Download eco 155 750 lecture twenty-three 1 okay. we`re getting to go on and

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OKAY. WE'RE GETTING TO GO ON AND TALK ABOUT THE LONG-RUN
EQUILIBRIUM FOR THE ECONOMY. BUT BEFORE WE DO, I WANT TO FINISH UP
ON SOMETHING I WAS TALKING ABOUT LAST TIME. I SAID THERE WERE
THREE AGGREGATE SUPPLY CURVES -- LET ME WRITE DOWN SHORT-RUN
AGGREGATE SUPPLY CURVES. THE FIRST ONE OF THESE CURVES YOU'LL
REMEMBER, AND WE TALKED ABOUT THAT ALREADY A LITTLE BIT, WAS A
HORIZONTAL AGGREGATE SUPPLY CURVE. THE AGGREGATE SUPPLY CURVE
THAT'S HORIZONTAL LOOKS LIKE THIS, SRAS. IF YOU'LL REMEMBER, I TOLD
YOU THAT'S THE AGGREGATE SUPPLY CURVE THAT WE NORMALLY WOULD
THINK ABOUT IN A DEPRESSION TYPE OF ECONOMY SUCH AS THE UNITED
STATES IN THE 1930S. OTHER COUNTRIES HAVE BEEN IN SERIOUS
DEPRESSIONS OVER TIME, SO THIS WOULD BE A GOOD EXAMPLE.
AND IT DOESN'T HAVE TO BE AS SERIOUS AS THE DEPRESSION IN THE
1930S, BUT STILL A VERY HIGH UNEMPLOYMENT RATE, A VERY SERIOUS
DOWNTURN IN THE ECONOMY. THEN WE WOULD THINK ABOUT AN
AGGREGATE SUPPLY CURVE THAT LOOKS THIS WAY.
AND SO WHAT HAPPENS IS, IF AGGREGATE DEMAND INCREASES FROM
AD1 TO AD2, IF THERE'S AN INCREASE IN AGGREGATE DEMAND, THAT WOULD
NOT BE INFLATIONARY. WE WOULD HAVE SO MANY UNEMPLOYED
RESOURCES, INCLUDING WORKERS, THAT TO HIRE SOME MORE WORKERS, IT
MIGHT REDUCE THE UNEMPLOYMENT RATE FROM, LET'S SAY, TWENTY
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PERCENT TO FIFTEEN. BUT STILL, THAT WOULD NOT INTRODUCE
INFLATIONARY FORCES INTO THE ECONOMY.
SO THAT BEING THE CASE, WE SEE NO CHANGE IN THE PRICE LEVEL.
AND I'M NOT TELLING YOU THE PRICE LEVEL IS FIXED BECAUSE WE MADE IT
FIXED; I'M SAYING IT'S FIXED IN THIS PARTICULAR CASE BECAUSE THE
ECONOMY IS DEEPLY DEPRESSED. AND SOME MODEST INCREASE IN
SPENDING IN THE ECONOMY DOESN'T MAKE RETAILERS SAY, "OH, BOY. NOW I
GET TO RAISE PRICES." THEY'RE STILL SAYING, "BOY, BUSINESS IS STILL
LOUSY, JUST NOT AS BAD AS IT WAS LAST WEEK OR LAST MONTH." SO
ANYWAY, THIS IS THIS SITUATION.
THE SECOND ONE, IF YOU'LL REMEMBER, WAS A KINKED AGGREGATE
SUPPLY CURVE. THIS AGGREGATE SUPPLY CURVE LOOKS JUST LIKE THE
ONE WE TALKED ABOUT A MOMENT AGO. IT'S HORIZONTAL UP TO A CERTAIN
POINT. AND ONCE WE GET TO THAT POINT, THEN THE CURVE IS VERTICAL.
AND WHAT IS THIS POINT? AND I'VE SORT OF PUT AN ELABORATE LABEL
DOWN HERE. I CALL IT Q, BUT I PUT A -- Q FOR REAL GDP. AND I PUT AN N
NEXT TO THAT, A SUBSCRIPT N, AND I'M LABELING THAT NATURAL REAL GDP.
WE'LL TALK MORE ABOUT THESE TERMS AS WE GO ALONG. THIS IS KIND OF
AN IMPORTANT TERM THAT IN THE NEXT BIT OF MATERIAL, WHEN WE START
TALKING ABOUT LONG-RUN EQUILIBRIUM, THIS WILL GET A LOT OF EMPHASIS.
BUT ANYWAY, THE IDEA FOR RIGHT NOW, WE'LL JUST LABEL IT
NATURAL GDP. AND I'M ALSO LABELING THAT FULL EMPLOYMENT REAL GDP.
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THAT IS TO SAY, THIS IS THE AMOUNT OF PRODUCTION THAT WOULD OCCUR
WHEN ALL WORKERS ARE FULLY EMPLOYED, IN THE SENSE THAT WE TALKED
ABOUT IT EARLIER WHERE THE UNEMPLOYMENT RATE IS EQUAL TO THE
FRICTIONAL RATE PLUS THE STRUCTURAL RATE PLUS THE CYCLICAL RATE -OH, BOY. WHICH JUST PROVES THAT I CANNOT WRITE AND TALK AT THE
SAME TIME. CYCLICAL RATE. AND WHAT I'M SAYING IS, WHEN WE HAVE FULL
EMPLOYMENT, THEN THERE'S NO CYCLICAL UNEMPLOYMENT BUT THERE'S
STILL FRICTIONAL AND STRUCTURAL UNEMPLOYMENT. IF YOU'LL REMEMBER,
THIS IS THE NATURAL UNEMPLOYMENT RATE. AND THE NATURAL
UNEMPLOYMENT RATE JUST INCLUDES THOSE FRICTIONAL AND STRUCTURAL
PROBLEMS IN THE ECONOMY, NO MACROECONOMIC UNEMPLOYMENT.
SO THAT'S REALLY WHAT I MEAN HERE, IS THAT WHEN THE
UNEMPLOYMENT RATE IS JUST THE NATURAL UNEMPLOYMENT RATE AND
THERE IS NO CYCLICAL, NO MACROECONOMIC UNEMPLOYMENT, THEN WE
CALL THAT FULL EMPLOYMENT AND THAT'S THE AMOUNT OF GDP THAT WE
WOULD PRODUCE, THIS NATURAL REAL GDP. THAT'S THE AMOUNT OF GDP
WE WOULD PRODUCE WHEN THE UNEMPLOYMENT RATE IS EQUAL TO THE
NATURAL RATE OR WHEN WE HAVE FULL EMPLOYMENT.
AND I'M SAYING IF WE REACH THAT POINT, THEN ACCORDING TO THIS
KINKED SUPPLY CURVE, AGGREGATE SUPPLY CURVE, BEYOND THAT POINT
ANY INCREASE IN SPENDING, IT ONLY CAUSES INFLATION. WE'VE REACHED
THE FULL CAPACITY OF THE ECONOMY AT THIS POINT. WE CAN'T PRODUCE
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ANY MORE. AND SO IF PEOPLE WANT TO BUY MORE, THEN IT JUST DRIVES UP
PRICES.
AND SO LET ME DRAW AN AGGREGATE DEMAND CURVE. HERE WE ARE
IN THIS SORT OF DEPRESSED SITUATION, AD1 TO AD2. AGGREGATE DEMAND
INCREASES; WE'RE IN A DEPRESSED TYPE OF ECONOMY; THERE IS GROWTH
AND OUTPUT BUT IT'S MODEST; THERE'S NO INFLATIONARY FORCES. IF
AGGREGATE DEMAND CONTINUES TO INCREASE, IT'LL GET UP TO WHERE WE
HAVE AD3, I'LL SAY, WHERE WE HAVE THE EQUILIBRIUM FOR THE ECONOMY IS
AT NATURAL REAL GDP. THE UNEMPLOYMENT RATE IS THE NATURAL RATE
OF UNEMPLOYMENT. AND NOW ANY GROWTH IN SPENDING BEYOND THAT
POINT, AGGREGATE DEMAND INCREASES ONE MORE TIME AND THERE'S NO
INCREASE IN REAL PRODUCTION IN THE ECONOMY. ALL WE SEE IS
INFLATIONARY FORCES COMING TO BEAR. WE'LL SAY WE HAD A P1 AS OUR
ORIGINAL PRICE LEVEL; NOW PRICES START GOING UP. SO THERE'S
INFLATION IN THE ECONOMY. QUESTIONS ABOUT THIS? OKAY.
THIS IS KIND OF AN EXTREME CASE AND WHAT WE WOULD -- I MEAN,
IT'S PRETTY UNLIKELY THAT WE JUST GET TO A CERTAIN POINT -- THERE'S
BEEN ZERO INFLATION UP TO THAT POINT -- AND ALL OF A SUDDEN, JUST A
LITTLE BIT MORE SPENDING, ALL THAT WE GET IS INFLATION. WE GET NO
EXPANSION IN OUTPUT OR PRODUCTION. THAT SEEMS KIND OF UNLIKELY.
THOSE ARE REALLY JUST KIND OF TWO EXTREME CASES THAT WE'RE
ILLUSTRATING.
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THE THIRD POSSIBILITY IS THE THREE-STAGE AGGREGATE SUPPLY
CURVE. I'LL PUT SOME LABELS HERE, A AND B, SOME POINTS ON MY THREESTAGE CURVE. SO NOW WHAT WE HAVE IS -- IT LOOKS A LOT LIKE THE
KINKED AGGREGATE SUPPLY CURVE. BUT INSTEAD OF A KINK RIGHT DOWN
THERE AT NATURAL REAL GDP, WE'VE GOT A REGION WHERE THERE'S AN
UPWARD SLOPING AGGREGATE SUPPLY CURVE. AND TO TELL YOU THE
TRUTH, IF YOU LOOK BACK IN YOUR NOTES, THIS UPWARD SLOPING PART OF
THE CURVE, THIS IS MORE OF A NORMAL SHAPE OF IT.
AND I'M JUST -- I'M NOT USING THAT TERM LIKE NORMAL GOODS, LIKE
THAT'S A KEY TERM. I'M JUST SAYING THAT NORMALLY WHEN I'VE BEEN
DRAWING THE SHORT-RUN AGGREGATE SUPPLY CURVE, UP UNTIL NOW
YOU'VE SEEN A SERIES OF UPWARD SLOPING CURVES. THAT'S THIS -- I'M
SAYING THAT'S NORMAL, THAT'S TYPICAL, THAT'S WHAT YOU WOULD EXPECT
THE AGGREGATE SUPPLY CURVE TO LOOK LIKE PERHAPS.
SO ANYWAY, WE'VE GOT THE HORIZONTAL STAGE, THE DEPRESSION
CASE. WE'VE GOT THIS CASE WHERE THE CURVE IS VERTICAL AND THAT
MEANS THAT WE ARE PRETTY MUCH AT FULL CAPACITY FOR THE ECONOMY.
AND SINCE WE'RE AT FULL CAPACITY AND NOT MUCH UNEMPLOYMENT, THEN
SPENDING INCREASES. AGGREGATE SPENDING INCREASES RESULTING IN
INFLATION. AND THEN IN-BETWEEN THOSE TWO EXTREMES, WE HAVE AN
UPWARD SLOPING AGGREGATE SUPPLY CURVE. AND THEN IF THERE'S AN
INCREASE IN SPENDING -- AND YOU CAN SEE THIS OCCURRING AS I SHIFT THE
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CURVE HERE. IF THERE'S AN INCREASE IN AGGREGATE DEMAND OR
AGGREGATE SPENDING, THEN WHAT WE NOTICE IS -- I'LL LABEL THIS. THEN
WHAT WE NOTICE IS THAT WE GET AN INCREASE IN PRODUCTION BUT WE
ALSO GET A LITTLE BIT OF INFLATION.
SO THAT SPENDING GETS DISTRIBUTED IN TWO DIFFERENT WAYS. ONE
IS, WE'RE HIRING MORE WORKERS AND PRODUCING SOME MORE OUTPUT,
BUT ALSO WE'RE PAYING EACH WORKER AND EACH RETAILER, AND SO
FORTH, A LITTLE BIT MORE PER UNIT. AND THAT IS WHAT I'M TELLING YOU
WE WOULD EXPECT IF THE UNEMPLOYMENT RATE WAS, LET'S SAY -- OH, I
DON'T KNOW -- SIX AND A HALF PERCENT. THIS IS A -- OH, I DON'T WANT TO
PUT THAT DOWN THERE LIKE A LABEL. BUT AT POINT A, WHERE THE CURVE
IS UPWARD SLOPING, MAYBE THE UNEMPLOYMENT RATE IS -- I DON'T KNOW -SIX AND A HALF TO SEVEN PERCENT. THAT'S THE UNEMPLOYMENT RATE.
AND AT THIS POINT MAYBE THE UNEMPLOYMENT RATE IS, OH, FOUR AND A
HALF PERCENT TO FIVE PERCENT. AND SO I'M SAYING THAT IN-BETWEEN
HERE THERE'S ABOUT A TWO AND A HALF, THREE PERCENT DIFFERENCE IN
THE UNEMPLOYMENT RATE. THIS IS FROM, YOU KNOW, FOUR AND A HALF,
FIVE PERCENT. BOY, WE ARE REALLY FULLY EMPLOYED, PRODUCING ABOUT
AS MUCH AS WE CAN. WHEN THE UNEMPLOYMENT RATE GETS TO ABOUT
SEVEN PERCENT, WE START THINKING ABOUT, "MAN, THINGS ARE KIND OF
TOUGH RIGHT NOW, YOU KNOW?" AND IF WE START THINKING THAT -- "OH,
UNEMPLOYMENT RATE'S LIKE SEVEN PERCENT. THINGS ARE KIND OF TOUGH"
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-- THEN THAT'S WHEN WE, AT EVEN HIGHER UNEMPLOYMENT RATES AND
LESS PRODUCTION, WOULD EXPECT THAT AGGREGATE SUPPLY CURVE TO
MAYBE BE A LITTLE BIT MORE OF A HORIZONTAL CASE, THE DEPRESSION
CASE.
MAYBE -- I DON'T KNOW. LET ME GO BACK AND LABEL THAT. MAYBE
THIS WOULD BE LIKE EIGHT PERCENT OR SOMETHING LIKE THAT. IT'S HARD -YOU KNOW, THERE'S NOT ANY MAGIC NUMBER WHERE YOU JUST WRITE IT
DOWN AND THAT'S IT, ONCE AND FOR ALL. BUT ANYWAY, SOMEPLACE IN
THAT RANGE. OKAY.
AND I'M TALKING ABOUT THE UNEMPLOYMENT RATE DOWN HERE WITH
THESE NUMBERS. THERE IS NO LEVEL OF GDP THAT ALWAYS MATCHES UP
WITH THESE BECAUSE GDP INCREASES OVER TIME, SO WE CAN'T JUST WRITE
THAT DOWN. BUT THE UNEMPLOYMENT RATE KEEPS COMING BACK TO
THESE OLD LEVELS, AND SO I'M SAYING THAT THERE'S A REGION HERE OF
ABOUT -- I DON'T KNOW -- THREE PERCENT, SOMETHING LIKE THAT, THREE
AND A HALF PERCENT, WHERE WE'VE GOT WHAT WE WOULD CALL THE
NORMAL AGGREGATE SUPPLY CURVE THAT'S UPWARD SLOPING. OKAY. ANY
QUESTIONS ABOUT THAT?
IF THERE ARE NO QUESTIONS, LET ME ERASE A LITTLE BIT. WE WANT
TO GO ON AND TALK ABOUT LONG-RUN EQUILIBRIUM FOR THE ECONOMY.
THAT'S OUR NEXT UNIT OF MATERIAL, IS TO TALK ABOUT THE LONG-RUN
EQUILIBRIUM FOR THE ECONOMY. WHAT WE'VE BEEN DOING UP UNTIL NOW
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IS WE'VE TALKED ABOUT SHORT-RUN ECONOMIC EQUILIBRIUM OR
MACROECONOMIC EQUILIBRIUM.
THIS TERM "EQUILIBRIUM," IT'S INTERPRETED IN DIFFERENT WAYS BUT
A NICE WAY OF THINKING ABOUT IT: WHEN THE ECONOMY REACHES AN
EQUILIBRIUM, IT'S AT REST. MEANING THERE'S NO TENDENCY FOR IT TO
CHANGE IN ONE DIRECTION OR ANOTHER. OKAY. AND SO THE QUESTION IS,
IF WE GET TO THE POINT WHERE THERE IS A SHORT-RUN EQUILIBRIUM,
WHICH WE'VE JUST DRAWN -- LET ME PUT IT UP HERE AGAIN -- SHORT-RUN
AGGREGATE SUPPLY AND AGGREGATE DEMAND. I AM SAYING THAT WHERE
THOSE TWO CURVES CROSS, WE ARE FINDING THE EQUILIBRIUM, PE AND QE.
WE'RE FINDING THE EQUILIBRIUM PRICE LEVEL AND REAL GDP, THESE TWO
CURVES.
AND WE'RE GONNA DRAW MORE CURVES, BUT JUST TO BE CLEAR
ABOUT IT: THESE TWO CURVES AT A POINT IN TIME, THOSE ESTABLISH
EQUILIBRIUM P AND Q FOR TODAY. THERE ARE OTHER THINGS OUT THERE
THAT ARE GONNA INFLUENCE THAT, WHAT IT'LL CHANGE TO. BUT I'M JUST
SAYING IF SOMEBODY SAYS TO YOU, "HEY, DEPICT THE SITUATION THAT WE
FACE TODAY," YOU'D DRAW THE AGGREGATE SUPPLY AND AGGREGATE
DEMAND CURVE. AND WHERE THEY INTERSECT, THAT DETERMINES TODAY'S
MACROECONOMIC CONDITIONS. PE, QE. OKAY.
NOW, THE QUESTION IS, IS TODAY A LONG-RUN EQUILIBRIUM? THAT IS,
THIS SITUATION THAT WE'VE DESCRIBED HERE -- I'LL PUT A POINT A NEXT TO
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THAT EQUILIBRIUM -- IS THIS SITUATION ONE WHERE THAT THE ECONOMY IS
AT REST? THERE'S NO REASON FOR REAL GDP TO GO UP OR DOWN.
THERE'S NO REASON FOR THE PRICE LEVEL TO GO UP AND DOWN, INFLATION
OR DEFLATION. IS THAT THE CASE? AND THE ANSWER IS NO, NOT
NECESSARILY. OKAY. AND I'LL GIVE YOU A HINT WHY THAT IS AND THEN
WE'LL COME BACK AND BE A LITTLE MORE FORMAL ABOUT IT IN A SECOND.
BUT WE TALKED ABOUT THIS LAST TIME JUST A LITTLE BIT. I'LL PUT QE
RIGHT HERE AND THEN ANOTHER HORIZONTAL AXIS. IF YOU'LL REMEMBER,
WE TALKED ABOUT THIS LAST TIME. WE'VE GOT EMPLOYMENT AND THEN
WE'VE GOT UNEMPLOYMENT GOING IN THE OTHER DIRECTION. LIKE THE
UNEMPLOYMENT RATE WAY OUT HERE MIGHT BE ZERO PERCENT. AND I
MEAN ZERO PERCENT WAY OUT THERE, THAT WOULD MEAN THERE'S NO
FRICTIONAL UNEMPLOYMENT, NO STRUCTURAL UNEMPLOYMENT. THAT'S
VERY UNLIKELY. SO IT'S WAY OUT THERE.
BUT THE POINT IS, AS WE START GOING TO THE LEFT NOW, SMALLER
LEVELS OF REAL GDP, SMALLER LEVELS OF EMPLOYMENT, THEN
UNEMPLOYMENT IS INCREASING. MAYBE OVER HERE IT'S TWENTY-FIVE
PERCENT, WAY TO THE LEFT. THAT'S THE DEPRESSION CASE. OKAY.
ANYWAY, WHAT I WAS SAYING TO YOU A MOMENT AGO OR ASKING THE
QUESTION, IS THIS SITUATION WHERE THE ECONOMY IS AT POINT A, IS THAT
A LONG-RUN EQUILIBRIUM FOR THE ECONOMY? LET'S COME DOWN HERE
AND WE WOULD SAY, "WELL, GEE. WHAT'S THE UNEMPLOYMENT RATE?" AND
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LET ME JUST WRITE A NUMBER DOWN. SEVEN PERCENT. THAT'S
HYPOTHETICAL, OF COURSE. IF THAT'S THE CASE, THEN WHAT I WOULD SAY
IS, "GEE, I DON'T THINK THIS IS A LONG-RUN EQUILIBRIUM FOR THE ECONOMY.
AND THE REASON I THINK IT'S NOT IS, I THINK THAT WITH SEVEN PERCENT
UNEMPLOYMENT THERE'S A LOT OF PEOPLE GOING OUT HERE, LOOKING FOR
JOBS. I DON'T THINK THEY CONSIDER IT AN EQUILIBRIUM SITUATION. THEY
FEEL LIKE, 'HEY, THIS IS PRETTY ROTTEN. I WANT A JOB AND I CAN'T FIND
ONE.'"
UNEMPLOYMENT LINE, YOU KNOW, OFFICE -- YOU CAN GO DOWNTOWN
ON, WHAT IS IT, WALNUT STREET HERE IN SPRINGFIELD. YOU GO
DOWNTOWN AND THERE'S AN OFFICE THERE WHERE THEY HAVE
UNEMPLOYMENT. YOU CAN GO DOWN THERE, YOU REGISTER FOR
UNEMPLOYMENT BENEFITS AND MAYBE THERE ARE JOBS THAT ARE POSTED
DOWN THERE AND SO FORTH. AND I'M SAYING THERE'D BE A LOT OF PEOPLE
DOWN THERE THAT DAY SAYING, "GOSH, I WANT A JOB." AND SO CAN THIS BE
A LONG-RUN EQUILIBRIUM? CAN THIS PERSIST JUST YEAR AFTER YEAR
AFTER YEAR? AND THE ANSWER IS: I DON'T THINK SO.
AND THAT IS WHERE WE GO ON TO THE LONG-RUN SITUATION. WE
FIND OUR SHORT-RUN EQUILIBRIUM FOR THE ECONOMY AND THEN WE START
ASKING, "IS THIS A SUSTAINABLE SITUATION, THIS UNEMPLOYMENT RATE
THAT WE OBSERVE?" AND I'M SAYING THAT IF THIS IS HIGH -- WHAT IS
SUSTAINABLE? I WOULD SAY IT WOULD BE SUSTAINABLE -- THAT IS TO SAY,
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EQUILIBRIUM, UNEMPLOYMENT RATE -- I'LL SAY LONG-TERM. EQUILIBRIUM
UNEMPLOYMENT RATE EQUALS -- OH, THE NATURAL RATE OF
UNEMPLOYMENT WHICH IS -- I SAID, OH, FOUR AND A HALF TO FIVE AND A
HALF PERCENT, SOMEPLACE IN THAT RANGE. MAYBE I SAID FOUR AND A
HALF TO SIX PERCENT EARLIER. I CAN'T REMEMBER EXACTLY WHAT I DID
SAY. BUT ANYWAY, SOMEPLACE IN THE RANGE OF FOUR AND A HALF TO FIVE
PERCENT, I'M SAYING THAT'S SUSTAINABLE.
WHERE PEOPLE SAY, "YEAH, I'M OUT OF WORK" -- FOUR AND A HALF
PERCENT, FIVE PERCENT OF THE POPULATION. THEY SAY, "YEAH, I'M OUT OF
WORK BUT IT'S 'CAUSE I QUIT MY JOB. AND I DIDN'T WANT TO WORK THERE
AND I'M JUST GOING TO ANOTHER JOB." OR IT'S BECAUSE "THE COMPANY I
WORKED FOR SHUT DOWN AND I'M GETTING RETRAINED RIGHT NOW TO GO
FIND ANOTHER KIND OF A JOB." AND IF THAT'S THE ONLY KIND OF
UNEMPLOYMENT THERE IS, THEN THAT UNEMPLOYMENT IS GONNA SOLVE
ITSELF. THE GUY WHO QUIT HIS JOB IS GONNA FIND A JOB. THE LADY WHO
LOST HER JOB BECAUSE THE COMPANY SHUT DOWN AND SHE DIDN'T HAVE
THE SKILLS TO GO TO THE NEXT JOB, SHE'S GONNA FINALLY GET RETRAINED
AND SHE'S GONNA GO TO ANOTHER JOB. SO THAT'S NOT THE KIND OF
UNEMPLOYMENT THAT CREATES REALLY A DISEQUILIBRIUM SITUATION.
THE KIND OF UNEMPLOYMENT THAT CREATES A DISEQUILIBRIUM
SITUATION IS THAT CYCLICAL UNEMPLOYMENT. AND I'M SAYING WHEN THERE
IS NO CYCLICAL UNEMPLOYMENT, HERE THERE'D BE A COUPLE PERCENT
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CYCLICAL UNEMPLOYMENT. IF THE UNEMPLOYMENT RATE IS SEVEN
PERCENT AND FOUR AND A HALF TO FIVE TO FIVE AND A HALF, IF THAT'S THE
NATURAL RATE OF UNEMPLOYMENT, THEN I'M SAYING THERE'S ABOUT TWO
PERCENT OF THE POPULATION THAT ARE SAYING, "I WANT TO WORK. I'M
WILLING TO WORK AT TODAY'S WAGE RATE. I'VE GOT THE SKILLS THAT ARE
REQUIRED. I JUST CAN'T FIND WORK." THAT'S NOT AN EQUILIBRIUM
SITUATION.
SO ANYWAY, THAT'S BASICALLY -- IT'S WHAT'S GOING ON WITH THE
UNEMPLOYMENT RATE. THAT IS WHAT IS GONNA CREATE A DISEQUILIBRIUM
IN THE LONG-RUN AND WHAT WILL CAUSE FURTHER ADJUSTMENTS TO
OCCUR IN THE ECONOMY.
SO LET ME DRAW THIS PICTURE AGAIN -- I'LL LEAVE THAT STUFF OVER
THERE. WE'LL PUT REAL GDP HERE, THE PRICE LEVEL, SHORT-RUN
AGGREGATE SUPPLY, AGGREGATE DEMAND. I'LL PUT LABELS ON THESE. P1,
Q1. I'M NOT PUTTING E'S ON THERE ANYMORE BECAUSE WE'RE GONNA DO
SOME CHANGING, SOME MOVING AROUND, AND I WANT TO KEEP TRACK OF
THESE.
WE'RE STARTING OFF AT POINT ONE. THE PRICE LEVEL IS P1, THE
AGGREGATE PRICE LEVEL. THE REAL GDP, Q1. LET'S SAY THAT I TELL YOU
THIS -- AND I'M JUST ASSUMING THIS FOR NOW, BUT LET'S SAY I TELL YOU
HERE'S REAL -- OR I SHOULD SAY NATURAL REAL GDP. WELL, LET'S JUST SAY
IT'S OVER THERE TO THE RIGHT OF THE SHORT-RUN EQUILIBRIUM, THE Q1.
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Q1 FALLS SHORT OF NATURAL REAL GDP. Q1, LESS THAN QN.
WE'VE GOT A TERM THAT WE GIVE TO THIS. WE SAY IF THE REAL GDP
IS LESS THAN NATURAL REAL GDP, THEN WE SAY THAT WE HAVE A
RECESSIONARY GAP. IT'S A RECESSIONARY GAP. WHY DO WE CALL IT THAT?
AND THE ANSWER IS: WELL, THE ECONOMY IS DEPRESSED BELOW THE
NATURAL LEVEL THAT WILL OCCUR, YOU KNOW, IF EVERYBODY'S WORKING
THAT'S TRYING TO FIND A JOB, EXCEPT FOR THOSE THAT ARE FRICTIONALLY
AND STRUCTURALLY UNEMPLOYED. ANYWAY, IF EVERYBODY'S WORKING
AND WE JUST HAVE -- AND THIS IS ANOTHER PART OF THIS -- THE
UNEMPLOYMENT RATE IS EQUAL TO THE NATURAL RATE OF UNEMPLOYMENT
-- WHICH IS, IF YOU'LL REMEMBER, THE FRICTIONAL PLUS THE STRUCTURAL
UNEMPLOYMENT RATE.
SO AT THIS POINT -- AND, BY THE WAY, I'LL JUST DRAW ME A VERTICAL
LINE, JUST SO THERE'S NO DOUBT ABOUT IT. IF NATURAL REAL GDP IS
SHOWN RIGHT THERE WHERE I'VE DRAWN THIS BLUE VERTICAL LINE, BUT
TODAY'S GDP, THE EQUILIBRIUM FOR TODAY, IS AT Q1, THEN WHAT WE HAVE
IS -- OH, I LABELED THAT WRONG UP THERE. THE UNEMPLOYMENT RATE IS -THERE WE GO -- GREATER THAN THE NATURAL UNEMPLOYMENT RATE AT
THIS POINT. SORRY. I GOT SO WRAPPED UP IN TELLING YOU ABOUT
NATURAL REAL GDP AND NATURAL UNEMPLOYMENT RATE THAT I FORGOT.
THE UNEMPLOYMENT -- I'LL PUT A ONE DOWN THERE. THE UNEMPLOYMENT
RATE TODAY, THE ONE IT CORRESPONDS WITH -- HERE'S UNEMPLOYMENT.
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AND WHAT WE HAVE RIGHT HERE IS U1. THE UNEMPLOYMENT RATE IS U1
AND THE UNEMPLOYMENT RATE AT U1 IS GREATER THAN IT WOULD BE IF WE
HAD NATURAL REAL GDP. LET ME PUT IN HERE'S UN. LET ME SLOW DOWN
FOR JUST A SECOND 'CAUSE I WANT YOU TO FOR SURE GET THIS IN YOUR
NOTES. I FOR SURE WANT YOU TO ABSORB WHAT I'M SAYING.
THIS STUFF THAT ISN'T BLUE, FORGET IT FOR JUST A MOMENT. I'M
SAYING THAT WE KNOW TODAY'S AGGREGATE DEMAND CURVE. WE SEE
TODAY'S SHORT-RUN AGGREGATE SUPPLY CURVE. THOSE TWO THINGS
DETERMINE TODAY'S EQUILIBRIUM IN THE ECONOMY, THE PRICE LEVEL AND
THE LEVEL OF REAL GDP. BUT I'M SAYING THAT EQUILIBRIUM THAT'S BEEN
ESTABLISHED FOR TODAY, IT HAPPENS TO BE AT A LOWER REAL GDP THAN
WE WOULD PRODUCE IF WE HAD FULL EMPLOYMENT. IF WE HAD FULL
EMPLOYMENT, THE UNEMPLOYMENT RATE WOULD JUST BE THE NATURAL
RATE. BUT INSTEAD, WE HAVE A HIGHER UNEMPLOYMENT RATE, AN
UNEMPLOYMENT RATE THAT EXCEEDS THE NATURAL RATE OF
UNEMPLOYMENT. WE HAVE SOME CYCLICAL UNEMPLOYMENT. EVERYBODY
WITH ME?
NOW, WHAT WILL HAPPEN? AND THAT'S THE NEXT LITTLE BULLET I
WANT TO PUT RIGHT HERE. THIS JUST DESCRIBES THE SITUATION. LET ME
NOT SAY "THE" SITUATION. LET'S SAY TODAY'S SITUATION. THAT IS, TODAY IS
-- HERE IS TODAY. AT THAT EQUILIBRIUM POINT. TODAY'S SITUATION, WE
HAVE A RECESSIONARY GAP. REAL GDP FALLS SHORT OF THE NATURAL
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LEVEL. UNEMPLOYMENT IS GREATER THAN THE NATURAL RATE OF
UNEMPLOYMENT. SO TODAY'S SITUATION.
NOW, WHAT WILL HAPPEN AS A RESULT OF THIS? RESULT. HOW
ABOUT THIS: WAGES WILL FALL. DO YOU AGREE WITH THAT? THERE'S A LOT
OF PEOPLE UNEMPLOYED, DOWN THERE AT THE UNEMPLOYMENT OFFICE,
REGISTERING FOR BENEFITS, GOING OUT AND KNOCKING ON DOORS AT
BUSINESSES, FILLING OUT APPLICATIONS "I WANT A JOB." THEN OVER TIME -AND I DO NOT MEAN TO SAY THAT TOMORROW THIS PROBLEM WILL BE
SOLVED. JUST BY SAYING "TODAY" I DON'T MEAN THAT THE LONG-RUN
EQUILIBRIUM IS REACHED TOMORROW. BUT I'M SAYING OVER TIME WAGES
WILL FALL. THAT'S NUMBER ONE. WHY? WELL, 'CAUSE THERE'S A SURPLUS
OF LABOR. SURPLUS OF LABOR. THAT'S WHY. THERE'S A BIG
UNEMPLOYMENT RATE. BIG UNEMPLOYMENT RATE? SURPLUS OF LABOR.
IF THE WAGES FALL, SRAS SHIFTS TO THE RIGHT, OR THERE'S AN
INCREASE IN THE SHORT-RUN AGGREGATE SUPPLY. NOW, LET ME COME
BACK TO MY GRAPH. THE SHORT-RUN AGGREGATE SUPPLY CURVE SHIFTS
TO THE RIGHT, SRAS TO -- YOU'VE GOT THIS IN YOUR NOTES. WHAT SHIFTS
THE SHORT-RUN AGGREGATE SUPPLY CURVE? AND ONE OF THE THINGS IN
YOUR NOTES SAYS, "IF WAGES WOULD FALL, THE SHORT-RUN AGGREGATE
SUPPLY CURVE WOULD SHIFT TO THE RIGHT. THERE'D BE AN INCREASE IN
AGGREGATE SUPPLY." WHY WAS THAT? 'CAUSE LOWER WAGES MEAN
GREATER PROFITS FOR MANUFACTURERS, COMPANIES IN GENERAL. AND
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SINCE THERE'S GREATER PROFITS, THEY INCREASE THEIR PRODUCTION.
OKAY. SO ANYWAY, BUT NOW WE HAVE A NEW EQUILIBRIUM. I'LL PUT A
POINT TWO NEXT TO THAT. AND I'M NOT GONNA GO AHEAD AND -- 'CAUSE
THIS IS NOT THE FINAL EQUILIBRIUM. BUT WHAT I WANT YOU TO SEE IS, THIS
CURVE SHIFTED TO THE RIGHT. THE SHORT-RUN AGGREGATE SUPPLY
CURVE SHIFTED TO THE RIGHT DUE TO THE FACT THAT WAGES WERE
FALLING -- LET ME SHIFT THAT OVER THERE. AND NOW DUE TO THE FACT
THAT THE SHORT-RUN AGGREGATE SUPPLY CURVE SHIFTED TO THE RIGHT,
WE HAVE A LITTLE LOWER PRICE LEVEL AND WE HAVE A LITTLE MORE REAL
GDP. BUT STILL, WE HAVE REAL GDP Q2 NOW FALLS SHORT OF REAL GDP -NATURAL REAL GDP, I SHOULD SAY. Q2, REAL GDP, FALLS SHORT OF THE
NATURAL LEVEL. THE UNEMPLOYMENT RATE AT U2 IS STILL ABOVE THE
NATURAL UNEMPLOYMENT RATE. SO WHAT'S NEXT? TIME FOR WAGES TO
FALL AGAIN.
SO, I MEAN, WE'RE JUST NOT DONE YET. WE'RE MOVING IN THAT
DIRECTION. HERE'S THE AGGREGATE SUPPLY CURVE SHIFTING TO THE
RIGHT AGAIN. WHY? WAGES FELL AGAIN. WHY? WELL, BECAUSE THE
UNEMPLOYMENT RATE WAS STILL TOO HIGH.
FINALLY, WHAT WILL HAPPEN IS WAGES WILL FALL, SRAS -- I'LL PUT A
FOUR NEXT TO THERE. FINALLY WAGES WILL FALL BY ENOUGH THAT REAL
GDP IS EQUAL TO NATURAL REAL GDP. THE UNEMPLOYMENT RATE IS EQUAL
TO THE NATURAL RATE OF UNEMPLOYMENT AND THEN THERE IS NO MORE
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SURPLUS OF LABOR AND THERE IS NO MORE WAGES GOING DOWN. AND THIS
POINT THAT WE'VE ARRIVED AT HERE -- I'LL SAY POINT FOUR -- THIS IS OUR
LONG-RUN EQUILIBRIUM. AND, BY THE WAY, THERE'S ALSO A PRICE LEVEL,
BUT WE'RE NOT ALL THAT INTERESTED IN A PRICE LEVEL RIGHT NOW.
AT THE LONG-RUN EQUILIBRIUM POINT, THE SHORT-RUN AGGREGATE
SUPPLY CURVE -- AND, IF YOU'LL REMEMBER, THAT'S WHAT DETERMINES THE
SHORT-RUN EQUILIBRIUM, TODAY'S EQUILIBRIUM OR WHATEVER. SHORT-RUN
AGGREGATE SUPPLY EQUALS AGGREGATE DEMAND AT THAT POINT. AND WE
SEE THAT AT POINT FOUR, SHORT-RUN AGGREGATE SUPPLY AND
AGGREGATE DEMAND INTERSECT. SO THAT SAYS TODAY'S EQUILIBRIUM,
ONCE WE'RE DOWN ON DAY FOUR, TODAY'S EQUILIBRIUM IS AT QN. OH, SO
WE HAVE NATURAL REAL GDP. THAT DETERMINES THE UNEMPLOYMENT
RATE AT UN. IT'S PRETTY LOW. IT'S ABOUT WHATEVER I SAID, FOUR AND A
HALF, FIVE PERCENT, FIVE AND A HALF, SOMEPLACE IN THAT RANGE. AND
THEN WE SAY, "HEY, IF WE GO DOWN TO OUR UNEMPLOYMENT OFFICE AND
LOOK, THERE'S NOT LONG LINES. THERE ARE A FEW PEOPLE COMING IN, BUT
NOT A HUGE PROBLEM. MOST OF THE PEOPLE -- ALL THE PEOPLE WHO ARE
LOOKING FOR WORK AND WILLING TO WORK AT TODAY'S WAGE, AND WHO
HAVE THE SKILLS AND SO FORTH, THEY CAN FIND JOBS."
YES, SIR? [STUDENT SPEAKING INAUDIBLE] I'M NOT SAYING WHAT'S
GOOD AND BAD. ALL I'M SAYING FOR YOU IS, IF WE FIND OURSELF IN A
SITUATION WHERE THERE IS THIS RECESSIONARY GAP AND WE FIND
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OURSELF FALLING SHORT ON PRODUCTION OR HAVING A LOT OF
UNEMPLOYED PEOPLE, IF WE FIND OURSELVES IN THAT SPOT, WHAT I'M
SHOWING YOU RIGHT HERE IS THE ECONOMY -- WE DON'T JUST SIT HERE AND
GO, "OH, WHAT A SHAME." THE ECONOMY GOES TO WORK ON ITS OWN. THIS
IS NOT WHERE GOVERNMENT COMES IN AND FIXES A PROBLEM. I'M SAYING
THERE ARE FORCES AT WORK IN LABOR MARKETS WHERE THAT PEOPLE
START GOING, "WOW, I DON'T LIKE BEING UNEMPLOYED." WAGES START TO
GO DOWN AND I'M SAYING THIS PROBLEM STARTS TO SOLVE ITSELF. AND
FINALLY, WHEN WE REACH THIS POINT FOUR, THE PROBLEM IS SOLVED.
NO, WE WOULD BE BETTER OFF -- AND NOW I'M SPEAKING NORMATIVE
IN TERMS OF WHAT I LIKE VERSUS DISLIKE. WE WOULD BE BETTER OFF IF WE
NEVER GOT TO THIS POINT. BUT IF WE GET TO THAT POINT, WHAT I'M SAYING
IS WE'RE NOT JUST STUCK THERE WHERE WE JUST GO, "WELL, WHAT A
SHAME. I HATE THIS. AND NOW FOR THE REST OF MY LIFE I'M GONNA BE
UNEMPLOYED." I'M SAYING THE ECONOMY CAN HEAL ITSELF, IN A SENSE.
NOW, WE'LL COME BACK LATER ON WHEN WE TALK ABOUT POLICY. WE
DON'T HAVE TO WAIT FOR THIS TO HAPPEN. 'CAUSE WE DON'T MOVE FROM
POINT ONE TO POINT FOUR, LIKE, IN THREE DAYS OR EVEN THREE MONTHS.
IT MAY BE THREE YEARS. SO THIS TAKES TIME. I'M JUST SAYING IF NOBODY
COMES ALONG FROM THE GOVERNMENT AND HAS A POLICY TO ADDRESS
THIS, THEN THE THINGS TAKING PLACE ON THE SUPPLY SIDE OF THE
ECONOMY, WHICH IS THE WORKERS AND THE EMPLOYERS AND SO FORTH,
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THEY WILL SOLVE THAT PROBLEM.
[STUDENT SPEAKING INAUDIBLE] WHAT HAPPENED WITH THE
DEPRESSION? HEH, HEH, GOOD QUESTION. BOY, THAT'S A HARD QUESTION,
TOO. LET ME TELL YOU WHAT SOME PEOPLE THINK. BUT WE'RE GONNA
HAVE A LATER CHAPTER WHERE WE COME BACK AND TALK ABOUT THIS
DEPRESSION CASE 'CAUSE THERE WAS A SPECIAL SORT OF BRAND OF
ECONOMICS THAT WAS DEVELOPED FOR THAT PERIOD. BUT THE STORY
THAT MOST PEOPLE THINK ABOUT THE DEPRESSION, WHY DIDN'T THAT
PROBLEM GET CLEARED UP, WHAT MOST PEOPLE WOULD TELL YOU IS
WAGES DIDN'T FALL. WE DID HAVE A LOT OF UNEMPLOYMENT. WE HAD A
LOT OF UNEMPLOYMENT AND WAGES DIDN'T FALL. THAT'S WHAT REALLY HAS
TO GO -- YOU KNOW, IF WE HAD THIS SITUATION WITH THE RECESSION AREA,
YEAH. IF THE ONLY WAY WE WOULD GET TO THE LONG-RUN EQUILIBRIUM,
WAGES FALL. WHAT IF THEY WON'T FALL? AND SO THAT'S WHAT I THINK
SOME PEOPLE WOULD TELL YOU HAPPENED DURING THE DEPRESSION.
WAGES DID NOT FALL. AND THERE ARE REASONS WHY THEY MIGHT NOT
HAVE.
PERSONALLY, I'M ONLY HALFWAY SOLD ON THAT STORY. AND I DON'T
WANT TO SPEND A LOT OF TIME TALKING ABOUT THE DEPRESSION PERIOD,
BUT WHAT HAPPENED DURING THE DEPRESSION IS THIS: ECONOMISTS DID
NOT KNOW A LOT OF THINGS THAT WE DO KNOW TODAY ABOUT THE
ECONOMY AND WE DIDN'T HAVE THE DATA THAT WE'VE ALREADY TALKED
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ABOUT -- CPI AND REAL GDP AND UNEMPLOYMENT RATE AND THINGS LIKE
THAT. IT'S ONLY BEEN SINCE THE DEPRESSION THAT WE WENT BACK AND
SAID, "HEY, THE UNEMPLOYMENT RATE WAS TWENTY-FIVE PERCENT DURING
1933." WE DIDN'T KNOW THAT IN 1933. SO THERE WAS A LOT OF
INFORMATION NOT AVAILABLE THEN. THE THEORIES WEREN'T ALL THAT
WELL DEVELOPED.
AND SO WHAT HAPPENED WAS, SOME ECONOMISTS THOUGHT THEY
KNEW WHAT TO DO BUT OTHERS SAID THEY DIDN'T KNOW, AND SO THERE
WAS NO CLEAR MESSAGE FROM THE ECONOMICS PROFESSION OF THE
GOVERNMENT. AND SO THE GOVERNMENT DIDN'T HAVE ANY CLEAR
UNDERSTANDING OF WHAT TO DO. AND SO FRANKLIN ROOSEVELT GOT
ELECTED PRESIDENT IN 1932; HE TOOK OFFICE IN '33. IN 1933, IN MARCH,
THAT WAS THE VERY BOTTOM OF THE DEPRESSION. THAT WAS THE WORST.
AND HE DIDN'T KNOW WHAT TO DO 'CAUSE HE WASN'T AN ECONOMIST AND
THE ECONOMISTS HE WAS TALKING TO, SOME OF 'EM -- THEY WERE ALL
CONFUSED. THEY DIDN'T KNOW WHAT TO DO. SO FRANKLIN ROOSEVELT
SAID, "ELECT ME AND I WILL EXPERIMENT." AND THE REASON I WOULD TELL
YOU THAT THE DEPRESSION WENT ON FROM 1933 -- I MEAN, IT STARTED
EARLIER, BUT WHEN HE TOOK OFFICE IN '33 IT CONTINUED ALL THE WAY
UNTIL 1941 -- WAS BASICALLY, THOSE EXPERIMENTS THAT HE UNDERTOOK
WERE BAD IDEAS AND HURT THE ECONOMY RATHER THAN HELP IT.
HE DID THINGS LIKE THIS. WHAT THEY DID IS THEY SAID, "OH, A
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DEPRESSION. THAT'S A SIGN THAT PRICES ARE TOO LOW." NOW, I'M NOT
GONNA TELL YOU I BELIEVE THAT. I'M SAYING THAT WAS HIS
INTERPRETATION. HIS INTERPRETATION WAS, "PRICES ARE TOO LOW. SO IF
WE COULD CAUSE PRICES TO GO UP, THAT'D BE THE END OF THE
DEPRESSION." SO THEN HE BROUGHT MANUFACTURERS INTO A ROOM
TOGETHER, LIKE CAR MANUFACTURERS, AND HE'D SAY, "COME ON IN THIS
ROOM. I WANT TO HAVE A MEETING." AND HE DIDN'T DO IT. HE HAD LIKE
CABINET OFFICIALS. SO THEY BRING ALL THE CAR MAKERS IN THE ROOM AND
THEY'D SAY, "OKAY. WE WANT YOU GUYS TO GET TOGETHER HERE AND SEE
WHAT YOU CAN DO TO RAISE THE PRICE OF CARS."
NOW, BY THE WAY, TODAY, IF ALL THE CAR MAKERS GOT TOGETHER
AND SAID, "WHAT CAN WE DO TO RAISE THE PRICE OF CARS?", WHAT WE
WOULD DO IS WE WOULD HAVE AN ANTI-TRUST LAWSUIT GOING ON WHERE
THE GOVERNMENT WOULD GET THESE GUYS AND SAY, "YOU CAN'T DO THAT.
YOU'RE RIGGING THE MARKET TO RAISE THE PRICES. THIS IS ILLEGAL."
THEY'D ALL BE SUED AND MAYBE ALL OF 'EM GO TO JAIL. FOR SURE THERE'D
BE HUGE FINES TO PAY. BUT MAYBE THEY'D ALL GO TO JAIL.
OKAY. BUT ANYWAY, DURING THE DEPRESSION THE IDEA WAS, "HEY,
WE'VE GOT A DEPRESSION 'CAUSE PRICES ARE GOING DOWN. IF WE CAN
GET PRICES UP, THAT WILL BE A WONDERFUL THING." SO THEY'D BRING
THESE MANUFACTURERS TOGETHER AND SAY, "YOU GUYS, WE WANT YOU TO
MEET AND SEE WHAT YOU CAN DO TO RAISE PRICES." SO WHAT DID THEY
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SAY? "HEY, LET'S RIG THE MARKET AND RAISE PRICES." HOW DO YOU DO
THAT? HOW DO YOU RAISE PRICES? NOW WE'RE BACK TO
MICROECONOMICS AND LET ME GIVE YOU A QUICK LITTLE PICTURE HERE.
HERE'S SUPPLY AND DEMAND FOR CARS. AND IF YOU WANT THE PRICES TO
GO UP, WHAT CAN YOU DO? HOW ABOUT THIS: RESTRICT THE SUPPLY. JUST
ALL -- EACH ONE OF YOU SAY, "I'LL CUT MY PRODUCTION TWENTY PERCENT IF
YOU'LL CUT PRODUCTION TWENTY PERCENT. IF YOU CUT PRODUCTION, AND
SO WE ALL CUT PRODUCTION TWENTY PERCENT." AND PRICES THEN -- DUE
TO THE REDUCED PRODUCTION, PRICES GO UP.
[STUDENT SPEAKING INAUDIBLE] EXACTLY. IF YOU CUT PRODUCTION,
THEN YOU'D GO BACK TO THE FACTORY AND SAY, "HEY, WE ONLY NEED
EIGHTY PERCENT OF YOU. TWENTY PERCENT OF YOU GO HOME." SO YOU'RE
ABSOLUTELY RIGHT. WHAT HAPPENS IS, YOU START RIGGING THESE
MARKETS SO THERE'S LESS PRODUCED TO RAISE THE PRICES, THERE'S
FEWER JOBS.
AND LET ME TELL YOU SOMETHING. IT WASN'T LIKE CAR MAKERS AND
THAT'S IT. IT WAS PRACTICALLY EVERY INDUSTRY OF ANY SIZE
WHATSOEVER. AND AGRICULTURE? THEY KILLED ANIMALS. MY FATHER
LIVED DOWN IN OKLAHOMA DURING THE DEPRESSION AND WHAT HAPPENED
WAS GOVERNMENT GUYS CAME IN WITH LIKE A BULLDOZER AND THEY DUG A
BIG TRENCH, AND THEY WENT OUT TO FARMERS AROUND THAT
NEIGHBORHOOD, THAT AREA, AND THEY SAID, "HEY, BRING YOUR COWS UP
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HERE." AND THE FARMERS BROUGHT THEIR COWS UP THERE AND THEN THE
GOVERNMENT PAID THEM FOR THE COWS, AND THEY PUT THE COWS DOWN
IN THE HOLE AND THEY SHOT 'EM DEAD. AND THEN THEY PUSHED DIRT ON
TOP OF THEM AND THEN EVERYBODY WENT AWAY. AND THEY WERE
THINKING, "HEY, IF WE COULD GET THE PRICE OF CATTLE UP -- YOU KNOW,
BEEF AND MILK AND SO FORTH -- IF WE COULD DO THAT, THIS WOULD HELP
ELIMINATE THE DEPRESSION."
WELL, YEAH. THIS IS A PERIOD WHEN PEOPLE ARE STANDING IN SOUP
LINES WANTING TO BE FED AND ALL OF A SUDDEN FOOD IS BEING, LIKE,
BURIED. IT CAUSED THE PRICE TO GO UP BUT NOW THE FARMERS SAY, "HEY,
I DON'T HAVE AS MANY CATTLE. I DON'T HAVE TO DO AS MUCH MILKING AND
THE BUTCHERS DON'T HAVE TO DO AS MUCH SLAUGHTERING. THE GROCERY
STORES DON'T HAVE AS MUCH MEAT IN THE MEAT DEPARTMENT TO SELL."
AND THE POINT IS, IN ORDER TO RAISE THOSE PRICES BY DESTROYING
SUPPLIES, WE DO PUSH PRICES UP BUT WE DON'T SOLVE THE DEPRESSION.
WE MAKE IT WORSE.
AND THAT IS REALLY WHAT HAPPENED, IN MY OPINION, AND WHY WE
DID NOT GET OUT OF THE DEPRESSION FOR SUCH A LONG PERIOD. THERE
WERE OTHER MACROECONOMIC PROBLEMS, BUT I'M SAYING THESE
PROBLEMS -- AND YOU CAN GO BACK AND READ. IN THE FIRST ONE HUNDRED
DAYS THEY PASSED ONE LAW AFTER ANOTHER IN 1933. THIS WAS F.D.R.'S
HUNDRED DAYS. AND, I MEAN, THERE WERE ALL THESE THINGS: THE WPA
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AND THE CCC AND THE -- WHATEVER. ALL THESE DIFFERENT LAWS WERE
PASSED. AND A LOT OF 'EM THAT AFFECTED THE ECONOMY, THEY HAD THE
EFFECT I'M DESCRIBING HERE.
IT WAS NOT UNTIL LATER ON THAT -- AND I CAN'T TELL YOU. IN 1936,
MAYBE, THERE WAS A GUY IN NEW YORK CITY AND HE WAS A CHICKEN
PLUCKER. HIS JOB -- PEOPLE WOULD BRING CHICKENS IN AND HE WOULD
PLUCK ALL THEIR FEATHERS OUT AND GET 'EM READY TO -- YOU KNOW, LIKE,
ROAST OR WHATEVER YOU DO TO CHICKEN -- COOK 'EM. OKAY. SO HIS JOB -HE WAS A CHICKEN PLUCKER. AND SO THEN THE GOVERNMENT CAME TO
NEW YORK CITY AND SAID, "I WANT ALL YOU CHICKEN PLUCKERS TO GET
TOGETHER, YOU KNOW, AND DO WHATEVER YOU GOT TO DO." THEY
PROBABLY HAD SOME OTHER FANCIER NAME FOR HIM, BUT CHICKEN
PLUCKER. THEY SAID, "WE WANT ALL YOU CHICKEN PLUCKERS TO GET
TOGETHER" -- I JUST LIKE TO SAY CHICKEN PLUCKER AND THAT'S WHY I
BROUGHT THIS UP. THEY SAID, "WE WANT ALL YOU CHICKEN PLUCKERS TO
GET TOGETHER AND RAISE THE PRICE OF YOUR PRODUCT." AND THIS GUY
SAID, "I'M NOT DOING IT." AND THEY SAID, "YEAH, YOU'VE GOTTA DO IT.
WE'RE THE GOVERNMENT." AND HE SAID, "I'M NOT DOING IT. THIS IS WRONG.
IT'S AGAINST THE LAW FOR YOU TO FORCE ME TO DO THIS. WE GET FREE
ENTERPRISE HERE. I GET TO PLUCK ALL THE CHICKENS I WANT TO PLUCK,
CHARGE WHATEVER PRICE I WANT TO CHARGE." AND THEY SAID, "NO, YOU
DON'T." AND HE SAID, "YES, I DO." AND SO HE GOT A LAWYER AND HE
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STARTED SUING THE GOVERNMENT. AND DO YOU KNOW HE BEAT THE
GOVERNMENT? AND I MEAN BEAT THE GOVERNMENT ALL THE WAY INTO THE
SUPREME COURT, AND BEAT 'EM IN THE SUPREME COURT.
AND SO THEN THESE POLICIES -- AND NOW WE'RE LATE IN THE 1930S
BY THE TIME IT GETS TO THE SUPREME COURT. THESE POLICIES THAT THE
GOVERNMENT HAD BEEN PURSUING SINCE 1933, THAT HAD BEEN ILLEGAL,
ALL OF A SUDDEN BY THE END OF THE 1930S WE GO, "UH, THOSE ARE
ILLEGAL" -- AND HARMFUL TO THE ECONOMY. BUT THE ILLEGAL PART MEANT
THE GOVERNMENT WAS TAKING AWAY FREEDOMS FROM AMERICANS THAT
THEY HAD, AND IT WAS JUST TAKEN AWAY.
SO WHAT HAPPENED AT THAT POINT WAS THE SUPREME COURT SAID,
"HEY, THE NEW DEAL, LARGE SEGMENTS OF IT, ARE JUST ILLEGAL. THEY
MUST BE TAKEN AWAY." AND BY THAT TIME EVERYBODY KNEW IT WASN'T
WORKING ANYWAY BECAUSE IT'S BEEN LIKE SEVEN YEARS UNDERWAY, OR
WHATEVER, AND WE STILL HAVEN'T RECOVERED. SO EVERYBODY KIND OF
HAD THE IDEA IT WASN'T WORKING. BUT THE POINT IS THAT THE SUPREME
COURT SAID THE NEW DEAL -- LARGE SEGMENTS OF IT; NOT EVERY ASPECT,
BUT A LARGE PART -- WAS ILLEGAL.
AND SO THEN IT CREATED A DISAGREEMENT BETWEEN THE
ROOSEVELT ADMINISTRATION AND THE SUPREME COURT. AND WHAT
HAPPENED AS A RESULT OF THAT -- AND THIS IS NOT ECONOMICS SO MUCH,
BUT A LITTLE BIT OF POLITICS, A LITTLE BIT OF THE LAW. WHAT HAPPENED
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OVER THIS ARGUMENT, THE CHICKEN PLUCKER BEATING THE GOVERNMENT,
IS THAT THE ROOSEVELT ADMINISTRATION -- FRANKLIN ROOSEVELT WAS
ANGRY WITH THE SUPREME COURT AND HE SAYS -- BOY, WE'VE JUST GOT A
BUNCH OF ANGRY OLD MEN HERE, YOU KNOW, THAT ARE -- THE ANGRY ONE
WAS F.D.R. BUT A BUNCH OF OLD MEN THAT ARE LIKE OUTLAWING WHAT THE
GOVERNMENT'S TRYING TO DO TO SOLVE THE NATION'S PROBLEMS. AND SO
THEN HE SAID, "YOU KNOW WHAT WE NEED? WE NEED A NEW LAW FROM
THE CONGRESS WHERE I GET TO APPOINT NEW PEOPLE TO THE SUPREME
COURT." THERE WERE ALREADY NINE PEOPLE ON THE SUPREME COURT AND
HE SAID, "BOY, IF I COULD PUT FOUR OR FIVE MORE ON THERE, THEN I'D HAVE
A MAJORITY THAT SEES THINGS MY WAY."
AND SO THE TERM THAT'S BEEN GIVEN TO THIS PERIOD IS -- THIS IS THE
PROPOSAL OF F.D.R. -- I'LL SAY F.D.R. PACKING, STACKING -- WHAT THE HELL
WAS IT? PACKING, STACKING? [STUDENT SPEAKING INAUDIBLE] STACKING,
PACKING, STACKING -- I DON'T KNOW. THE SUPREME COURT. I THINK IT'S
PACKING. HEY, EITHER ONE WILL WORK FOR ME. ANYWAY, THIS TRULY
CREATED A CRISIS IN OUR GOVERNMENT AT THE TIME BECAUSE THE
CONGRESS SAID, "LOOK, WE CAN'T BE HAVING PRESIDENTS COMING ALONG
AND JUST LIKE CHANGING THE SUPREME COURT. IT'S BEEN THIS WAY" -- YOU
KNOW, THE SUPREME COURT -- "FOR JUST LIKE CENTURIES. WE CAN'T BE
HAVING SOME PRESIDENT WHO DOESN'T LIKE A SUPREME COURT CASE
COME ALONG AND SAY, 'WE'VE GOTTA CHANGE THE WHOLE -- THE
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MEMBERSHIP OF THE SUPREME COURT,' AND THINGS LIKE THAT. WE JUST
CAN'T HAVE IT."
SO IT CREATED A CONFLICT BETWEEN -- REALLY, IT INVOLVED THE
SUPREME COURT, IT INCLUDED THE PRESIDENT, AND INCLUDED THE
CONGRESS. AND SO THERE WERE SOME VERY HARD FEELINGS AT THAT
POINT. A LONGER-TERM EFFECT OF THIS -- AND I'M SAYING OVER THE YEARS.
OH, BY THE WAY, THE END OF THIS WAS F.D.R. HAD THIS PROPOSAL STRUCK
DOWN AND THERE WERE NO MORE PEOPLE ADDED TO THE SUPREME COURT.
THE NEW DEAL, THOSE ASPECTS OF IT WE'VE TALKED ABOUT, WERE JUST
OUTLAWED. TOO BAD FOR YOU.
BUT THERE WERE ULTIMATE RESULTS. THE SUPREME COURT WAS
INTIMIDATED BY F.D.R.'S PROPOSAL. YOU'VE DISPLEASED THE PRESIDENT;
NOW THE PRESIDENT WANTS TO COME ALONG TRYING TO FORCE SOME OF
THE OLDER MEMBERS OFF THE SUPREME COURT. "TIME FOR YOU TO RETIRE,
OLD-TIMER." BUT TRYING TO FORCE SOME OF 'EM OFF, TRYING TO ADD
MORE PEOPLE TO THE SUPREME COURT. THEY WERE INTIMIDATED. AND SO
WHAT HAPPENED WAS, THE SUPREME COURT AFTERWARDS SAID ALMOST
ANYTHING THE GOVERNMENT DOES IS LEGAL.
I'M SAYING TO YOU THAT IT IS
AT THIS POINT IN TIME, LATE 1930S -- AND I CAN'T TELL YOU AGAIN WHAT THE
YEAR WAS. 1936, MAYBE '37, SOME TIME ALONG IN THERE. BUT SINCE 1936
OR 1937, WE HAD THIS CASE OF PACKING THE SUPREME COURT AND THE
FIGHTING AND THE CONSTITUTIONAL CRISIS AND ALL THAT TOOK PLACE. I'M
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SAYING SINCE THAT DAY AND CONTINUING UNTIL TODAY, THE SUPREME
COURT'S GENERAL ATTITUDE -- THERE ARE EXCEPTIONS, BUT THE GENERAL
ATTITUDE THE SUPREME COURT HAS IS THIS: WHATEVER THE GOVERNMENT
DOES, THAT'S LEGAL. THE GOVERNMENT WOULDN'T BE DOING IT IF IT
WASN'T GOOD.
AND SO WHAT I'M SAYING TO YOU IS, THIS IS IN A SENSE -- AND I'M
REALLY TALKING ABOUT ECONOMIC LAWS MORE THAN OTHERS. BUT IN A
SENSE, THIS IS KIND OF THE END OF THE CONSTITUTIONAL PERIOD WHERE
THAT WE'D JUST SAY, "WELL, YOU KNOW, THESE CONSTITUTIONAL RULES.
THOSE DETERMINE WHAT'S LEGAL AND WHAT'S ILLEGAL." ALL OF A SUDDEN
IT'S NO, NOW THE GOVERNMENT IS DECIDING WHAT'S LEGAL AND ILLEGAL.
AND THE GOVERNMENT ALMOST CAN'T BREAK THE LAW.
AND SO THIS IS REALLY AN IMPORTANT TURNING POINT IN AMERICAN
HISTORY. I'VE ALREADY TOLD YOU ABOUT A CASE -- WHEN WE WERE
TALKING EARLIER ABOUT SUPPLY AND DEMAND, I TOLD YOU ABOUT A CASE,
ONE ON THE EAST COAST AND ONE ON THE WEST COAST, ABOUT SOME
PROPERTY OWNERS. AND THE GOVERNMENT CAME ALONG AND SAID, "JOE,
YOU CAN'T BUILD ON YOUR PROPERTY," IF YOU REMEMBER THAT. AND THEN
THIS GUY SUES THE STATE OF SOUTH CAROLINA AND THEN THE STATE OF
SOUTH CAROLINA APPEALS, THEN THERE'S ANOTHER APPEAL, AND IT
WORKED ITS WAY TO THE SUPREME COURT. AND THE SUPREME COURT SAID
TO THE STATE OF SOUTH CAROLINA, "YOU CANNOT TAKE THIS PERSON'S
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PROPERTY." IF YOU REMEMBER, THAT WAS THE FIFTH AMENDMENT, THE
TAKINGS CLAUSE. THE SUPREME COURT SAID, "YOU MAY NOT TAKE THIS
MAN'S PROPERTY WITHOUT COMPENSATING HIM." THAT WAS SEEN TO BE -AND THAT WAS IN 19, WHAT, 93 OR SO. NOT UNTIL ABOUT 1993 DID THE
GOVERNMENT -- OR THE SUPREME COURT COME BACK AND SAY TO THE
GOVERNMENT, "JUST BECAUSE YOU WANT TO DO THAT DOESN'T MEAN IT'S
OKAY."
AND SO I'M SAYING THAT HERE OUR ECONOMIC CONSTITUTION SORT
OF WAS OUT THE WINDOW IN THE '30S, AND NOT UNTIL THE 1990S DID THE
GOVERNMENT START MAKING LAWS THAT THEN THE SUPREME COURT SAID,
"THAT'S ILLEGAL. YOU'VE BROKEN THE LAW. YOU'VE BROKEN THE
CONSTITUTION. YOU MUST NOT DO THAT." AND SO THAT WAS A LONG
PERIOD OF ALMOST SIXTY YEARS WHEN -- AND I DON'T MEAN TO SAY THIS
PERIOD IS OVER. THESE CASES ARE STILL FAR AND FEW BETWEEN THE
ONES LIKE IN THE 19, WHAT'D I SAY, '93 -- WHERE THE SUPREME COURT
STRIKES DOWN THESE ECONOMIC LAWS.
AND SO WE ARE AT A PERIOD RIGHT NOW WHERE WE STILL HAVE -- I
MEAN, ALWAYS HAVE THE RIGHT TO VOTE, THE RIGHT TO FREE SPEECH. SO
OUR POLITICAL RIGHTS I DO NOT MEAN WERE ENDANGERED BY THIS
SITUATION. BUT I'M SAYING OUR ECONOMIC RIGHTS THAT ARE WRITTEN INTO
THE CONSTITUTION -- YOU'VE GOT THE RIGHT TO LIFE, LIBERTY, PROPERTY -IT SAYS THOSE THINGS. BUT OUR ECONOMIC RIGHTS, I'M SAYING, WERE --
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HAVE BEEN SORT OF, MMMM, NOT VERY STRONG IN THE CONSTITUTION. THE
CONSTITUTION'S WORDS HAVEN'T CHANGED BUT THE INTERPRETATION HAS
BEEN WEAK EVER SINCE THE 1930S. AND STILL IS WEAK. AND OUR
ECONOMIC RIGHTS ARE NOT AS STRONG AS OUR POLITICAL RIGHTS.
LET'S TAKE JUST ONE MORE MINUTE AND THEN WE'LL QUIT FOR THE
DAY. WE'LL FINISH THIS UP NEXT TIME. I WANT TO MAKE THE POINT WHICH,
ANSWERING YOUR QUESTION, I SORT OF DID. SOME ECONOMISTS BELIEVE
THAT WAGES WILL NOT DECLINE. SOME ECONOMISTS THINK THAT, YOU
KNOW, WE'RE JUST NEVER GONNA GET TO THAT POINT OF LONG-RUN
EQUILIBRIUM THROUGH THIS PROCESS I JUST DESCRIBED. WE'LL NEVER GET
THERE BECAUSE WAGES WON'T GO DOWN. IF THERE'S A HIGH
UNEMPLOYMENT RATE -- THIS IS THE THEORY. I DO NOT PERSONALLY HOLD
TO THIS THEORY. BUT THE THEORY IS THAT IF THERE'S A HIGH
UNEMPLOYMENT RATE AT OUR ORIGINAL EQUILIBRIUM, AND THERE'S A LOT
OF PEOPLE STANDING DOWN THERE, TRYING TO GET UNEMPLOYMENT
BENEFITS, THAT EMPLOYERS WON'T LOWER WAGES AND EMPLOYEES WON'T
BARGAIN WAGES DOWN AND THEY JUST WON'T FALL. AND SO WE'RE JUST
STUCK RIGHT THERE UNLESS SOMEBODY COMES ALONG AND DOES
SOMETHING. THERE'S THE GOVERNMENT. BUT UNLESS GOVERNMENT HAS A
POLICY, WE'RE STUCK RIGHT HERE AT UNEMPLOYMENT.
PERSONALLY, I DO THINK WAGES ARE FLEXIBLE DOWNWARDS, BUT -AND THIS IS MY PART OF THE STORY HERE -- I THINK THAT THIS MOVEMENT
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FOR WAGES TO FALL BY ENOUGH FOR US TO GET TO THAT EQUILIBRIUM, I
THINK THAT THIS CAN TAKE ANYWHERE FROM ONE TO THREE YEARS. SO IT
CAN BE A SLOW PROCESS.
THAT'S WHERE WE'LL STOP FOR THE DAY. FRIDAY WE'LL TAKE THE
OTHER CASE OF AN INFLATIONARY GAP. SO LONG.