20100920b+for+20100920+Econ+1.ppt

20100920b+for+20100920+Econ+1.ppt - Economics 1: Fall...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Economics 1: Fall 2010 J. Bradford DeLong, Michael Urbancic, and a cast of thousands... hAp://delong.typepad.com/econ_1_fall_2010/ Ladies and Gentlemen, to Your i>Clickers... •  How many people think the ongoing “inflaOon economics” problem set is... –  A. Too hard? –  B. Too easy? –  C. Too short? –  D. Too long? –  E. Just right/no opinion/don’t know? Economics 1: Fall 2010: InflaOon, the Federal Reserve, and HyperinflaOon J. Bradford DeLong September 20, 2010, 12 ­1 Wheeler Auditorium, U.C. Berkeley Readings •  1.2 InflaOon Economics –  W Sep 15: InflaOon Economics. •  CFO, chapter 22 “InflaOon”; chapter 25 “An Overview of Money” and “How Banks Create Money”; chapter 29 “ The Short Run RelaOonship Between the Unemployment Rate and InflaOon” and “ The Long Run Aggregate Supply Curve, PotenOal Output, and the Natural Rate of Unemployment”; chapter 33 “Monetarism” –  M Sep 20: The Federal Reserve and Macroeconomic Management. •  CFO, chapter 25 “ The Federal Reserve System”; chapter 26 “Interest Rates and Bond Prices”, “ The Equilibrium Interest Rate”, and “ The Federal Reserve and Monetary Policy”; chapter 30 “ Time Lags Regarding Monetary and Fiscal Policy” •  1.3 Budget Economics –  M Sep 20: The Government's Resources and Promises: The NaOonal Debt and Budget Balance. •  CFO, `chapter 19 “ The Economics of TaxaOon” and “ Tax Incidence: Who Pays?”; chapter 24 “ The Federal Budget”; chapter 30 “Fiscal Policy and Deficit TargeOng” –  W Sep 22: Fiscal Crisis, Capital Flight, HyperinflaOon. •  CFO, chapter 35 “ The Balance of Payments”, “Equilibrium Output in an Open Economy”, and “ The Open Economy with Flexible Exchange Rates” –  Problem set 2: inflaOon economics due at start of lecture on September 22. RecapitulaOon The InflaOon Rate Monetary Economics •  The quanOty theory of money: –  P = (M • V)/Y* •  The Phillips Curve: –  π = E(π) + β(u*  ­ u) •  Where does E(π) come from? •  Where does u* come from? The Unemployment Rate and the Change in InflaOon The Phillips Curve Welfare Costs of InflaOon Why Does It MaAer? •  Should we care about inflaOon? –  I mean, if wages and prices rise at about the same amount, why is it a problem? •  Why would anybody ever do what Paul Volcker did in 1982? –  That is, deliberately trigger a nasty episode of depression economics in order to push inflaOon down? Why InflaOon MaAers •  InflaOon deranges the price system and makes it “inefficient” •  InflaOon is unfair •  InflaOon is unpopular –  PoliOcians whose central bankers allow inflaOon to take hold tend to lose the next elecOon InflaOon Deranges the Price System •  A market economy works by people using prices to calculate what to do •  And a market economy works well when prices reflect actual social values and scarciOes –  That is, when low ­priced things are “cheap” in the sense that they use up liAle of our resources; and high ­priced things are “valuable” and hence worth making •  InflaOon makes these calculaOons difficult, and error ­ridden InflaOon Is Unfair •  John Maynard Keynes: –  Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a conOnuing process of inflaOon, governments can confiscate, secretly and unobserved, an important part of the wealth of their ciOzens... confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.... Those to whom the system brings windfalls, beyond their deserts and even beyond their expectaOons or desires, become 'profiteers’... the object of... hatred.... All permanent relaOons between debtors and creditors... become... disordered... wealth ­gevng degenerates into a gamble and a loAery. Lenin was certainly right. There is no subtler, no surer means of overturning the exisOng basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destrucOon, and does it in a manner which not one man in a million is able to diagnose... InflaOon Is Unpopular •  •  •  •  •  •  Arthur Okun and the “Misery Index” The defeat of Gerald Ford The defeat of Jimmy Carter The defeat of James Callaghan The reelecOon victory of Ronald Reagan The reelecOon victory of Margaret Thatcher Ladies and Gentlemen, to Your i>Clickers... •  Which do you think is the most important reason to try to avoid even moderate inflaOon—say, 8% per year? –  A. InflaOon destabilizes the price system –  B. InflaOon is unfair –  C. Because inflaOon is unfair it destabilizes the government and support for the market economy in general –  D. InflaOon is unpopular and tends to lead to the defeat of poliOcians currently in office –  E. Even moderate inflaOon is unstable: a government that will tolerate 8% inflaOon will tolerate 10%, and a government that will tolerate 10% inflaOon will tolerate 12%, and things then unravel... Maintaining Stable Prices Controlling the Money Stock •  “Money” = “assets people are holding only because they are ways of paying for things that they buy” •  The Federal Reserve makes money: “high powered money” –  It does so by buying bonds and paying for them with: •  Cash which the Treasury prints •  Deposits which the Federal Reserve simply announces exist •  Banks offer individuals and businesses checking accounts –  The proporOonality between checking accounts and bank reserves –  Are checking deposits too high relaOve to reserves? Banks can and do make them less aAracOve... •  M = µR –  µ for the money mulOplier, determined by banking system behavior –  R for high powered money, determined by the central bank The Federal Reserve System •  The Federal Reserve Board –  Chair (4 ­yr term), vice chair (4 ­yr term), five members •  The FOMC –  Federal Reserve Board plus 12 regional bank presidents, five of whom can vote each year •  A commiAee that moves by consensus –  Scarred by the inflaOonary episode of the 1970s –  Further scarred by the depth of the 1982 “Volcker disinflaOon” –  Outside its comfort zone right now –  PrevenOng any reemergence of inflaOon job #1, other goals of lesser importance Failing to Maintain Stable Prices Why Would Anybody Allow InflaOon? •  If you want to stop inflaOon, simply stop levng the money stock increase •  But what if people expect inflaOon? Then not fulfilling those expectaOons will create high unemployment •  And what if you want to goose the economy? Richard Nixon •  And what if the government spends but cannot tax –  It can borrow for a while –  But then? HyperinflaOon $Z100,000,000,000,000 Ladies and Gentlemen, to Your i>Clickers... •  At the start of 2005, $1=$Z10. By the end of 2008, $1= $Z1,000,000,000,000,000,000,000,000. What was the average rate of inflaOon in % per day over those four years? •  A. 1% per day •  B. 4% per day •  C. 10% per day •  D. 100% per day •  E. 1000% per day An Answer: The ArithmeOc of Compound Growth... •  e = 2.71828 –  A number growing at k% per day equals e^(kT) a•er T days... –  10^3 = e^7 more ­or ­less (actually e^7=1096.7) •  •  •  •  •  10 = 10^1 = e^(2.3) 1,000,000,000,000,000,000,000,000 = 10^24 = e^(56) 1460 days... Grow at 1% per day then a•er 1460 days = e^(14.6) 56 is four Omes as big as 14 –  So the Zimbabwean price level is growing 4 Omes as fast, so 4% per day... Test Your Knowledge •  What are the three reasons to fear inflaOon? •  How can the Federal Reserve expand or contract the money stock? •  How can the banking system as a whole expand or contract the money stock? •  Why would any central bank allow inflaOon, ever? •  What is hyperinflaOon? Ladies and Gentlemen, to Your i>Clickers... •  At the moment, three of the seven seats on the Federal Reserve Board are vacant, and the chair of the Federal Reserve expresses the consensus. That means that the voOng members of the FOMC excluding the chair now consist of: –  A. Four chosen by bankers, two DemocraOc appointees, and two Republican appointees –  B. Five chosen by bankers, one DemocraOc appointee, and two Republican appointees –  C. Five chosen by bankers and four DemocraOc appointees –  D. Seven Republican appointees and one DemocraOc appointee –  E. Eight DemocraOc appointees Economics 1: Fall 2010: The Long ­Run Government Budget J. Bradford DeLong September 20, 2010, 12 ­1 Wheeler Auditorium, U.C. Berkeley The NaOonal Debt Federal Spending and Revenue: History and Near Future Federal Spending and Revenue: Longer ­Term Outlook The “Current ­Law Baseline” Is Close to Balanced •  Primary fiscal gap of 1.2% of GDP over the next 25 years •  But the CBO does not believe congress and the president will sOck to the current ­law baseline –  –  –  –  –  –  –  “Middle class” tax cuts (0.7%) High bracket tax cuts, estate tax, etc. (0.6%) “AMT fix” (0.3%) “doc fix” (0.2%) R&D credit (0.1%) Special tax on high ­cost health plans (0.8%) iPAB (0.9%) •  AlternaOve fiscal scenario: primary fiscal gap of 4.8% of GDP What Happens If a Government Loses the Confidence of Its Creditors? •  Zimbabwe •  Four lesser examples: –  –  –  –  Mexico 1995 East Asia 1997 ­1998 ArgenOna 2001 ­2002 Greece 2010 •  Are we close to the edge now? –  No •  Will we be someday? –  Perhaps •  When? –  We don’t know... Test Your Knowledge •  When in American history has the debt ­to ­GDP raOo risen? •  What happens when a government’s creditors— the bondholders—conclude that a government might never close its fiscal gap? •  What is the CBO’s budget baseline—the thing that shows only a small fiscal gap (1.2% of GDP) over the next 25 years? •  So our budgetary situaOon right now is fine— except that we want to run short ­term deficits in order to reduce cyclical unemployment—right? ...
View Full Document

This note was uploaded on 07/15/2011 for the course ECON 1 taught by Professor Martholney during the Fall '08 term at University of California, Berkeley.

Ask a homework question - tutors are online