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ECN202: Macroeconomics Introduction to Macroeconomics Imagine no WW II “Had the price of gold been raised in the late 1920's, or, alternatively, had the major central banks pursued policies of price stability instead of adhering to the gold standard, there would have been no Great Depression, no Nazi revolution, and no World War II.” Robert Mundell, the recipient of the 1999 Nobel Prize in Economics Imagine no Communist Russia & China “The Chinese Communist Party never forgets it seized power in 1949 following not just military victory, but also hyperinflation under the Kuomintang government…” DIDI KIRSTEN TATLOW, NYT 12/9/2010 Imagine no Yugoslavian genocide "In October of 1993 the created a new currency unit. One new dinar was worth one million of the old dinars. In effect, the government simply removed six zeroes from the paper money. This of course did not stop the inflation and between October 1, 1993 and January 24, 1995 prices increased by 5 quadrillion percent. This number is a 5 with 15 zeroes after it.” Imagine no Arab Spring “Critics argue that U.S. drone strikes are creating more problems than they solve and are driving al Qaeda's recruiting. But as much as the terrorist network plays up civilian casualties and U.S. intervention in its propaganda videos, the truth is that economic distress, not resentment of U.S. strikes, is what's pushing Yemenis into the insurgency.” Christopher Swift, “The Drone Blowback Fallacy”, Foreign Affairs 2012 Imagine no European Crisis “The lack of opportunity is feeding a mounting alienation and anger among young people across Europe — animus that threatens to poison the aspirations of a generation and has already served as a wellspring for a number of violent protests in European cities from Athens to London.” Thomas, NYT 2012 Imagine no burning of witches in Renaissance Europe “violence and scapegoating prompted by a deterioration in economic conditions. In this case, the downturn was brought on by a decrease in temperature and resulting food shortages” Emily Oster, “Witchcraft, Weather, and Economic Growth in Renaissance Europe,” Imagine no Roosevelt “What do the people of America want more than anything else? To my mind, they want two things: work, with all the moral and spiritual values that go with it; and with work, a reasonable measure of security--security for themselves and for their lives and children. Work and security--these are more than words. FDR 1933 Imagine no Kennedy “get the economy moving again” Imagine no Reagan “Can anyone compare the state of the economy when the Carter administration took office with where you are today and say, 'Keep up the good work'? Can you look at our reduced standing in the world and say, 'Let's have four more years of this'?" Ronald Reagan Imagine no Obama “HAD Barack Obama lost to Mitt Romney yesterday, the explanation would have barely taken up a sentence: the economy defeated him. Political pros always disparaged “it could have been worse” as a winning slogan “The macroeconomics mandate,” The Economist Is there a common denominator in these stories of war and elections - and how is this related to the course you signed up for? Basic Premises of Macro Theory and Policy 1. Economic well-being matters You can get a sense of it from these headlines. In the news: Macro matters 1. “Right-wing extremists’ popularity rising rapidly in Greece” 2. “Violence and protest in Iran as currency drops in value” 3. “Increase seen in U.S. suicide rate since Great Recession” 4. “As economy dips, arrests for shoplifting soar” 5. “Recession election” 6. “Employment data may be key to the president’s job” And in this graph What does this graph tell us? What does this line suggest? The Effect of the U.S. Economy on Presidential Elections: 1828-2008, Jill Gloekler Basic Premises of Macro Theory and Policy 1. Economic well-being matters 2. Economic well-being can be “estimated” with macroeconomic variables – we can look at the words, the images, or the data The Great Depression: The Pictures 1940 Bread lines Unemployment lines Farm foreclosures Hooverviles The Great Depression: The Numbers Unemployment rate What do you see here? 30 25 20 15 10 5 0 1900 1920 1940 1960 1980 2000 Basic Premises of Macro Theory and Policy 1. Economic well-being matters 2. Economic well-being can be “estimated” with macroeconomic variables 3. Stable relationships between macro variables exist In the news: Relationships exist 1. “Income surges, spending up” 2. “Lower interest rates spur construction” 3. “Low housing interest rates creates more sales” 4. “low inflation rate leads to drop in dollar” 5. “Job numbers give inflation clue” 6. “How raising the minimum wage could reduce gun violence” In the data: Relationships exist What is the relationship between the two? Basic Premises of Macro Theory and Policy 1. Economic well-being matters 2. Economic well-being can be “estimated” with macroeconomic variables 3. Stable relationships between macro variables exist 4. Macroeconomic variables can be “managed” by the appropriate policies In the news: Macro policies in action 1. “Don’t tell anyone, but the stimulus worked” 2. “Fed’s quantitative easing improves fiscal outlook” 3. “New austerity incites a bitterness the postwar generation did without” 4. “Bombs, bridges, jobs” In the words: Monetary policy Macroeconomic Performance (GDP, Inflation, Unemployment) Monetary Policy (Federal Reserve) Interest rates/ Money supply In the data: Monetary policy in action What is happening here – and why?? In the words: Fiscal policy Macroeconomic Performance (GDP, Inflation, Unemployment) Fiscal Policy (Congress & President) Government spending & Taxes In the data: Fiscal policy in action GS = (T-G) What is happening here – and why?? Course Themes 1. Ideology matters Alternative ideologies Conservatives / Liberals / Marxists (Socialists) 1. Ideology matters Marxists “Whereas the liberal mistake is to think that there is a program or policy to alleviate every problem in the world, the conservative flaw is to be vigilant against concentrations of power in government only – not in the private sector.” 2 Timing matters: VLR What is the Share of World GDP story here? 30% 27% 25% 25% 20% 20% 17% 15% 10% 5% 5% 0% 0% 1500 1950 2006 2 Timing matters: LR GDP Per Capita Annual Growth Rate: 1980 - 2003 What is the story here? 7% 6% 5.9% 5.1% 5% 4% 3.5% 3% 2.3% 2% 2.1% 1.9% 1.5% 1% 0% 2 Timing matters: SR US employment: Post 1969 recessions and Great Recession 1.12 Average Recessions 1.08 1.04 1.00 0.96 What is the story here? Great Recession 0.92 0 months 10 20 30 40 50 60 70 80 4 History matters Know the important ideas and people Evolution of Macro Theory and Policy • • • • • • 1920s: The end of the beginning 1930s: A decade of transition 1960s: Experiments with fiscal policy 1970s: Experiments with monetary policy 1980s: A decade of transition 1990s-2000s: Government & the economy