ECN202: Macroeconomics

Introduction to Macroeconomics

Imagine no WW II

“Had the price of gold been raised in the late 1920's, or, alternatively, had the major central banks pursued policies of price stability instead of adhering to the gold standard, there would have been no Great Depression, no Nazi revolution, and no World

War II.” Robert Mundell, the recipient of the 1999 Nobel Prize in Economics

Imagine no Communist Russia & China

“The Chinese Communist Party never forgets it seized power in 1949 following not just military victory, but also hyperinflation under the Kuomintang government…” DIDI KIRSTEN TATLOW, NYT 12/9/2010

Imagine no Yugoslavian genocide

"In October of 1993 the created a new currency unit. One new dinar was worth one million of the old dinars. In effect, the government simply removed six zeroes from the paper money. This of course did not stop the inflation and between October 1, 1993 and January 24, 1995 prices increased by 5 quadrillion percent. This number is a 5 with 15 zeroes after it.”

“Critics argue that U.S. drone strikes are creating more problems than they solve and are driving al Qaeda's recruiting. But as much as the terrorist network plays up civilian casualties and U.S. intervention in its propaganda videos, the truth is that economic distress, not resentment of U.S. strikes, is what's pushing Yemenis into the insurgency.” Christopher Swift, “The Drone Blowback Fallacy”, Foreign Affairs 2012

Imagine no Arab Spring

Imagine no European Crisis

“The lack of opportunity is feeding a mounting alienation and anger among young people across Europe — animus that threatens to poison the aspirations of a generation and has already served as a wellspring for a number of violent protests in European cities from Athens to London.”Thomas, NYT 2012

Imagine no burning of witches in Renaissance Europe

“violence and scapegoating prompted by a deterioration in economic conditions. In this case, the downturn was brought on by a decrease in temperature and resulting food shortages” Emily Oster, “Witchcraft, Weather, and Economic

Growth in Renaissance Europe,”

Imagine no Roosevelt“What do the people of America want more than anything else? To my mind, they want two things: work, with all the moral and spiritual values that go with it; and with work, a reasonable measure of security--security for themselves and for their lives and children. Work and security--these are more than words. FDR 1933

Imagine no Kennedy

“get the economy moving again”

Imagine no Reagan

“Can anyone compare the state of the economy when the Carter administration took office with where you are today and say, 'Keep up the good work'?  Can you look at our reduced standing in the world and say, 'Let's have four more years of this'?" Ronald Reagan

Imagine no Obama

“HAD Barack Obama lost to Mitt Romney yesterday, the explanation would have barely taken up a sentence: the economy defeated him. Political pros always disparaged “it could have been worse” as a winning slogan “The macroeconomics mandate,” The Economist

Is there a common denominator in these stories of war and elections - and how is this related to the course you signed up for?

Basic Premises of Macro Theory and Policy

1. Economic well-being matters

You can get a sense of it from these headlines.

In the news: Macro mattersIn the news: Macro matters

1. “Right-wing extremists’ popularity rising rapidly in Greece”

2. “Violence and protest in Iran as currency drops in value”

3. “Increase seen in U.S. suicide rate since Great Recession”

4. “As economy dips, arrests for shoplifting soar”

5. “Recession election”

6. “Employment data may be key to the president’s job”

The Effect of the U.S. Economy on Presidential Elections: 1828-2008, Jill Gloekler

What does this graph tell us?

What does this line suggest?

And in this graph

Basic Premises of Macro Theory and Policy

1. Economic well-being matters

2. Economic well-being can be “estimated” with macroeconomic variables – we can look at the words, the images, or the data

The Great Depression: The Pictures

1940

Bread lines

Unemployment lines

Farm foreclosures

Hooverviles

The Great Depression: The Numbers

Basic Premises of Macro Theory and Policy

1. Economic well-being matters

2. Economic well-being can be “estimated” with macroeconomic variables

3. Stable relationships between macro variables exist

In the news: Relationships existIn the news: Relationships exist

1. “Income surges, spending up”2. “Lower interest rates spur construction”3. “Low housing interest rates creates more

sales”4. “low inflation rate leads to drop in dollar”5. “Job numbers give inflation clue”6. “How raising the minimum wage could reduce

gun violence”

In the data: Relationships exist

What is the relationship between the two?

Basic Premises of Macro Theory and Policy

1. Economic well-being matters

2. Economic well-being can be “estimated” with macroeconomic variables

3. Stable relationships between macro variables exist

4. Macroeconomic variables can be “managed” by the appropriate policies

In the news: Macro policies in actionIn the news: Macro policies in action

1. “Don’t tell anyone, but the stimulus worked”2. “Fed’s quantitative easing improves fiscal

outlook”3. “New austerity incites a bitterness the postwar

generation did without”4. “Bombs, bridges, jobs”

Macroeconomic Performance(GDP, Inflation, Unemployment)

Macroeconomic Performance(GDP, Inflation, Unemployment)

Monetary Policy(Federal Reserve)

Monetary Policy(Federal Reserve)

Interest rates/Money supplyInterest rates/Money supply

In the words: Monetary policyIn the words: Monetary policy

What is happening here – and why??

In the data: Monetary policy in actionIn the data: Monetary policy in action

Macroeconomic Performance(GDP, Inflation, Unemployment)

Macroeconomic Performance(GDP, Inflation, Unemployment)

Fiscal Policy(Congress & President)

Fiscal Policy(Congress & President)

Government spending & Taxes

Government spending & Taxes

In the words: Fiscal policyIn the words: Fiscal policy

GS = (T-G)

What is happening here – and why??

In the data: Fiscal policy in actionIn the data: Fiscal policy in action

Course Themes

1. Ideology mattersAlternative ideologies

Conservatives / Liberals / Marxists (Socialists)

1. Ideology matters

Marxists

“Whereas the liberal mistake is to think that there is a program or policy to alleviate every problem in the world, the conservative flaw is to be vigilant against concentrations of power in government only – not in the private sector.”

2 Timing matters: VLR

What is the story here?

2 Timing matters: LR

What is the story here?

2 Timing matters: SR

What is the story here?

4 History matters

Evolution of Macro Theory and Policy•1920s: The end of the beginning•1930s: A decade of transition•1960s: Experiments with fiscal policy•1970s: Experiments with monetary policy•1980s: A decade of transition•1990s-2000s: Government & the economy

Know the important ideas and people