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WELL, HERE WE ARE AGAIN TODAY. WE WANT TO CONTINUE
DISCUSSING THAT KEYNESIAN MACROECONOMICS MODEL WHICH WE WERE
DOING LAST TIME. LET ME GIVE YOU KIND OF A QUICK REVIEW AND THEN
WE'LL DO A FEW WORD -- PROBLEMS, I SHOULD SAY. WE'VE GOT DIFFERENT
SYMBOLS, OF COURSE, THAT WE'RE USING DOWN HERE BUT THEY ALL
REPRESENT MACROECONOMIC OUTPUT IN THE ECONOMY.
WHAT WE WANT TO DO IS DRAW THE FORTY-FIVE DEGREE LINE AND
WE'VE CALLED THAT THE TOTAL PRODUCTION CURVE. IT'S BASICALLY THE
VALUE OF TOTAL PRODUCTION. IF REAL GDP IS A HUNDRED DOLLARS,
WHAT'S THE VALUE OF TOTAL PRODUCTION? WELL, IT'S A HUNDRED
DOLLARS. AND SO THE SLOPE OF THIS CURVE IS ONE. OKAY.
WE ALSO THEN LAST TIME PUT IN A TOTAL EXPENDITURE CURVE, AND
WE START THE CURVE OFF -- AH, MAYBE I'LL EVEN USE A DIFFERENT COLOR
HERE. TOTAL EXPENDITURES EQUAL CONSUMPTION PLUS INVESTMENT
SPENDING PLUS GOVERNMENT SPENDING -- GOVERNMENT PURCHASES, I
SHOULD SAY, PLUS NET EXPORTS. THIS AMOUNT OF SPENDING IS CALLED
AUTONOMOUS SPENDING AND IT'S CALLED AUTONOMOUS -- IT'S UNRELATED
TO INCOME OR PRODUCTION. IT'S JUST A CERTAIN AMOUNT. AND THEN
WHAT WE ALSO SEE, THOUGH, IS IF THERE'S A SLOPE TO THE CURVE THAT -AS INCOME GOES UP, PEOPLE SPEND MORE AND WHATEVER, AND SO THIS
CURVE HAS THIS INDUCED COMPONENT TO IT. INDUCED SPENDING VERSUS
AUTONOMOUS SPENDING.
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ANYWAY, EQUILIBRIUM OCCURS AT THE POINT WHERE TOTAL
EXPENDITURES EQUAL TOTAL PRODUCTION. QE OR YE, DEPENDS ON THE
SYMBOLS THAT YOU WANT TO USE TO REPRESENT THAT, BUT BASICALLY
THAT'S THE EQUILIBRIUM LEVEL OF INCOME. OKAY.
NOW, HOW MUCH IS THIS, THIS LEVEL OF INCOME? THERE'S A
FORMULA FOR THAT. EQUILIBRIUM LEVEL OF INCOME IS EQUAL TO
AUTONOMOUS SPENDING TIMES A MULTIPLIER, WHICH IS ONE OVER ONE
MINUS THE MPC, MARGINAL PROPENSITY TO CONSUME. SO THIS LEVEL OF
INCOME IN THE DIAGRAM THAT I'VE CALLED THE EQUILIBRIUM, WE CAN
CALCULATE THAT IF WE KNOW TWO PIECES OF INFORMATION. ONE PIECE OF
INFORMATION, WHAT IS TOTAL AUTONOMOUS SPENDING? AND THE OTHER
PIECE OF INFORMATION IS WHAT'S THE MARGINAL PROPENSITY TO
CONSUME? AND, OF COURSE, THE SLOPE OF THE TOTAL EXPENDITURES
CURVE IS EQUAL TO THE MARGINAL PROPENSITY TO CONSUME. OKAY.
SO ON TEST DAY, WHAT I WOULD DO IS TELL YOU SOMETHING LIKE
THIS: OH, TOTAL AUTONOMOUS SPENDING IS A HUNDRED DOLLARS. THE
MPC IS EQUAL TO POINT SEVEN FIVE. AND THEN I WOULD SAY TO YOU, "HEY,
CALCULATE THE EQUILIBRIUM LEVEL OF INCOME FOR THE ECONOMY, THE
EQUILIBRIUM PRODUCTION LEVEL FOR THE ECONOMY." AND THEN WHAT
YOU WOULD DO IS, YOU WOULD COME ALONG HERE AND SAY, "OKAY. A
HUNDRED DOLLARS TIMES ONE OVER ONE MINUS POINT SEVEN FIVE IS
EQUAL TO A HUNDRED DOLLARS TIMES ONE OVER POINT TWO FIVE IS EQUAL
TO A HUNDRED DOLLARS TIMES FOUR OR FOUR HUNDRED DOLLARS." THIS IS
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QE.
AND SO IF WE KNOW THIS AMOUNT, ONE HUNDRED DOLLARS, AND WE
KNOW THE SLOPE IS POINT SEVEN FIVE OF THE TOTAL EXPENDITURES
CURVE, WE KNOW THAT EQUILIBRIUM LEVEL OF INCOME IS FOUR HUNDRED
DOLLARS.
LET ME MENTION SOMETHING TO YOU. THIS FORMULA HERE FOR THE
MULTIPLIER, THIS ONE MINUS THE MPC, THAT'S ALSO EQUAL TO THE
MARGINAL PROPENSITY TO SAVE. IF YOU'LL REMEMBER, THE MARGINAL
PROPENSITY TO CONSUME PLUS THE MARGINAL PROPENSITY TO SAVE
EQUALS ONE OR ONE HUNDRED PERCENT. AND SO WHEN I SAY ONE MINUS
MPC, THAT'S ALSO JUST EQUAL TO THE MARGINAL PROPENSITY TO SAVE. SO
I COULD'VE SAID THE MULTIPLIER IS ONE OVER THE MPS.
YOU SHOULD ALSO BE FAMILIAR -- AND WE DID, I THINK, SOME OF
THESE PROBLEMS THE OTHER DAY -- YOU SHOULD BE FAMILIAR WITH JUST
CALCULATING MULTIPLIERS. IF I TELL YOU THAT THE MARGINAL PROPENSITY
TO CONSUME IS TWO-THIRDS, WHAT'S THE MULTIPLIER? IF I TELL YOU THE
MARGINAL PROPENSITY TO CONSUME IS POINT FIVE FIVE, WHAT'S THE
MULTIPLIER? AND YOU NEED TO BE FAMILIAR WITH SORT OF PUTTING THAT
NUMBER TWO-THIRDS IN RIGHT HERE. IF IT'S TWO-THIRDS, ONE OVER ONE
MINUS TWO-THIRDS IS EQUAL TO ONE OVER ONE-THIRD IS EQUAL TO THREE.
SO THE MARGINAL PROPENSITY TO CONSUME IS TWO-THIRDS; THE
MULTIPLIER IS THREE. AND SO YOU NEED TO BE COMFORTABLE WITH DOING
THAT, THOSE TYPES OF CALCULATIONS.
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THEN THIS TYPE OF CALCULATIONS GOES BEYOND JUST THE
MULTIPLIER. THIS TELLS ME THAT THE MULTIPLIER IS EQUAL TO FOUR -- THAT
IS, THE MPC DOES -- BUT I ALSO NEED TO MULTIPLY THAT FOUR BY TOTAL
AUTONOMOUS SPENDING.
LET'S EXPAND THIS EXAMPLE A LITTLE BIT. TOTAL AUTONOMOUS
SPENDING EQUALS -- LET'S ADD SOME THINGS TOGETHER. C0. THIS IS
AUTONOMOUS CONSUMPTION SPENDING PLUS IO -- THIS IS AUTONOMOUS
BUSINESS INVESTMENT, SPENDING, BUSINESSES PURCHASING CAPITAL
GOODS AND SO FORTH. AND, BY THE WAY -- OH, I WON'T GO INTO THAT. GO,
AUTONOMOUS GOVERNMENT SPENDING. THAT ZERO IS TELLING US IT'S
AUTONOMOUS, THAT IT'S OVER HERE. IF THE LEVEL OF INCOME IS ZERO,
THEN HOW MUCH WOULD THE SPENDING BE? PLUS NET EXPORTS, 0. AND
ONE MORE THING THAT WE HAVEN'T REALLY TALKED ABOUT BEFORE: MINUS
MPC TIMES T. AND I'M ONLY TELLING YOU ABOUT THIS NOW BECAUSE IN THE
NEXT CHAPTER OR UNIT OF MATERIAL WE'LL BE TALKING ABOUT FISCAL
POLICY, BUT THIS IS TAX COLLECTIONS. I SHOULD SAY PERSONAL TAX
COLLECTIONS. AND THE MPC -- YOU KNOW WHAT THAT IS: MARGINAL
PROPENSITY TO CONSUME.
SO WE NEED TO TAKE INTO ACCOUNT, OR AT LEAST WE EVENTUALLY
WILL -- AND I DON'T WANT TO GIVE YOU A FORMULA THAT'S INCOMPLETE
RIGHT NOW JUST 'CAUSE WE HAVEN'T YET GOTTEN TO TALKING ABOUT
TAXES. BUT LATER ON WE WILL COME BACK AND PUT IN TAXES INTO THIS
FORMULA. SO THIS WILL BE OUR AUTONOMOUS SPENDING FIGURE.
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SO I MAY SAY SOMETHING TO YOU LIKE THIS: CONSUMPTION
SPENDING, TWENTY DOLLARS -- AUTONOMOUS CONSUMPTION.
AUTONOMOUS INVESTMENT, TWENTY-FIVE; GOVERNMENT, THIRTY; NET
EXPORTS, MINUS TEN; TAXES -- OH, WHAT DO WE MAKE IT? LET'S SAY TEN
DOLLARS ALSO. MPC, POINT SEVEN FIVE. SO I WOULD GIVE YOU THESE
AMOUNTS AND THESE ARE ALL DOLLAR AMOUNTS. THIS MINUS TEN FOR NET
EXPORTS, THAT'S TELLING US THAT -- NET EXPORTS OR EXPORTS MINUS
IMPORTS. AND IF THIS IS A NEGATIVE NUMBER, THAT SAYS THAT OUR
IMPORTS ARE GREATER THAN OUR EXPORTS. WE'RE RUNNING A BALANCE
OF TRADE DEFICIT. MORE ON THAT LATER IN THE SEMESTER.
BUT ANYWAY, WHAT'S TOTAL AUTONOMOUS CONSUMPTION
SPENDING? TWENTY AND TWENTY-FIVE IS FORTY-FIVE, SEVENTY-FIVE MINUS
TEN, SIXTY-FIVE, MINUS -- SO TAXES ARE GONNA LOWER AUTONOMOUS
SPENDING BUT MINUS SEVENTY-FIVE PERCENT OF TEN DOLLARS, SO THAT
WOULD BE SEVEN FIFTY. WHAT WOULD THAT BE? FIFTY -- SEVEN FIFTY? SO
GIVEN THESE NUMBERS -- AND THE ONLY REASON I'M DOING THIS IS TEST
DAY I WILL GIVE YOU SOME NUMBERS LIKE THIS. THEY'LL BE A LITTLE BIT
DIFFERENT BUT THE IDEA IS THERE. WE'VE GOT FIFTY-SEVEN DOLLARS AND
FIFTY CENTS WORTH OF AUTONOMOUS SPENDING. THE MULTIPLIER IS FOUR
AND SO THE EQUILIBRIUM LEVEL OF GDP IS FIFTY-SEVEN FIFTY DIVIDED -- OR
TIMES FOUR, TWO HUNDRED AND THIRTY DOLLARS. I WOULD URGE YOU TO
PRACTICE THAT.
WHAT'S THAT -- TWO HUNDRED AND THIRTY DOLLARS. OKAY. OH, I
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KNOW WHAT I WANTED TO DO NEXT. OUR NEXT THING IS TO COME ALONG
AND SAY SUPPOSE THERE IS A SHIFT IN THIS CURVE, TE2. WELL, HOW MUCH
DID IT SHIFT? WELL, LET'S SAY SOMETHING LIKE THIS HAPPENED.
AUTONOMOUS INVESTMENT SPENDING WENT UP TO FORTY-FIVE DOLLARS.
THEN THAT WOULD MEAN THIS TOTAL EXPENDITURES CURVE SHIFTED
UPWARD BY TWENTY DOLLARS 'CAUSE ONLY ONE COMPONENT CHANGED BY
THAT MUCH. NOW THAT'S SEVENTY-SEVEN FIFTY. IS THAT RIGHT? SEVENTYSEVEN FIFTY TIMES FOUR IS THREE HUNDRED AND TEN DOLLARS. AND WHAT
WE CAN SEE AGAIN IS WE'VE GOT AN EXTRA TWENTY DOLLARS WORTH OF
SPENDING AND THAT RESULTED IN AN EXTRA EIGHTY DOLLARS WORTH OF
EQUILIBRIUM GDP OR INCOME. AND SO THE RELATIONSHIP BETWEEN THOSE
TWO OF TWENTY DOLLARS LEADS TO EIGHT DOLLARS WORTH OF INCOME,
AND THAT GOES ALONG WITH OUR MULTIPLIER OF FOUR.
LET ME DO A LITTLE ERASING AND DRAW YOU THE AGGREGATE
DEMAND CURVE THAT GOES ALONG WITH THIS. IF YOU'LL REMEMBER,
KEYNES ASSUMED THIS AGGREGATE SUPPLY CURVE THAT WAS
HORIZONTAL. THIS IS -- WE'RE GONNA DRAW AN AGGREGATE DEMAND
CURVE. THERE'S OUR AGGREGATE SUPPLY. AND SO IN THIS PARTICULAR
CASE WHERE THERE'S A TWENTY DOLLAR INCREASE IN SOME AUTONOMOUS
COMPONENT OF SPENDING AND THEN THE EQUILIBRIUM INCOME INCREASES
BY EIGHTY DOLLARS, HERE'S WHAT WE'RE SAYING IS HAPPENING. THE
AGGREGATE DEMAND CURVE WAS IN ONE PARTICULAR POSITION TO BEGIN
WITH, EQUILIBRIUM WAS TWO HUNDRED AND THIRTY DOLLARS -- THAT WAS
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GDP, AND THEN WHEN THIS AUTONOMOUS INVESTMENT SPENDING WENT UP,
THE AGGREGATE DEMAND CURVE SHIFTED TO THE RIGHT TO AD2 AND THE
EQUILIBRIUM LEVEL OF INCOME WOULD NOW BE THREE HUNDRED AND TEN
DOLLARS.
SO WHAT WE ARE LEARNING FROM THIS PICTURE -- THIS IS THE ONE
THAT KEYNES DID BACK -- WELL, ACTUALLY KEYNES NEVER DREW ANY
DIAGRAMS. HE DID IT ALL MATHEMATICALLY. BUT THE KEYNESIANS WHO
CAME ALONG AND FOLLOWED HIM, THEY TOOK THE MATHEMATICS,
TRANSFORMED IT INTO DIAGRAMS. THEIR DIAGRAM ASSUMES THIS PASSIVE
AGGREGATE SUPPLY. ALL YOU HAVE TO DO IS DEMAND MORE AND IT WILL
PRODUCE MORE.
AND SO UNDER THAT ENVIRONMENT -- AND THAT'S WHAT THIS CURVE
SHOWS ALSO, THIS FORTY-FIVE DEGREE LINE. IT SAYS, "HEY, IF YOU WANT
US TO PRODUCE MORE, WE CAN. IF YOU WANT US TO PRODUCE OUT HERE
OR HERE OR HERE, WE DON'T CARE. WE'LL PRODUCE ALL YOU WANT."
SO ANYWAY, IN THIS SITUATION, AN INCREASE IN TOTAL
EXPENDITURES THROUGH THIS -- I'VE GIVEN AN EXAMPLE OF INVESTMENT
SPENDING GOING UP -- THAT WOULD CAUSE EQUILIBRIUM LEVEL OF INCOME
TO RISE BY EIGHTY DOLLARS. UNDER THAT SITUATION OF PASSIVE
AGGREGATE SUPPLY. IN REALITY, WE DO NOT FACE THIS PASSIVE
AGGREGATE SUPPLY CURVE. I SHOULDN'T SAY "IN REALITY." DURING
KEYNES'S REALITY WE DID. BUT THE POINT IS, IN REALITY MAYBE TODAY WE
FACE AN AGGREGATE SUPPLY CURVE THAT'S UPWARD SLOPING. VERY
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STEEP, PERHAPS. SO WE DON'T ACTUALLY MOVE ALL THE WAY OUT TO
THREE HUNDRED -- AND I'LL JUST KIND OF DRAW THIS HERE, AS. WE DON'T
ACTUALLY MOVE WITH THIS GIVEN -- WITH THE INCREASE IN INVESTMENT
SPENDING THAT WE HAD HERE, WE DON'T ACTUALLY MOVE ALL THE WAY
OUT FROM TWO HUNDRED AND THIRTY TO THREE HUNDRED AND TEN
DOLLARS LEVEL -- THREE HUNDRED AND TEN DOLLARS WORTH OF INCOME.
WE DON'T ACTUALLY MAKE THAT FULL TRIP FROM POINT A TO B. WE GO UP
TO POINT C, AND THE REASON FOR THAT IS: AS DEMAND STARTS TO GROW,
THE UNEMPLOYMENT RATE IS GOING DOWN. AS WE START MOVING THIS
DIRECTION, THERE'S MORE PEOPLE WITH JOBS. WAGES START TO RISE.
AND SO THIS CURVE DOESN'T LOOK HORIZONTAL. IT'S GOT AN UPWARD
SLOPE TO IT DUE TO THE FACT THAT WAGES AND FACTOR PRICES AND SO
FORTH ARE RESPONDING TO THIS INCREASED DEMAND.
BUT THE POINT IS, IS THAT ALL KEYNES IS REALLY TELLING US WITH
THIS STORY IS NOTHING ABOUT THIS POINT C IN THIS NEW EQUILIBRIUM. HE
DOESN'T GET TO THAT. WHAT HE'S DOING IS SHOWING US THE SIZE OF THE
AGGREGATE -- OF THE SHIFT IN THE AGGREGATE DEMAND CURVE. AND IF
WE HAD AN EIGHTY DOLLAR INCREASE HERE, THAT MEANS THAT THE
AGGREGATE DEMAND CURVE IS SHIFTING TO THE RIGHT BY EIGHTY
DOLLARS. AND THEN IT'S -- WE ALSO HAVE TO INVESTIGATE WHAT'S GOING
ON WITH AGGREGATE SUPPLY TO KNOW WHERE THE NEW EQUILIBRIUM IS.
KEYNES'S EQUILIBRIUM -- HERE IS -- LET ME PUT A AND B. KEYNES'S
EQUILIBRIUM FROM POINT A TO POINT B, THAT'S GREAT IF WE HAVE THIS
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PASSIVE AGGREGATE SUPPLY. WE MOVE FROM POINT A TO POINT B. BUT I'M
SAYING THAT IN REALITY, IN OUR REALITY, THAT'S NOW THE AGGREGATE
SUPPLY CURVE SO THAT'S NOT THE END OF THE STORY, THIS POINT B.
NEVERTHELESS, WHAT WE ARE TRYING TO DO IS UNDERSTAND WHAT'S
GOING ON WITH AGGREGATE DEMAND. AND WE COULD COME BACK HERE
AND COULD'VE DONE THE SAME THING. IT COULD'VE BEEN GOVERNMENT
SPENDING OR AUTONOMOUS CONSUMPTION SPENDING THAT COULD'VE
RISEN BY TWENTY DOLLARS, AND WE WOULD'VE HAD EXACTLY THESE SAME
SHIFTS AND EXACTLY THAT SAME RESULT WITH RESPECT TO EQUILIBRIUM
INCOME.
ANY QUESTIONS ABOUT THIS? A LOT OF WHAT WE'RE DOING HERE IS
REVIEW, BUT NOT ALL OF IT. OKAY.
HERE'S A QUESTION FOR YOU. WHAT CAUSES THESE THINGS TO
SHIFT: CHANGE IN AUTONOMOUS CONSUMPTION, CHANGE IN AUTONOMOUS
INVESTMENT, AND SO FORTH? WHAT CAUSES THOSE TO HAPPEN? WE'VE
TALKED ABOUT SOME OF THESE ALREADY. AUTONOMOUS CONSUMPTION
SPENDING? THAT COULD CHANGE DUE TO, OH, WHAT? CHANGES IN
EXPECTATIONS. I'LL PUT A DELTA SIGN THERE. CHANGES IN EXPECTATIONS
OF PRICES. FOR EXAMPLE, IF YOU THINK PRICES ARE GONNA GO UP, IT'S A
GOOD TIME TO GO OUT AND SPEND YOUR MONEY TODAY BEFORE THE
PRICES GO UP. AND IF YOU GO OUT AND SPEND THAT MONEY TODAY
BEFORE THE PRICES GO UP, CONSUMPTION SPENDING RISES.
CHANGE IN WEALTH OF HOUSEHOLDS. HERE'S A GOOD EXAMPLE FOR
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YOU. THIS IS TAKING PLACE AND HAS BEEN FOR SEVERAL YEARS. WHAT
HAPPENS IS THE STOCK MARKET GOES UP, STOCK PRICES GO UP. IT WAS
GOING UP THIS MORNING BEFORE I CAME IN. SO STOCK PRICES GO UP,
PEOPLE SAY, "GOSH, YOU KNOW, I MADE TEN THOUSAND DOLLARS LAST
YEAR IN THE STOCK MARKET." I DIDN'T ACTUALLY MAKE THAT; I'M SAYING
PEOPLE SAY THAT. SO SOMEBODY SAYS, "I MADE TEN THOUSAND DOLLARS
IN THE STOCK MARKET," AND THEN THEY START SAYING, "I KIND OF FEEL
PRETTY WELL OFF, YOU KNOW. THAT'S KIND OF LIKE GETTING A RAISE IN
PAY."
AND THEN WHAT THEY MIGHT SAY IS SOMETHING LIKE THIS: "HECK, I
THINK I'M GONNA GO OUT AND BUY A NEW CAR." A NEW CAR? YOU CAN'T
BUY A NEW CAR WITH TEN THOUSAND DOLLARS. "NO, BUT NEXT YEAR I'LL
MAKE ANOTHER TEN THOUSAND DOLLARS AND THE YEAR AFTER THAT
ANOTHER TEN THOUSAND -- YOU KNOW, THE STOCK MARKET IS GONNA GO
UP FOREVER. SO I'LL JUST GO OUT AND BUY A NEW CAR AND THEN EACH
YEAR I'LL TAKE A LITTLE BIT OF MY GAINS FROM THE STOCK MARKET AND I'LL
PAY FOR THAT CAR." THAT'S HAPPENING IN THE UNITED STATES AND HAS
BEEN FOR SEVERAL YEARS. PEOPLE ARE SAVING VERY LITTLE IN TERMS OF
SAVING OUT OF THEIR CURRENT INCOME. THEY SPEND OUT OF THEIR
CURRENT INCOME BECAUSE THEY SAY, "MY SAVINGS ARE GROWING
ANYWAY. THE STOCK MARKET IS GOING UP." PEOPLE FEEL A WEALTH
EFFECT. AND I HAVEN'T WRITTEN THAT TERM DOWN HERE, BUT THERE'S A
WEALTH EFFECT FROM THE STOCK MARKET.
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I WANT TO BE CAREFUL AND NOT JUST LEAVE IT AT THAT. THERE'S
NOT ALWAYS A WEALTH EFFECT -- WELL, THERE'S ALWAYS A WEALTH
EFFECT. SOMETIMES IT'S NEGATIVE, THOUGH. STOCK MARKET CAN GO
DOWN. IT HAS GONE DOWN MANY TIMES. AND SO IF THE STOCK MARKET
GOES DOWN, THEN WE SAY, "OH, MAN. I FEEL MISERABLE. I LOST TEN
THOUSAND DOLLARS." AND THEN SOMEBODY SAYS, "HEY, LET'S TAKE A
VACATION," AND YOU GO, "OH, NO, MAN. I CANNOT TAKE A VACATION. I AM
SUFFERING HERE. I LOST TEN THOUSAND DOLLARS." THAT WILL TEACH YOU
NOT TO GET IN THE STOCK MARKET. NO. THE STOCK MARKET GOES UP
OVER LONG PERIODS OF TIME AND IT GOES DOWN SOME DAYS. OTHER DAYS
IT GOES UP. BASICALLY, OVER THE LONG RUN, THE STOCK MARKET WILL GO
UP TWO DAYS FOR EVERY DAY IT GOES DOWN. AND SO OVER THE LONG
RUN, THE STOCK MARKET IS GOING UP. AND SO OVER THE LONG RUN, WE
HAVE MORE AND MORE OF THIS WEALTH THAT'S GROWING AND SO THAT
ENCOURAGES US TO SPEND MORE AND MORE.
LET'S TALK ABOUT INVESTMENT SPENDING, WHAT COULD AFFECT
THAT. HERE'S ONE THING: A CHANGE IN INTEREST RATES. YOU KNOW,
BUSINESSES FINANCE A LOT OF THEIR INVESTMENT -- AND BY "INVESTMENT,"
YOU KNOW, WE'RE NOT TALKING ABOUT BUYING STOCKS AND BONDS. I
WANTED TO DRAW THAT DISTINCTION SINCE WE WERE JUST A MOMENT AGO
TALKING ABOUT STOCKS. WHAT WE'RE TALKING ABOUT WITH RESPECT TO
INVESTMENT HERE, WE'RE TALKING ABOUT BUYING CAPITAL EQUIPMENT,
BUILDINGS, NEW STRUCTURES, NEW TOOLS, INVESTING IN INVENTORIES AND
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SO FORTH. BUT IF INTEREST RATES GO UP, BUSINESSES THEN SAY -BUSINESS MANAGERS SAY, "GOSH, THAT MEANS I'M GONNA HAVE TO MAKE A
HIGHER PAYMENT EVERY MONTH IF I WANT TO BUILD A NEW FACTORY. IF IT'S
A TEN MILLION DOLLAR BUILDING I WANT TO BUILD AND THE INTEREST RATE
GOES UP FROM EIGHT PERCENT TO NINE PERCENT, THEN THAT'S GONNA
COST ME AN EXTRA ONE PERCENT OF TEN MILLION DOLLARS. THAT'S GONNA
-- OH, BOY. CAN I DO THAT? ONE PERCENT OF TEN MILLION DOLLARS IS A
HUNDRED THOUSAND DOLLARS A YEAR. IT'S GONNA COST ME AN EXTRA
HUNDRED THOUSAND DOLLARS A YEAR IN INTEREST." AND THEN, "AH, I
DON'T KNOW IF I'M GONNA GO AHEAD AND BUILD THAT FACTORY."
AND SO ANYWAY, HIGHER INTEREST RATES, LOWER INVESTMENT.
THERE'S A NEGATIVE RELATIONSHIP HERE BETWEEN INTEREST RATES AND
INVESTMENT. THE INTEREST RATE'S UP, THE INVESTMENT DOWN. NEGATIVE
RELATIONSHIP. AND, BY THE WAY, INTEREST RATES COME DOWN,
INVESTMENT WILL GO UP. SO VERY OFTEN WHAT WE'LL SEE IS INTEREST
RATES ARE -- MAYBE THE FEDERAL RESERVE IS CAUSING INTEREST RATES
TO COME DOWN WITH ITS POLICIES AND THEN BUSINESS INVESTMENT WILL
RESPOND BY GOING UP.
WHAT ELSE? HOW ABOUT CHANGE IN PESSIMISM -- I'LL SAY MOOD,
AND THEN I'LL WRITE DOWN PESSIMISM AND OPTIMISM. BY THE WAY,
KEYNES THOUGHT THIS WAS EXTREMELY IMPORTANT. HERE'S WHAT HE
SAID. HE SAID, "YOU KNOW, THESE CAPITALISTS, THEY LOOK LIKE THE
CAPTAINS OF INDUSTRY BUT THEY'RE KIND OF TIMID PEOPLE INSIDE. AND
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SOMETHING CAN GO WRONG AND THEY JUST GET CHICKEN AND JUST RUN
AWAY AND THEY REFUSE TO INVEST. AND AT OTHER TIMES THEY FEEL REAL
AGGRESSIVE AND, YOU KNOW, LIKE 'OH, I'M READY TO INVEST.'" AND SO
WHAT HE SAID IS INVESTMENT VERY OFTEN IS RESPONDING TO THESE SORT
OF MOODS THAT RUN THROUGH THE BUSINESS COMMUNITY. OPTIMISM,
PESSIMISM.
AND HE SAYS THAT THOSE SWINGS IN THE MOOD, THAT CAN HAVE A
MUCH BIGGER IMPACT ON INVESTMENT SPENDING THAN CHANGES IN
INTEREST RATES OR REALLY ANYTHING ELSE. AND HE SAID THAT WHAT
HAPPENED DURING THE DEPRESSION WAS BUSINESS -- AND, IN FACT, HE
SAID THIS IS WHAT STARTED THE DEPRESSION. YOU MAY WANT TO THINK
ABOUT THIS. AND, BY THE WAY, I DON'T AGREE WITH HIM. BUT KEYNES SAID
WHAT STARTED THE DEPRESSION IS REALLY BUSINESSES BECAME
PESSIMISTIC AND THEY JUST WERE RELUCTANT TO INVEST.
LET'S FOLLOW THAT THROUGH. LET'S SAY THAT OUR ORIGINAL -- LET
ME GET RID OF THESE A'S AND B'S BECAUSE WE DON'T NEED THOSE. LET'S
SAY THAT OUR ORIGINAL TOTAL EXPENDITURE CURVE WAS THIS -- THE TOP
CURVE, WHICH I BELIEVE WILL TE2, AND SUPPOSE THEN BUSINESSES -BUSINESS MANAGERS BECOME PESSIMISTIC AND SAY, "OH, MAN. I'M AFRAID
TO INVEST." AND SO THIS CURVE SHIFTS DOWNWARD. THERE'S LESS
AUTONOMOUS INVESTMENT SPENDING. THE CURVE SHIFTS DOWNWARD.
AND THEN THE ECONOMY SHRINKS BY, IN THIS PARTICULAR CASE, EIGHTY
DOLLARS.
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AND SO IF THE ECONOMY BEGAN AT, LET'S SAY, FULL EMPLOYMENT,
NATURAL REAL GDP, ALL OF A SUDDEN WE'RE IN A RECESSIONARY GAP. AND
SO THAT'S WHAT KEYNES SAID HAPPENED TO BASICALLY GET THE
RECESSION OR THE DEPRESSION -- IN ENGLAND IN THE '20S AND '30S AND IN
THE UNITED STATES THE DEPRESSION OF THE '30S. BUT HE SAID IT WAS
THESE TIMID BUSINESS MANAGERS. THEY WOULDN'T INVESTMENT. THE
CURVE -- THE TOTAL EXPENDITURES CURVE SHIFTS DOWN, EQUILIBRIUM GDP
FALLS, AND THEN WE'RE JUST STUCK IN A RECESSION. STUCK.
WHAT DO WE DO ABOUT IT? WELL, YOU COULD COME ALONG, YOU
KNOW, AND CHEER UP THESE BUSINESS MANAGERS. "C'MON, C'MON.
THINGS AREN'T AS BAD AS YOU THINK." BUT THAT WON'T WORK. IN FACT,
THAT WAS REALLY MY IDEA TO CHEER 'EM UP. NOBODY'S EVER MENTIONED
DOING THAT BEFORE. SOME KIND OF MAYBE A GETAWAY THING, A
LOVEBOAT CRUISE IN THE CARIBBEAN. ANYWAY. I DON'T KNOW WHAT I'M
TALKING ABOUT HERE. BUT I THINK THAT WOULD BE A GOOD IDEA FOR A
NEW POLICY.
KEYNES SAYS THESE GUYS BECAME PESSIMISTIC AND THE ECONOMY
FELL APART. IF YOU CAN'T COME OUT HERE AND JOLLY THESE GUYS UP AND
SOMEHOW GET 'EM TO REVERSE THEIR DECISION TO NOT SPEND, HE SAID,
"WE'RE JUST GONNA STICK BACK HERE IN THIS DEPRESSED SITUATION." AND
THEN OUR NEXT UNIT OF MATERIAL, WE'LL COME BACK TO WHAT HE SAID TO
DO ABOUT THAT. HEY, IT'S THE GOVERNMENT'S JOB TO COME IN AND
OFFSET THOSE SHIFTS IN INVESTMENT. IF YOU SEE BUSINESS INVESTMENT
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GO DOWN BY A CERTAIN AMOUNT -- HERE IT WAS TWENTY DOLLARS -- IF YOU
SEE BUSINESS INVESTMENT SPENDING GO DOWN BY A CERTAIN AMOUNT
AND THAT SLOWS DOWN THE ECONOMY, HE SAID, "WHY DON'T YOU HAVE
THE GOVERNMENT COME BACK IN AND SPEND MONEY AND THEN DO
SOMETHING ABOUT THAT?"
SO IF THERE'S A DECREASE OF INVESTMENT SPENDING BY TWENTY
DOLLARS, THEN HOW ABOUT LET'S INCREASE GOVERNMENT SPENDING BY
TWENTY DOLLARS AND THE ECONOMY -- YOU KNOW, SO THE CURVE SHIFTS
DOWN, TOTAL EXPENDITURE IS DOWN, AND THEN BACK UP -- HERE'S
INVESTMENT DOWN, GOVERNMENT UP, AND THEN WE KEEP THE SAME OLD
EQUILIBRIUM. AND THAT'S REALLY WHAT THE NEXT UNIT OF MATERIAL IS
ABOUT, IS FISCAL POLICY.
LET ME TALK ABOUT THIS FOR JUST A SECOND. CHANGES IN
GOVERNMENT PURCHASES. DON'T FORGET, THIS IS NOT GOVERNMENT
SPENDING 'CAUSE THE GOVERNMENT SPENDS SOME MONEY JUST AS
TRANSFER PAYMENTS. THIS IS GOVERNMENT PURCHASES OF GOODS AND
SERVICES. WHY WOULD THAT SHIFT? YOU KNOW, FOR TWO REASONS I CAN
THINK OF. ONE REASON IS FISCAL POLICY, WHICH I WAS JUST TALKING
ABOUT A MOMENT AGO. THERE CAN BE A CHANGE IN GOVERNMENT
SPENDING BECAUSE THE GOVERNMENT SAYS, "WE WANT TO BASICALLY
INFLUENCE THE ECONOMY. WE WANT TO STIMULATE THE ECONOMY" OR "WE
WANT TO SLOW DOWN THE ECONOMY." THAT'S FISCAL POLICY. AGAIN, WE
COME BACK TO THAT LATER ON.
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THERE'S ANOTHER REASON THAT GOVERNMENT SPENDS, THOUGH.
PUBLIC GOODS. SOMETIMES THE GOVERNMENT -- SOMETIMES. USUALLY
WHEN THE GOVERNMENT'S SPENDING, IT'S NOT SPENDING TRYING TO
MANIPULATE THE ECONOMY. USUALLY WHEN THE GOVERNMENT IS
SPENDING IT'S DOING SO BECAUSE THEY THINK, YOU KNOW, THERE ARE
GOODS THAT -- GOODS AND SERVICES, BUT THERE ARE GOODS AND
SERVICES OUT THERE THAT THE PUBLIC WANTS.
AND THIS TERM "PUBLIC GOODS," IT'S A TECHNICAL TERM. I DON'T
MEAN TO SAY THE WAY IT JUST SOUNDED. I DON'T MEAN TO SAY WITH THIS
TERM "PUBLIC GOODS," OH, GOODS AND SERVICES THE PUBLIC WANTS. I
DON'T MEAN IT LIKE THAT. ECONOMISTS USE THIS TERM IN A TECHNICAL
WAY. WHAT THEY MEAN BY PUBLIC GOODS IS GOODS THAT PROVIDE
BENEFITS TO VIRTUALLY EVERYBODY IN SOCIETY. SIMULTANEOUSLY. OKAY.
SO WHAT I'M SAYING IS THAT IF THE GOVERNMENT CAME OUT AND,
LET'S SAY, WAS JUST LIKE -- OH, I DON'T KNOW -- BUILDING -- WHAT WOULD
THEY BUILD? I DON'T WANT TO GET INTO BAD EXAMPLES. LET ME GET INTO
A GOOD EXAMPLE. NATIONAL DEFENSE. NATIONAL DEFENSE IS AN EXAMPLE
OF A PUBLIC GOOD. WHEN THE GOVERNMENT PURCHASES THAT GOOD AND
PROVIDES IT TO ME, THEY PROVIDE THE SAME NATIONAL DEFENSE TO YOU.
IT'S IMPOSSIBLE FOR ANOTHER NATION TO ATTACK ME IN MY HOME WITHOUT
SIMULTANEOUSLY ATTACKING YOU. WHEN THE GOVERNMENT HAS NATIONAL
DEFENSE SPENDING AND DETERS THE FOREIGN ATTACK AGAINST ME, THE
GOVERNMENT'S ALSO DETERRING FOREIGN ATTACK AGAINST YOU AND
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EVERYBODY ELSE IN THE UNITED STATES.
AND SO PUBLIC GOOD IS THE GOOD THAT PROVIDES BENEFITS TO
VIRTUALLY EVERYBODY IN SOCIETY. SIMULTANEOUSLY. AND SECONDLY, IT'S
REALLY KIND OF HARD TO EXCLUDE THESE PEOPLE FROM CONSUMING
THESE. THAT IS TO SAY, IF THE GOVERNMENT PROVIDES NATIONAL DEFENSE
FOR ME AND THEN TURNS TO YOU AND SAYS, "WELL, WE'RE DEFENDING YOU,
TOO. WHY DON'T YOU PAY US?" YOU COULD JUST SAY, "HEY, I DON'T WANT
TO PAY. AND DON'T DEFEND ME IF YOU DON'T FEEL LIKE IT." WELL, THE
THING IS IS THAT'S EASY TO SAY, BUT THE GOVERNMENT DOESN'T HAVE
THAT CHOICE. ONCE THEY GET THE NATIONAL DEFENSE IN PLACE TO
DEFEND ME, YOU'RE AUTOMATICALLY DEFENDED.
SO PUBLIC GOODS HAVE THOSE TWO CHARACTERISTICS: PROVIDING
BENEFITS FOR VIRTUALLY EVERYBODY IN SOCIETY SIMULTANEOUSLY AND
WE CAN'T REALLY PUT A PRICE TAG ON IT WHERE WE CHARGE EACH
INDIVIDUAL CONSUMER. IT'S NOT POSSIBLE TO EXCLUDE NON-PAYERS FROM
CONSUMING.
ANYWAY. SO THERE'S TWO REASONS THAT GOVERNMENT COULD BE
SPENDING MONEY. IT COULD BE THAT ALL OF A SUDDEN THERE'S A BIG
FOREIGN THREAT TO OUR NATION'S SECURITY. AND IF SO, THE
GOVERNMENT WILL SAY, "OH, WE NEED TO HAVE MORE DEFENSE SPENDING,"
AND THE GOVERNMENT WILL GO OUT AND SPEND MORE AND THAT WILL
AFFECT THE ECONOMY. BUT IT WILL NOT AFFECT THE ECONOMY SORT OF
ON PURPOSE. THAT IS TO SAY, THERE WAS NO ATTEMPT IN THIS STORY TO
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INFLUENCE THE ECONOMY. IT WAS JUST AN ATTEMPT TO DEFEND THE
COUNTRY. FISCAL POLICY, WE'RE REALLY TALKING ABOUT WHETHER THE
GOVERNMENT SPENDS OR DOESN'T SPEND, TRYING TO INFLUENCE THE
ECONOMY. AND IT'S NOT LIKE, "WELL, WE NEED TO BE DEFENDED." IT'S
MORE A CASE OF, "WELL, WE NEED TO GET OUT OF THIS RECESSION" OR "WE
NEED TO FIGHT INFLATION," OR WHATEVER THE PROBLEM IS. THAT'S WHAT
FISCAL POLICY DOES.
SO ANYWAY, WE WERE REALLY GOING THROUGH THE LIST OF WHAT
INFLUENCES EACH ONE OF THESE COMPONENTS OF AUTONOMOUS
SPENDING, AND I'M SAYING THERE'S A COUPLE OF THINGS THERE.
NET EXPORTS, WHAT INFLUENCES THAT? HOW ABOUT TWO THINGS IN
PARTICULAR: CHANGES AND EXCHANGE RATES, THE VALUE OF THE DOLLAR
RELATIVE TO THE VALUE OF OTHER CURRENCIES. LET'S GIVE AN EXAMPLE.
SUPPOSE THE DOLLAR STRENGTHENS. SUPPOSE THE DOLLAR GETS MORE
VALUABLE RELATIVE TO OTHER CURRENCIES. OKAY. IF THAT HAPPENS,
THEN -- WELL, LET'S GIVE SOMETHING SPECIFIC HERE. LET'S SAY JAPAN -THE UNITED STATES, JAPAN -- LET'S SAY THE EXCHANGE RATE IS A HUNDRED
TO ONE. ONE HUNDRED YEN EQUALS ONE DOLLAR.
OKAY. NOW, LET'S SAY THE DOLLAR STRENGTHENS. THEN IT MIGHT
TAKE A HUNDRED AND TEN YEN TO BUY ONE DOLLAR. NOW THE DOLLAR IS
TEN PERCENT STRONGER. AND WHAT I'M SAYING IS THIS: IF WE HAVE
SOMETHING TO SELL, LET'S SAY AN AIRPLANE, FOR FIFTY MILLION DOLLARS
TO JAPAN -- THIS MIGHT BE SOME AIRLINER THAT BOEING MANUFACTURES.
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IF WE HAVE A FIFTY MILLION DOLLAR AIRLINE TO SEND TO JAPAN, TO SELL TO
JAPAN, IN THE FIRST INSTANCE WHERE THE EXCHANGE RATE WAS A
HUNDRED TO ONE, THEN THEY SAY, "OH, MAN" -- AND HOW MUCH IS THAT? I
DON'T EVEN KNOW BILLIONS. BUT IN THE FIRST INSTANCE THE JAPANESE
SAY, "OH, IT TAKES A HUNDRED YEN TO BUY EACH DOLLAR. WE NEED FIFTY
MILLION DOLLARS," AND SO THAT'S A CERTAIN NUMBER OF YEN TO BUY THE
AIRPLANE. BUT THE DOLLAR STRENGTHENS AND NOW IT TAKES A HUNDRED
AND TEN YEN TO BUY THAT SAME DOLLAR, MORE YEN TO BUY THE DOLLAR
SINCE THE DOLLAR IS STRONGER. NOW IT TAKES MORE YEN TO BUY THAT
AIRPLANE. IT'S STILL FIFTY MILLION DOLLARS, BUT NOW IT'S TEN PERCENT
MORE YEN THAN IT WAS A MOMENT AGO.
SO WHEN THE DOLLAR STRENGTHENS, OUR EXPORTS GO DOWN. OUR
PRODUCT BECOMES MORE EXPENSIVE, PEOPLE OVERSEAS ARE LESS
WILLING TO BUY IT. SO A STRONGER DOLLAR -- STRONGER DOLLAR -- LEADS
TO REDUCED EXPORTS BY THE U.S. AND ALSO TO INCREASED IMPORTS.
OKAY.
A SECOND THING: CHANGES IN FOREIGN GDP. HOW'S THAT WORK
OUT? SUPPOSE THAT PEOPLE IN FRANCE HAD THEIR INCOMES GO UP,
GROSS DOMESTIC PRODUCT. THEIR ECONOMY'S EXPANDING, THEIR
INCOMES ARE GOING UP. SUPPOSE THAT HAPPENS. THEN THE PEOPLE IN
JAPAN FEEL -- JAPAN -- FRANCE FEEL MORE PROSPEROUS. THEY SAY, "HEY,
OUR INCOMES ARE GOING UP." THEY PROBABLY SAY THAT IN SOME FRENCH
ACCENT. "HEY, OUR INCOMES ARE GOING UP. LET'S BUY THINGS." AND
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SOME OF THE THINGS THEY BUY ARE FROM FRANCE, SOME ARE FROM
GERMANY, SOME ARE FROM THE UNITED STATES. SO IF FOREIGN GDPS ARE
RISING, U.S. EXPORTS ARE GONNA BE RISING. PEOPLE OVERSEAS ARE
BETTER OFF, MORE PROSPEROUS, AND THEY CAN AFFORD TO BUY MORE
THINGS FROM THEIR OWN COUNTRIES AS WELL AS FROM THE UNITED
STATES. SO OUR EXPORTS RISE. OKAY.
SO THAT IS A PARTIAL LIST. YOU CAN THINK OF ADDITIONAL THINGS TO
PUT ON THE LIST. INTEREST RATES CHANGING. THAT WOULD PROBABLY
ALSO AFFECT CONSUMER AUTONOMOUS CONSUMPTION SPENDING BECAUSE
INTEREST RATES CHANGE AND THAT WOULD AFFECT THE AMOUNT OF A CAR
PAYMENT YOU HAVE TO MAKE OR SOMETHING LIKE THAT, A HOUSE
PAYMENT. AND SO YOU COULD ADD ADDITIONAL THINGS TO THE LIST BUT
THOSE ARE GOOD THINGS RIGHT THERE.
I DIDN'T GO AHEAD AND TALK ABOUT TAXES. BUT IF TAXES CHANGE,
WHICH WE WILL TALK ABOUT IN THE NEXT UNIT OF MATERIAL, THAT WOULD
ALSO AFFECT AUTONOMOUS SPENDING.
SO ANY QUESTIONS ABOUT THIS? THAT'S WHERE I WANT TO STOP
TALKING ABOUT THIS MATERIAL AND GO ON TO THAT NEXT UNIT OF
MATERIAL AND TALK ABOUT FISCAL POLICY. GOSH, I FEEL LIKE WE'VE
ALREADY GOTTEN PRETTY DEEP INTO IT 'CAUSE I'VE BEEN TALKING ABOUT
TAXES AND GOVERNMENT SPENDING. AND SO WHY DON'T WE DO THAT, JUST
GO ON AND TALK ABOUT FISCAL POLICY.
I WILL ADD ONE THING. I THINK I MADE THAT CLEAR. BUT ALL THESE
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THINGS WE'VE BEEN TALKING ABOUT, FOR THE MOST PART I'VE BEEN
INCREASING TOTAL EXPENDITURES AND SHIFTING THE AGGREGATE DEMAND
CURVE TO THE RIGHT AND SO FORTH. THIS ALL CAN WORK IN REVERSE. IF
INVESTMENT SPENDING WENT DOWN, TOTAL EXPENDITURES FALL;
AGGREGATE DEMAND DECLINES; GDP WOULD GO DOWN. SO ANYWAY,
EVERYTHING CAN BE REVERSED FROM WHAT WE WERE DOING BEFORE -- OR
I THINK IT CAN. EVERYTHING I REMEMBER CAN BE REVERSED.
OKAY. FIRST OF ALL, FISCAL POLICY. LET'S DEFINE THAT. FISCAL
POLICY IS THE DELIBERATE MANIPULATION, IF YOU LIKE, OF GOVERNMENT
SPENDING AND TAXES TO INFLUENCE ECONOMIC ACTIVITY. IT'S THE
MANIPULATE -- MANIPULATE -- DELIBERATE MANIPULATION -- I THINK THAT'S
WHAT MANIPULATE MEANS -- DELIBERATE MANIPULATION OF GOVERNMENT
SPENDING AND TAXES, THAT G AND T, IN ORDER TO BRING ABOUT A DESIRED
CHANGE IN ECONOMIC ACTIVITY. SAY IT ONE MORE TIME? I'LL TRY, 'CAUSE
I'M JUST MAKING THIS UP AS I GO, YOU KNOW, SO I HOPE I MAKE IT UP THE
SAME. IT'S THE DELIBERATE MANIPULATION OF GOVERNMENT SPENDING
AND TAXES, G AND T, IN ORDER TO BRING ABOUT DESIRED CHANGES IN
ECONOMIC ACTIVITY. I'LL HAVE TO REMEMBER THAT AND PUT IT ON THE
TEST.
THE IDEA OF FISCAL POLICY -- YOU JUST SAW IT A MOMENT AGO BUT
LET'S MAKE IT VERY CLEAR. HERE'S OUR TOTAL PRODUCTION CURVE, TOTAL
EXPENDITURES CURVE, EQUILIBRIUM GDP. AND THE IDEA IS THAT THAT
EQUILIBRIUM GDP MAY NOT BE NATURAL REAL GDP, QN. AND IF YOU'LL
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REMEMBER AT THIS NATURAL REAL GDP, THAT'S WHERE THE
UNEMPLOYMENT RATE IS EQUAL TO THE NATURAL RATE. AND WHAT'S THAT
NEIGHBORHOOD, FIVE PERCENT. SO IN THIS PARTICULAR CASE, WE HAVE
SOMETHING CALLED A RECESSIONARY GAP. A RECESSIONARY GAP IS
ACTUALLY THE DIFFERENCE BETWEEN THE EXISTING EQUILIBRIUM AND THE
FULL EMPLOYMENT LEVEL OF REAL GDP. OKAY.
SO THE IDEA ORIGINALLY WHEN KEYNES WROTE HIS BOOK, THIS
GENERAL THEORY, THE IDEA WAS WE'RE IN A RECESSION. HOW DO WE GET
RID OF THAT RECESSION? LATER ON WE CAN TALK ABOUT THE POSSIBILITY
OF AN INFLATIONARY GAP. SUPPOSE THAT INSTEAD -- AND WE CAN ONLY
HAVE ONE OF THESE, SO LET ME CROSS OUT THE ONE. SUPPOSE INSTEAD
THAT NATURAL REAL GDP WAS THIS SMALLER AMOUNT. THEN WE WOULD
SAY THAT, "OH, WE HAVE AN INFLATIONARY GAP." THE EQUILIBRIUM LEVEL
OF GDP IS GREATER THAN NATURAL REAL GDP. THE ECONOMY WANTS TO
PERFORM STRONGER THAN IT'S CAPABLE OF OVER THE LONG RUN. WE
HAVE INFLATIONARY PRESSURES IN PLAY.
SO ANYWAY, THE IDEA IS -- I'LL SAY IT AGAIN. FISCAL POLICY,
DELIBERATE MANIPULATION OF G AND T, GOVERNMENT SPENDING AND
TAXES, TO BRING ABOUT DESIRED CHANGES IN ECONOMIC ACTIVITY. EITHER
TO STIMULATE THE ECONOMY OR TO SLOW DOWN THE ECONOMY. THAT'S
ITS PURPOSE.
LET'S TALK ABOUT A FEW TERMS. FIRST OF ALL, GOVERNMENT
SPENDING HAS GOT TWO COMPONENTS: GOVERNMENT PURCHASES OF
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GOODS AND SERVICES PLUS TRANSFER PAYMENTS. WE -- STRICTLY
SPEAKING, WE ARE USUALLY NOT TALKING ABOUT TOTAL GOVERNMENT
SPENDING. USUALLY WE DIVIDE THESE TWO THINGS OUT. AND WE TALK
ABOUT GOVERNMENT PURCHASES OF GOODS AND SERVICES, AND G IS THE
LETTER THAT I'VE ASSIGNED TO THOSE GOVERNMENT PURCHASES. AND
TRANSFER PAYMENTS, THESE ARE DOLLARS, WHAT, SHIFTED FROM ONE
PERSON TO ANOTHER.
WHY DO I DISTINGUISH BETWEEN THOSE? AND HERE'S THE REASON
FOR THIS. HERE THERE'S NO NEW PRODUCTION. THERE'S NO DEMAND FOR
GOODS. WHAT HAPPENS IS, A DOLLAR COMES OUT OF MY POCKET AND IT
GOES INTO YOUR POCKET. I WAS GONNA BUY A HAMBURGER FOR LUNCH
WITH THAT DOLLAR BUT NOW THE DOLLAR'S GONE. I CAN'T BUY THAT
HAMBURGER. BUT NOW YOU HAVE THAT DOLLAR AND YOU CAN BUY THAT
HAMBURGER. SO REALLY, WHEN THERE'S TRANSFER PAYMENTS, IT MAY NOT
HAVE A VERY BIG IMPACT ON TOTAL SPENDING. WE'RE TAKING MY MONEY
AWAY. I SPEND LESS. YOU GET THE MONEY AND YOU SPEND MORE. THOSE
ARE SOME OFFSETTING THINGS TAKING PLACE. BUT HERE I CONTINUE TO
SPEND THE AMOUNT OF MONEY I WAS GONNA SPEND BEFORE. BUT ALL OF A
SUDDEN GOVERNMENT'S SPENDING SOME ON TOP OF THAT PURCHASING
GOODS AND SERVICES, AND SO THAT CONSTITUTES A LARGER INCREASE
AND DEMAND FOR GOODS.
SO WE WANT TO DISTINGUISH BETWEEN THESE TWO THINGS. THE
TRANSFER PAYMENTS -- I'LL USE TR TO REPRESENT THAT. THE
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GOVERNMENT PURCHASES THE GOODS AND SERVICES FROM THE TRANSFER
PAYMENTS. AND SOMETIMES I'M A LITTLE SLOPPY AND I SAY GOVERNMENT
SPENDING, BUT I USUALLY MEAN GOVERNMENT PURCHASES OF GOODS AND
SERVICES. SO YOU SHOULD ALWAYS HAVE THAT IN MIND.
THAT'S REALLY ALL I WANT TO DO HERE, THOUGH, IS DEFINE A FEW
TERMS SO THAT WE'RE REAL CLEAR ON WHAT'S GOING ON. TAXES. I THINK
EVERYBODY KNOWS WHAT TAXES ARE, BUT TAXES ARE UNILATERAL
PAYMENTS BY PERSONS OR ORGANIZATIONS TO THE GOVERNMENT. AND
THE KEY HERE IS THAT WORD "UNILATERAL." WELL, THE KEY IS TO THE
GOVERNMENT. BUT THE WORD "UNILATERAL," HERE'S WHAT THAT MEANS.
THEY JUST TELL YOU, "HEY, SEND US SOME MONEY." AND IF YOU SAY TO
THEM -- WELL, YOU KNOW, IF A GROCERY STORE OWNER SAID TO YOU,
"SEND US SOME MONEY," YOU WOULD SAY, "AND WHAT'RE YOU GONNA GIVE
ME, YOU KNOW? SOME SODA, SOME HAMBURGER, SOME CHEESE? WHAT DO
I GET FOR MY MONEY?" WITH THE GOVERNMENT THEY SAY, "SEND US
MONEY" AND THAT'S THE END OF THE STORY. AND IF YOU SAY, "WELL, WHAT
DO I GET BACK?" THEY SAY, "WE'LL TELL YOU. YOU KNOW, LIKE LATER ON IF
YOU'RE DRIVING DOWN THE ROAD AND YOU SEE A ROAD, THAT'S WHAT YOU
GET. BUT DON'T BE ASKING US THESE QUESTIONS, YOU KNOW."
AND SO ANYWAY, UNILATERAL. IT'S NOT A "HERE'S SOME MONEY AND I
GET BACK -- RIGHT THEN, AT THE TIME, IN A CLEAR WAY, I GET BACK GOODS
AND SERVICES." IT'S NOT THAT WAY WITH TAXES. YOU DO GET GOODS AND
SERVICES, BUT THERE'S NO RELATIONSHIP BETWEEN YOU AND THE
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GOVERNMENT IN TERMS OF YOU HAND OVER THE MONEY, THEY HAND BACK
THE SERVICES. YOU GET THE SAME SERVICES EVERYBODY DOES, THOSE
PUBLIC GOODS THAT WE WERE TALKING ABOUT A FEW MINUTES AGO.
GOVERNMENT BUDGET. YOU'LL HEAR PEOPLE TALKING ABOUT THE
BUDGET THROUGHOUT YOUR LIFE AND REALLY ALL THEY MEAN IS
GOVERNMENT SPENDING MINUS TAX REVENUES. I JUST TOLD YOU A
MOMENT AGO I DON'T VERY OFTEN MEAN GOVERNMENT SPENDING BUT HERE
I DO. I MEAN BOTH FORMS OF GOVERNMENT SPENDING, EITHER FOR
TRANSFER PAYMENTS OR FOR PURCHASES OF GOODS AND SERVICES. SO
LET'S SAY THE GOVERNMENT -- DOES ANYBODY KNOW HOW MUCH THE
GOVERNMENT SPENDS IN A YEAR? CLOSE TO TWO TRILLION DOLLARS. IT'S
NOT QUITE THERE, BUT IT'LL BE THERE BEFORE LONG. CLOSE TO TWO
TRILLION DOLLARS. AND RIGHT NOW TAX REVENUES ARE ABOUT THE SAME,
ONE POINT EIGHT TRILLION TOO, SOMEPLACE IN THERE. WHAT'S A COUPLE
OF HUNDRED BILLION DOLLARS AMONG FRIENDS?
ANYWAY, SO THE GOVERNMENT IS COLLECTING -- IS SPENDING AND
COLLECTING ABOUT TWO TRILLION DOLLARS A YEAR HERE IN THE UNITED
STATES, AND THAT'S ALL FORMS OF GOVERNMENT. ANYWAY, IF
GOVERNMENT SPENDING IS GREATER THAN TAX REVENUES -- LET ME MOVE
OVER HERE -- AND IF GOVERNMENT SPENDING IS GREATER THAN TAX
REVENUES, THEN WE SAY THAT THERE'S A GOVERNMENT BUDGET DEFICIT.
AND, ON THE OTHER HAND, IF GOVERNMENT SPENDING IS LESS THAN TAX
REVENUES, WE SAY THERE'S A SURPLUS. THERE WAS A DEFICIT IN THE
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UNITED STATES FROM 1969 THROUGH 1998 EVERY YEAR. ALMOST -- WELL, I
GUESS THAT WOULD BE THIRTY YEARS IF YOU COUNT THE END POINT. FOR
THIRTY YEARS, THE GOVERNMENT RAN DEFICITS YEAR AFTER YEAR AFTER
YEAR. GOVERNMENT SPENDING EXCEEDED TAX REVENUES. WHAT DO WE
HAVE HERE? DEFICIT IS THIS SITUATION RIGHT HERE. GOVERNMENT
SPENDING EXCEEDED TAX REVENUE FOR THIRTY YEARS.
BY THE WAY, IF YOU GO BACK BEFORE 1969, THERE WERE NO
SURPLUSES IN '68, '67, '66, '65, '64, '63, '62. IN 1961 THERE WAS A SURPLUS.
SO THERE WAS A SMALL SURPLUS IN '61, THERE WAS A SMALL ONE IN '69,
AND, OTHER THAN THAT, REALLY FROM 1961, TWO YEARS OF SURPLUS ALL
THE WAY UP TO 1998. SO A LOT OF DEFICIT.
AND THEN WHAT WE HAVE IS SOMETHING CALLED THE NATIONAL DEBT
AND THAT'S EQUAL TO THE ACCUMULATED DEFICITS. IF YOU TOOK ALL THE
DEFICITS YEAR AFTER YEAR AFTER YEAR, AND THEN YOU SUBTRACT AWAY
THE SURPLUSES, THEN THE TOTAL IS THE NATIONAL DEBT. SO WHAT WE
HAVE IS THE BUDGET DEFICIT OR SURPLUS. THESE ARE ANNUAL MEASURES
OR ONE-YEAR MEASURES, THE SURPLUS AND DEFICIT. OKAY. WE HAVE A
SURPLUS FOR THIS YEAR OR A DEFICIT FOR THIS YEAR. BUT THE NATIONAL
DEBT, THAT GOES BACK TO WHEN THE UNITED STATES FIRST STARTED. AND
EVERY TIME THE GOVERNMENT BORROWED, WE ADDED TO THE DEBT.
EVERY TIME THE GOVERNMENT RAN A SURPLUS AND PAID OFF, WE
SUBTRACTED FROM THE DEBT. AND SO THE NATIONAL DEBT IS -- AND AGAIN,
BALLPARK NUMBERS -- FIVE POINT SEVEN TRILLION DOLLARS. THAT'S KIND
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OF A LOT, ISN'T IT?
IF YOU THINK -- AND JUST TAKE A SECOND HERE TO THINK ABOUT THIS.
IF THE INTEREST RATE WAS FIVE PERCENT -- AND THAT'S WHAT HAPPENS
HERE WHEN I SAY WE HAVE A NATIONAL DEBT OF FIVE POINT SEVEN
TRILLION. THE GOVERNMENT'S GOT THAT MUCH BORROWED. IF THE
INTEREST RATE WAS FIVE PERCENT -- LET'S SEE IF I CAN DO THIS IN MY
HEAD. I THINK THIS IS TWO HUNDRED AND EIGHTY-FIVE BILLION DOLLARS
EACH YEAR IN INTEREST. AND SO THAT'S MORE THAN A THOUSAND DOLLARS
FOR EVERY PERSON IN THE UNITED STATES. MORE THAN A THOUSAND
DOLLARS FOR EVERY PERSON IN THE UNITED STATES, EVERY SINGLE YEAR,
JUST TO PAY INTEREST ON THE DEBTS THAT HAVE ACCUMULATED IN THE
PAST. AND THAT'S KIND OF A SIGNIFICANT AMOUNT, ISN'T IT?
BEFORE KEYNES -- AND WE STILL HAVEN'T LEFT THE LAND OF KEYNES.
WE'RE STILL TELLING HIS STORY. BEFORE KEYNES, THE UNITED STATES
HAD -- OH, I'M SORRY. I WANTED TO MENTION ONE OTHER THING. WHERE
WILL I WRITE OVER HERE? EXPANSIONARY POLICY CAUSES AN INCREASE IN
REAL GDP AND THEN A CONTRACTIONARY POLICY CAUSES A REDUCTION IN
REAL GDP. SO WHEN I USE THOSE TERMS, "OH, THAT'S AN EXPANSIONARY
POLICY" OR "THAT'S A CONTRACTIONARY POLICY," WE'RE TALKING ABOUT
HOW DOES IT AFFECT THE ECONOMY, REAL GDP. OKAY. SO BACK TO
KEYNES.
KEYNES WROTE HIS BOOK, THIS GENERAL THEORY OF EMPLOYMENT
INTEREST IN MONEY, HE WROTE THAT BOOK IN 1936. I TOLD YOU ABOUT
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THAT BEFORE. PREVIOUS TO THE TIME HE WROTE THAT BOOK, THERE WAS
THIS UNDERSTANDING ABOUT FISCAL POLICY THAT WE CAN CALL THE OLDTIME FISCAL RELIGION. BEFORE KEYNES -- AND THINGS ARE DIFFERENT
SINCE KEYNES. BUT BEFORE KEYNES, THERE WAS THIS FEELING AND THIS
FEELING HAD GROWN OVER THE DECADES -- THE CENTURIES, REALLY -ABOUT HOW THE GOVERNMENT OUGHT TO MANAGE ITS FINANCES. FOR
EXAMPLE, THE OLD-TIME FISCAL RELIGION? BALANCE THE BUDGET. "WE
DON'T WANT THE GOVERNMENT GOING OUT AND RUNNING UP A BUNCH OF
DEBT." AND I DON'T MEAN TO SAY WE TODAY, BUT I MEAN IN THESE OLDER
TIMES. "WE DON'T WANT THE GOVERNMENT GOING OUT AND RUNNING UP A
BUNCH OF DEBT." BALANCE THE BUDGET YEAR AFTER YEAR AFTER YEAR,
EXCEPT FOR IN VERY EXTRAORDINARY TIMES.
A SECOND THING: DO NOT MANAGE THE ECONOMY. THAT IS TO SAY,
NO FISCAL POLICY. THE GOVERNMENT SHOULDN'T BE OUT THERE TRYING TO
INCREASE OR DECREASE GDP. JUST IF WE NEED CERTAIN GOODS AND
SERVICES, THE GOVERNMENT OUGHT TO BUY 'EM. PUBLIC GOODS, WE
TALKED ABOUT THOSE A FEW MOMENTS AGO. IF WE NEED PUBLIC GOODS,
LET THE GOVERNMENT PURCHASE THOSE. THAT'S A GREAT THING. BUT IF
WE DON'T NEED 'EM, THOSE PUBLIC GOODS AND SERVICES, LET'S DON'T BE
TRYING TO MANAGE THE ECONOMY AND GOVERNMENT SPENDING MONEY IN
ORDER TO MANAGE THE ECONOMY.
AND ANOTHER THING IS THAT WE LIKE TO -- INCREASES IN
GOVERNMENT SPENDING SHOULD BE ACCOMPANIED BY INCREASES IN
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TAXES. WE NEED TO HAVE A CLEAR UNDERSTANDING THAT EVERY TIME THE
GOVERNMENT SPENDS SOME MONEY, WE'RE GONNA HAVE TO PAY TAXES. IF
WE HAVE THE GOVERNMENT JUST GO OUT THERE SPENDING MONEY AND NO
TAXES, THEN THAT STARTS PEOPLE THINKING, "OH, MAN. WE CAN HAVE THIS
STUFF FOR FREE." AND YOU REMEMBER THAT TERM TNSTAAFL, THERE'S NO
SUCH THING AS A FREE LUNCH. AND THE WAY WE MAKE THAT CLEAR TO
EVERYBODY IS: IF WE'RE GONNA SPEND MONEY TO PUT A HIGHWAY GOING
BY YOUR CITY, WE'RE GONNA HAVE TO TAX YOU. IF YOU WANT A HOSPITAL
OR A SCHOOL, YOU HAVE TO PAY. THAT WAS THE UNDERSTANDING BEFORE
KEYNES.
KEYNES BROKE THESE RULES AND THAT'S WHAT WE WILL TALK ABOUT
NEXT TIME. SO LONG.