Lively articles on the fiscal stimulus debate
“Around the world over the last century, the typical financial crisis caused the jobless rate to rise for almost five years, according to work by the economists Carmen Reinhart and Kenneth Rogoff.”
David Leonhardt - writing in the New York Times - praises the employment effects of the Obama stimulus programme in a super piece. Judging Stimulus by Job Data Reveals Success
And over at the Financial Times, the ever-readable Martin Wolf considers the thickness of the fiscal tightrope facing the US government and other leading economies.
“The argument is, rather, that the benefits of the higher output today exceed the costs of debt service tomorrow ....high-income countries face huge fiscal challenges. And yes, the crisis-hit countries start from grossly unsustainable fiscal positions. But the US is not Greece. Moreover, a massive fiscal tightening today would be a grave error.”
And here is the link to last week’s feature in the Independent on the views of economist Joseph Stiglitz: The Money Man: Super-economist Joseph Stiglitz on how to fix the recession
All three of these articles will stretch and challenge A2 economists wanting to understand more about the big fiscal issues facing governments at the moment.
The Keynes and Hayek Rap
If you havent watched this yet, do give it a go! A tremendous reaction amongst the Economics teacher community about this very funny rap on Keynes versus Hayek! Your students will love this!
read more...»Questioning the natural rate of unemployment
Roger Farmer questions the existence of a stable natural rate of unemployment in this post to the Vox Blog.
read more...»Keynes v Hayek (PBS Broadcast)
As part of his continuing series Making Sense of financial news, Paul Solman at PBS has a unique look at the legacy of economist John Maynard Keynes, who first introduced the concept of government intervention in the economy, and his countertenor Friedrich Hayek.
Aggregate Demand - Teacher Revision Presentation
Many thanks to Geoff for updating his popular revision presentation for AS students on Aggregate Demand
Launch interactive version
Download slides handout
Stimulating Times
I was drawn to this very interesting graphic from the latest IMF report on the state of government (fiscal) finances in countries around the world.
read more...»Paul Mason on the Wall Street Crash
Paul Mason - BBC Newsnight’s Economics Editor - is running a series of reports this week to mark the 80th anniversary of the Wall Street Crash. They are likely to be superb and a great resource for students and teachers. Here are the links to Paul’s output.
What caused the Wall Street Crash? (11 mins)
How the crash changed everything (13 mins)
Explaining the Paradox of Thrift
Dugie Young looks at the paradox of thrift and its relevance to today’s financial and economic crisis.
read more...»The return of Keynesian influence
This excellent four minute BBC news video looks at the return of Keynesian policy ideas. Peter Clarke and Robert Skidelsky spoke to BBC News about how they believe his economic philosophy is continuing to influence today’s political scene. We hear that Keynes was an early day short-seller and a currency speculator but that markets can fail because of deep uncertainties or weak animal spirits about the future.
Is Keynes still relevant?
Paul Mason considers the return of Keynesian economics as the state has returned to rescue the market in this BBC Newsnight video - an excellent resource to show in the classroom. The return of Keynesian thinking is - according to Paul Mason - a result of a more pragmatic approach to macro-economic policy-making.
In a follow-up discussion on Newsnight Jeremy Paxman is joined by Lord Skidelsky, biographer of John Maynard Keynes, and Sunday Telegraph columnist Liam Halligan, to debate how relevant Keynes’ theories are in the current economic climate.
Keynes v Friedman
A cross posting from my blogging colleague Jon Mace
Today’s extract in The Telegraph from Edmund Conway’s new book looks at Milton Friedman and Monetarism. Economics students need to have a sound awareness of the Monetarism versus Keynesian debate. Friedman and Keynes came from opposing ends of economic ideology. They doctrines have dominated economic thinking and policy over the last 50 years. In short Keynes placed greater emphasis on unemployment than inflation and gave warning that the state of the economy could be improved by some government interference. Friedman argued otherwise.
Conway provides a good analysis of the difference between these two economic giants:
“Inflation is always and everywhere a monetary phenomenon,” Friedman said. In short, by pumping extra money into the system (as the Keynesians were prone to doing) governments would drive up inflation, risking major economic pain. Friedman believed that if central banks were charged with maintaining control of prices, most other aspects of the economy – unemployment, economic growth, productivity – would take care of themselves.
While Keynes had asserted that it was difficult to persuade workers to accept lower wages, classical monetarist theory argued otherwise: that lower incomes for workers and lower prices for firms were acceptable in the face of rising inflation. The growth rate of an economy, argued Friedman, could be determined by controlling the amount of money being printed by central banks. Print more cash and people would spend more, and vice versa. It also marked an important political departure: whereas Keynes argued politicians should attempt to control the economy through fiscal policy, Friedman advocated giving independent central banks control over the economy using interest rates
The piece then goes on to examine the successes and failures of the two doctrines over the last fifty years. I always think it important for students to have an awareness of the changing economic conditions and favored policies over the decades, it only helps them to ingrain a deeper understanding of the theory.
He finishes the extract with an excellent quote from Martin Wolf:
Just as Keynes’s ideas were tested to destruction in the 1950s, 1960s and 1970s, Milton Friedman’s ideas might suffer a similar fate in the 1980s, 1990s and 2000s. All gods fail, if one believes too much.
The article in full can be found here.
Keynes - The Return of the Master
A new book on Keynes by his eminent biographer Professor Robert Skidelsky arrives in the bookshops this weekend - it is an account of Keynes’s ideas set in the context of the global economic recession. FT Editor Lionel Barber enjoys lunch with Prof Skidlesky in a feature in the weekend edition of the Financial Times.
One of Keynes’ most famous quotes is evoked in conversation
“The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy a task ... if they can only tell us that when the storm is past the ocean is flat again.”
Reviews (more links to follow)
Dominic Lawson (Sunday Times)
Robert Skidelsky’s articles in the Guardian
Using the Big Question
The Big Question feature in the Independent is a reassuringly regular source of useful and interesting background articles. There is often an economic / environmental /social / business perspective to their choice of topics in the news. And the Indy handily provides some vivid graphics that can serve well as student handouts or a prompt for a data response question. Here is a brief selection of recent features
Why is inequality rising in the UK? (July 2009)
Can the G8 meet its climate change targets? (July 2009)
What has gone wrong between the Chancellor and the Governor? (June 2009)
Will there be cuts in public spending whichever party is in power? (June 2009)
Why are games consoles the focus of the battle between computer giants? (June 2009)
In praise of Joseph Schumpeter
Hedge Fund manager Hugh Hendry makes the case for his economic hero Joseph Schumpeter in this BBC radio piece from January 2009 - is he the greatest economist of the 20th century?
Australia’s Broadband Superhighway
It is ambitious, expensive and will take years to roll out - but the Australian government’s newly announced $43 billion project to extend super-fast broadband across the country is the type of government funded infrastructure project that makes you sit up and take notice. This article in the Times could be a good one to use when teaching about the supply-side consequences of government spending. And it is another example of how fiscal policy can be used to kick start domestic demand with the creation of thousands of ‘shovel-ready’ jobs.
“The project, which will start in Tasmania next year, requires the installation of fibre cables across Australia - a vast undertaking that the Government said would create 25,000 jobs a year during the eight years of construction.”
Q&A: What is crowding out?
Crowding out is an idea often used by fiscal conservatives to suggest that a strategy of using fiscal policy to stimulate demand during an economic recession might not be particularly effective.
read more...»Q&A: What is a Keynesian stimulus and will it work?
A Keynesian–style stimulus happens when policy-makers deliberately seek to stimulate one or more of the components of aggregate demand to boost output, jobs and incomes during an economic recession.
read more...»Robert Schiller on Animal Spirits
Robert Schiller writes in the Financial Times about his new book Animal Spirits
read more...»Q&A: Is roadbuilding an effective way of reducing unemployment?
Q&A: To what extent would a major road building project by the government be an effective way for the government to tackle unemployment?
Road to recovery or bridge to nowhere?
Road-building projects would count as capital investment spending and (if financed by borrowing) a net injection of demand into the circular flow of income and spending. The question mentions a major programme hinting at projects that together could amount to many millions of pounds.
The question also invites the student to focus on whether this is an effective way to tackle unemployment and so a good answer will go back to the main causes of people being out of work and address how a spending programme might tackle this.
read more...»Superb presentation on the credit crunch
Here is a superb presentation on the economics of the credit crunch given by Nick Fawcett, Fellow of Lady Margaret Hall. There are some perceptive comments on the role that monetary and fiscal policy can play in stabilising output together with the constraints facing policy-makers. And there a fascinating section on the economics of asymmetric information (a topic in AS micro) and the problems in unfreezing the supply of credit given the amount of stinky debt in the banking system. Many of the supporting charts could be used profitably with an able set of students.
The presentation is available to download from Nick’s website.
How low can they go?
As the UK’s service sector shows signs of weakening, unemployment rises and households find it more difficult to pay bills and mortgages, home repossessions are expected to rise. But will even a 1% cut in base rate be enough to alleviate the downward pressure in the economy?
One possible problem is the extent to which a lower base rate will feed into lower mortgage payments. Many households (58% in August 2008) are still on fixed deals, meaning their monthly repayments will not change. And some tracker mortgages are ‘collared’ (there is a minimum interest rate paid, regardless of base rate) and homeowners will be checking the small print today to ensure they can benefit fully from any cut in base rate. There is evidence, too, that new tracker deals coming onto the market are less generous than in the past - and this will typically affect those households finding things hardest at present, for example those with low deposits or customers unwilling or unable to find a large ‘set up’ fee.
Another issue is the liquidity trap - a theory proposed by man-of-the-moment (after many years where his ideas were in the wilderness), John Maynard Keynes. Put simply, the lower the base rate, the fewer opportunities the Bank of England has to make further cuts to stimulate spending (consumption and investment). Also, during a period of deep recession (or ‘dark depression’ as a year 12 student put it in an essay he wrote for me recently!) households and firms will not want to spend and may even choose to save when interest rates are falling.
So even for households where the cut in base rate is passed on in full, how much of this windfall will they actually spend? And how much of it will they save instead?
Roger Bootle on Keynes
““Everything you wanted to know about Keynes and were afraid to ask.” I think I can reduce Keynes’ view to seven essential propositions.2
Roger Bootle, senior economist from Capital Economics is on top form in this article in today’s Telegraph
Could the UK budget deficit reach £100bn?
The government announced this week that it was borrowing money at a record rate of over £200m a day. Over the last six months, the budget deficit (the difference between government spending and tax revenues) was a staggering £37.6bn - the largest since records began in 1946, when Clement Attlee was prime minister. In September alone the government ran a fiscal deficit of over £8bn.
For the current fiscal year the British government has forecast a budget shortfall of £43bn. This will be impossible to achieve and the likely out-turn will be £65bn or more. But what worries many commentators is that the worst is yet to come. Can the budget deficit reach £100bn?
read more...»
