances the worker.  In the long run, after all costs have been internalized, technology does not affect the natural rate of unemployment.  How long and what costs are involved in this long-run adjustment?

The Provision of a Social Good

Today’s Livescribe Lecture is here. 

Deriving the Marginal Social Benefit curve for a good that is nonrival in consumption and nonexcludable is the vertical summation of societies marginal benefits. In the lecture, Flad derives a MSB curve for Beavis and Butthead while Juan looks on.

Livescribe Lecture on Positive Externalities

Click here to hear my lecture.

White Board Videos

Some excellent videos http://vimeo.com/marketplace/videos/sort:date.  An excellent paper http://www.17-76.net/interest.html on why quantitive easing will not work.

Impact of Marginal Thinking

Microeconomics has taught me the power of marginal thinking. Marginal thinking is like the straw that breaks the camel’s back. The straw builds until a critical mass is reached then great breakthroughs are obtained. Tim Schilling, Powell Center for Economic Literacy, says that “thinking at the margin is the deal maker or deal breaker.” My personal mission statement is “to make daily marginal improvements.” If I make a 1% improvement daily, then over a year, I’ve make a 360% gain. This is significant. The picture is from iStockphoto.com and is intended to show the impact that a single drop can make on the whole.

Spending Hangover

The statistics I see is that North Americans spend 98% of their disposable income. Approximately 70% of GDP is consumption. So many consumers I see live way above their means by using credit cards or refinancing their homes. Looks like the party is over and the effects will last way into 2009.

Core Inflation

Why do economists exclude the volatile food and energy while discussion inflation?  Consumers form inflationary expectations and ask for wage increases based on these expectations.  Producers form expectations too and set prices based on those expectations.  Once these expectations are in place, they are hard to remove.  In the graph, I show that during the 1980’s long-run inflationary expectations were formed.  When wages increase, producers respond by cutting back on labor.  This is precisely what happened in the 80’s.   Consumers know that fluctuations in food and energy happen for a variety of reasons.  The core inflation is used to show entranced expectations and is a better indicator of the long run.

Fiscal Policy

An increase in government spending increases the trade deficit and leads to a depreciation of the dollar.  Government spending in excess of tax revenues means a growing budget deficit.  Paul Krugman estimates the multiplier effect of the $700 billion package at 1.1.  Of course, crowding out is a problem.   See Wade Rousse for an excellent discussion on government spending.  Also, fiscal policy suffers from lags and bad timing.  Greg Mankiw reiterates what colleague, David Backus writes, “It’s the financial system, stupid” implying that the fiscal policy is misdirected.  Fiscal policy is a slippery slope.  I will aver that when the government intervenes, more is lost than is gained.