Download Macroeconomic instability

ECO 481:
Public Choice Theory
Week 12:
Macroeconomic
Instability
Dr. Dennis Foster
Economic Instability
• Marx & Keynes - an inherent flaw in capitalism.
• Schumpeter - inherent, but advantageous.
• Austrians - not inherent nor advantageous.
• Highly valued; rarely seen. Why?
• Economic ignorance.
• Self-interest of political decision-makers.
Economic Ignorance
• Economists are not physicists.
• Agreement on variables doesn’t matter.
• Data - not current; not complete; uncertain;
costly to collect; unreliable.
• Has stimulus kept Ur under 8%?
• Macro policy - offer with humility.
• Can we tell the fool from the demagogue?
Humility Explained, or not …
Instability = f (self-interest)
• Wealth, income, power, status come from:
• Having more to do. (“Getting the job done.”)
• Not getting the job done.
• “Fighting” unemployment is esp. rewarding:
cut taxes and raise spending!
• Appear to fight deficits; do so is political suicide.
• “[M]arket fluctuations, in turn, provide rhetorical
ammunition for politicians wanting to inject the
government still more into economic life.”
Political Business Cycles
•  money supply in last 2 years of term.
• SR gains - reduced unemployment.
• LR costs - inflation; deal with later.
• Evidence from U.K. and U.S.
• Even Keynesian prescriptions are not followed:
raise taxes and cut spending during recovery.
• Is Obama a Keynesian?
• “And, of course, deficits are at all time highs.”
Deficits
The Problem w/Macro Policy
• Ignores micro principles.
• People make choices & respond to incentives.
• Macro aggregates ignore the individual.
• Provide $ to bridge unemployment gap.
• Now - incentivizes people to stay unemployed.
• Policies discourage saving/investment.
• Tax exempt mortgage; crowding out.
A Depression
Story
What if we didn’t “fight” recessions?
8/1920 - 11/1922
5/1979 - 3/1988
6/2008 - ???
Real GDP - Quarterly Growth (Annual Rate)
1990 to 2011
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
GDP (2011) = $18.3 tr. vs. $13.3 tr.
-4.0%
-6.0%
1990 - 2011 net gain = $34.6 tr.
-8.0%
2011q1
2010q1
2009q1
2008q1
2007q1
2006q1
2005q1
2004q1
2003q1
2002q1
2001q1
2000q1
1999q1
1998q1
1997q1
1996q1
1995q1
1994q1
1993q1
1992q1
1991q1
-12.0%
1990q1
-10.0%
Reducing Deficits
• Three choices - taxes, spending, MS.
• Text on Paul Ryan’s plan!!
• Current dilemma - $4 b. or $60 b. or $100 b.
on a $1.5 trillion deficit?
• AZ experience - sell & lease;
defer payments.
• Can we even hope for a 19% solution?
ECO 481:
Public Choice Theory
Week 12:
Macroeconomic
Instability
Dr. Dennis Foster