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Syed Ali
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Personally, I found this article really interesting because I can relate to it very well. No matter how busy I am or how much work I know I have to do, the impulse to check your email, facebook, or to simply waste time on the internet is always lurking in the background. I think the idea of using meditation, to strengthen my ability to focus my attention, is something I will have to try and incorporate into my daily life. Like the author suggests, just like bicep curls yield larger muscles, repeatedly meditating and focusing our attention might allow us to do the same for less physical attributes.
This article talks about how monetary policy has changed in the past several years, to deal with the global economic crisis. Before discussing the role of monetary policies, Blanchard first implies that it is important to tie together fiscal and monetary policy, so that they have concerted effects. Otherwise, as we discussed in class, attempts to increase Aggregate Demand via expansionary monetary policy may be subverted by contractionary fiscal policy. Blanchard also mentions the necessity of stabilizing banks; as banks are responsible for lending out money from the Fed-manipulated money supply, they are the key intermediate agents in introducing liquidity and stimulating investment spending in the market. Consequently, stabilizing the banks is an important first step in allowing for economic recovery, as any attempts at monetary policy by the Federal Reserve rely on them. Blanchard mentions three key changes/discoveries in monetary policy that have resulted from the current financial crisis; “the liquidity trap, the provision of liquidity, and the management of capital flows.” I believe Blanchard is referring to the current reluctance of banks to lend out money, as “the liquidity trap.” Although banks have a minimum reserve ratio they are required to maintain by the Fed, there is no upper limit on how much cash they keep in reserve. Instead of lending out money, banks are instead choosing to store most of their cash as “reserves.” Thus, although the Fed has injected massive amounts of money into the money markets, investment spending has increased only slightly. In turn, the marginal increase in investment spending has had a marginal impact on Aggregate Demand, and we remain in a recessionary gap. Unfortunately, as we discussed in class, there is not a whole lot more the Fed can do to motivate lending by banks, as it has already pushed the real interest rate down to zero. It isn’t possible for the Fed to force banks to lend out their excess reserves in our capitalistic society. Blanchard mentions how Bernanke and the Fed have tried to circumvent these issues through unconventional monetary policies; for example, by purchasing housing loans directly, in private markets. Overall, while these monetary policies have undoubtedly helped in mitigating the effects of the recession, we still have a long way to go to reach the potential GDP and LRAS. Monetary policy, usually considered the primary response to economic instability, has proven to be only a part of the solution to our current economic crisis.
I found the author's explanation of how the federal government accounts for its spending, investments, and savings to be very interesting, particularly given its relevance to the current political climate. The fact that investment spending today is accounted for as consumption spending, or an accounting "loss," seems to be just plain dumb - it does not anticipate the future returns on our investment, and makes it very difficult to deduce the long term costs and benefits of a course of action. This information makes me want to reconsider much of what I've read in terms of federal programs that "run up" the deficit; how many of them actually are more financially and economically costly than beneficial, and how many are actually more beneficial than costly but simply defer the benefits until a later period?
As Mitchell explained, this article discusses the range of responses that the Federal Reserve has employed, in seeking to ease economic downturns over the past century. The Fed is entrusted with setting monetary policy, and maintaining low unemployment and steady inflation rates. The writers of this article argue that, over the past century, the Fed has been both too aggressive and too timid at times in responding to recessions; however, on the whole, they say the Fed has erred towards the timid side. The authors explain how the Federal Reserve was reluctant to exert its monetary power during both the Great Depression and the 1960s/70s; “undue pessimism” about the impact of monetary policy led to inaction, whereas monetary intervention might have promoted more desirable economic outcomes. After the history lesson, the article implies that over the past few years, another period of “dismal macroeconomic performance,” the Reserve is repeating the past by being overly reticent in using monetary policy. For example, various leading figures at the Fed have argued that their tools are limited, and unable to make up for the shortfall in aggregate demand. This reminds me of the earlier discussion about whether or not the Fed should push for higher inflation rates, purportedly to return us to the natural rate of unemployment (along the LRAS curve). Does the Fed have enough of an impact on the overall US economy to be able to return it to its natural rate of unemployment? If it does, should we artificially return the economy to LRAS, or should we wait on it to do so by itself, naturally, through the business cycle? Personally, I think that the sluggishness of the economy for the past several years warrants a change in our approach – whether this should be a different fiscal strategy or a more aggressive monetary approach, I’m not sure.
I think Matt brings up an interesting point, in that consumers may not be adequately aware of what inflation is and what tangible effects different inflation levels have, and that they therefore won't be as responsive to changes in inflation as we hope. Perhaps this is factored into the "perfect information" assumption of the perfect competition model, that is so often applied to our economy. The article itself summarizes how various economists, on both sides of the spectrum, are arguing that increased inflation rates will encourage consumer spending; by both reducing the relative value of debt, and by disincentivizing the hoarding of money. As we discussed in class, a high inflation rate will eventually move us from a recessionary gap to the natural rate of employment, which lies on the vertical LR Aggregate Supply curve. I think the idea of raising inflation to return our economy to maximum employment follows sound economic principles (at least, the ones we’ve learned in class) and has potential. However, I also recall the book mentioning several drawbacks to having high inflation, and the large detrimental effect of high inflation in both the US and Portugal in the past century. According to the book, the Federal Reserve chairman at the time was forced to keep the US in a state of partial recession to lower inflation rates to a manageable level. I am a little bit worried about whether we would choose to lower the inflation rate in the future, and how we would go about doing that, if we raised it now. What negative consequences could result? Would reaching maximal employment today justify creating a recession in the future?
I have to agree with Matt. The article seems to be pointing out that although unemployment decreased modestly, the percentage drop in unemployment is less than last year. Furthermore, because the employment-to-population (EPOP) rate also decreased, some of this observed decrease in unemployment might simply be because people have grown frustrated and have chosen to cease their job search. As we discussed in class, % unemployment is calculated from the number of people actively looking for work - even though some people might desire employment, they will not be included in % unemployment if they are not actively seeking it. However, I was also wondering if the decrease in EPOP rate might partly be due to people choosing to return to school, for further undergraduate or graduate study. As we talked about in class, due to the stagnant economy, the government is currently seeking to incentivize borrowing by keeping the interest rate artificially low. As many people use loans to pay for schooling, and as the effective interest rate is so low, more people might now view returning to school to pursue further graduate coursework as economically favorable. That is, for more people, the return on investment from returning to school will equal or exceed the opportunity cost of doing so, due to lowered interest rates. These people would be pursuing investment spending, as they are investing in their human capital. Through this investment, they can improve their employment opportunities in the future, and contribute to positive economic growth over time. Although this is a tenuous hypothesis, if true, it would appear that the government is achieving its goal of promoting investment spending; furthermore, the economy might be improving at a rate greater than indicated solely by employment metrics, as human capital investment is a contributor to GDP growth.
I found the article interesting to read. I was especially intrigued by the author's contention that powerful people are less empathic than less powerful people are. It almost seems to imply that empathy is not an attribute inherent to the individual, but instead one which is a consequence of social circumstance and financial status. If empathy is not an inherent attribute, is it possible that it can be cultivated and developed? Can we teach people to be more emphatic of others and those who are less fortunate than they are? The author would appear to argue that yes, we can. He provides examples showing how lack of interaction between the "powerful" and less powerful social classes has led to a decrease in the empathy exhibited by the former. Conversely, he also references how "extensive interpersonal contacts" were able to counteract biases, and allow for empathy to develop between two disparate groups. I think it seems logical that segregation of two groups of people will decrease the empathy they have for each other - it produces a classic "them" vs. "us" situation. Perhaps the solution to the extensive political divides in the United States are for people to be more open about their political views with each other, allowing for individuals to mingle and interpersonal contacts to flourish. If what the author holds is true, empathy and understanding will follow.
I have to agree with Jean, in that it seems to be an intentional decision on the part of Reich to leave the article open-ended. If Reich had formally outlined his theories on how to “make the economy work for us, rather than the other way around,” he would have strayed from a rigid argument predicated on logic into a normative argument. Expressing personal opinions on what should be done dilutes the effectiveness of an article intended to systematically outline how things are. I was also intrigued by Reich’s argument regarding the artificiality of the “free market,” which he contends is a human creation and should therefore necessarily have human rules organizing and maintaining it. While I might agree with the latter point he makes, I think Reich is constraining the concept of the “free market” when he argues they are purely human in origin. It is true that the free market as we define it in Economics classes is human in origin. However, I personally consider the terminology of a free market to be broadly applicable to many other systems. In my personal opinion, the concept of a free market centers on the concept of self-regulation and autonomy. I like to think of anything, in which the quantities and costs of entities are determined not by a central processor but by individual units of the “economy,” as an effective free market. This makes more sense through an example. An interesting one that I can think of involves the transportation of Oxygen molecules in multicellular organisms, a complex biological process essential to life but elegantly simple in concept. Oxygen is required by all cells to generate the energy they use in various biological processes, thus maintaining life. In multicellular organisms, oxygen is transported to individual cells, bound to the hemoglobin molecules contained within red blood cells. Red blood cells have an interesting conundrum in that they must be able to bind and transport oxygen in the lungs, and then release this oxygen as it is needed in the tissues. Binding and releasing are both accomplished by relatively simple hemoglobin molecules. How does this relate in any way to the concept of a free market? Markets are used to distribute goods and services; the organism, in determining how to efficiently allocate oxygen to its various cells, uses a free market structure. Cells that are most metabolically active require the most oxygen; it is efficient for them to receive the majority of hemoglobin-bound oxygen. But there is no central authority in the circulatory system of organisms, micromanaging individual hemoglobin molecules on how to best distribute their precious oxygen molecules. Instead, a free market of sorts occurs, where cells that are most in need of oxygen (most metabolically active) receive the most oxygen, by causing the greatest release of oxygen from hemoglobin. The biochemical reactions that accomplish this exchange are rather complex, but we can see that there is no central authority; instead, an efficient allocation of oxygen molecules is achieved by numerous, individual biochemical interactions between cells in the body and hemoglobin molecules. Tying this all up, I think Reich is too specific in his definition of a free market. While it is true that there are no literal “free markets” in the natural world, classical free market structure is foundational to many interactions in the biological and biochemical worlds. However, I do personally agree with Reich that regulation is necessary. Even in biochemistry, a degree of regulation is maintained by the rough “central authorities” of the brain and the endocrine system.
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