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Katherine Dau
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In “Balanced Budget Amendment ‘Very Unsound Policy’, Leading Economists Warn,” the author summarizes a recent letter protesting the aforementioned legislation. This legislation would create a constitutional amendment blocking the government ability to run a deficit. This would, in theory, save the United States from spiraling too far into debt. However, prominent economists among others warn of the acute dangers of such an amendment. In times of crisis, the Aggregate Demand curve for the national economy falls to the left, thus reducing both output and price level. At this point, tax income also decreases as the number of people qualified for taxes decreases. The best way to quickly recover from a recession is for the government to attempt to shift the aggregate demand curve back outward through government expenditure. However, in a time of crisis, with a falling tax base, the government would not be able to attempt to kick start a recovery. Not only that, it would most likely need to cut back on funding of things like education and infrastructure. This would slow recovery even further than doing nothing. Furthermore, macroeconomics is not a precise field. Each circumstance is slightly different and thus there can be no blanket solutions. The balanced budget amendment would not allow for the flexibility that is necessary in dealing with the world’s largest economy.
Economist Brad DeLong makes the claim that we have not yet recovered from the 2008 Recession in “Future Economists Will Probably Call This Decade ‘The Longest Depression’.” In his article, he admits his the fact that he has changed his mind on the self-correcting economy since the Great Recession. Previously, he believed that when the Aggregate Demand Curve shifts left, the SRAS curve will eventually also shift to the left. Thus, the curves will return to the equilibrium at potential output and the only thing effected will be the price level. However, studies have shown that we have still not returned to pre-recession levels. DeLong argues that Joe Stigletz was and continues to be right: the way to return to the pre-2008 aggregate demand curve is through massive government expenditure. This will shift the aggregate demand curve back out, and in turn shift the short run aggregate supply out. Furthermore, he argues that education will be the biggest shifter. Education, preschool education in particular, can shift the long run aggregate supply curve out, increasing our overall productive capacity. I agree with DeLong: in the future, we will not be able to return to our previous aggregate demand curve without a large government spending plan now.
Susan Kelley does an excellent job of outlining the effects of raising the minimum wage on restaurants. The restaurant sector does not advocate for the rise of the tipping minimum wage because they say it raises the prices on their menus too much. However, Kelley says this is not necessarily the case. A massive minimum wage hike would probably cause this, and restaurants would lay off workers. This would increase overall unemployment and poverty as there would be a scarcity of jobs. Kelley is not advocating for a massive increase, but rather a moderate one. She makes the clear point that employees with higher wages will be happier and therefore more productive. Furthermore, it appears that with increased purchasing power, the tipped workers will spend more. As we know from the multiplier effect, this will have a greater effect on the economy than just the additional money spent. Thus, a small increase in minimum wage may actually stimulate the economy. This would probably outweigh the negative effects that restaurants might experience through a potential slight loss in profits.
In “Structural Humbug Revisited”, Paul Krugman reassessed the unemployment spike of the late 2000s. He describes how the spike was quickly branded as structural despite the efforts of economists to declare otherwise. He is correct in asserting that the rapid rise of unemployment was a different type of unemployment. With the collapse of the housing bubble and other economic events of 2008, the demand curve for labor rapidly shifted left, as Krugman states. If the unemployment were Structural, then we would also see a leftward shift in the supply curve as there would be an inefficient number or workers trained to perform the jobs needed. This phenomenon would result in an increased equilibrium wage. As we did not see this, and we know the unemployment was not frictional, we must conclude that the unemployment of the great recession was largely cyclical. Structural unemployment is hard to influence by public policy, but law makers could have done more in the 2000s to prevent and counteract the cyclical unemployment of the era if they had listened to economists.
In “The Costs of Inequality: When a Fair Shake Isn’t” Alvin Powell outlines the issues with inequality and their causes. He describes in depth how only twenty percent of the population owns almost ninety percent of the nation’s wealth. This is because they possess capital that the bottom two fifths do not. The top group possess both physical and human capital. They have the education to give them the business prowess that they need. These men and women possess advanced degrees from top institutions like Harvard, Princeton, or Stanford. Meanwhile, the bottom two thirds is more likely to be getting by with a high school degree or maybe some community college. The discrepancy in human capital plays a major role in wealth inequality. Furthermore, the top twenty percent owns a great deal of physical capital, whether that be properties, cars, machinery, etc, while the bottom actually owns little to nothing. This is a major factor in wealth because real wages may not rise at the same rate as inflation. The value of capital rises at a much faster and steadier rate than wages do. Thus, those with capital can continue to save, invest, and get wealthier while those without are reduced to relying solely on income. Although not the only factor in inequality, Powell presents convincing evidence that this is a major factor. Macroeconomic policy can help to close this gap which has been widening in recent years. As Powell concludes, for the sake of democracy, we must take action.
In the article “Mario Draghi defends ECB’s monetary easing policy” James Shotter and Claire Jones outline the president’s actions on easing. The EU, like the rest of the world, is suffering from a bit of a downturn. In fact, the GDP of the United States displayed only marginal growth in the final quarter of 2015. Most nations attempt to keep their inflation rate around 2%. This both stimulates producers to continue expanding, producing, and investing in capital, and consumers to continue to purchase goods and services, which in turn allows the economy to grow. Furthermore, with inflation at a low point the unemployment rate increases. This is particularly problematic for Europe in a time where millions are migrating to the continent, jobless. Thus, Draghi is trying to stem the tide of unemployment and stimulate the economy by raising inflation. A conflict has emerged between those who support Draghi’s proactive position and those who prefer a more laisse-faire approach. This is a constant debate of macroeconomic policy: what actions need to be taken and will those actions have the desired effect. Although it is impossible to know exactly what will happen if Draghi’s policies continue to be implemented, his goal in raising the inflation rate is well founded.
Toggle Commented Jan 31, 2016 on Econ 102 at Jolly Green General
The blog post, “Some Economics for Martin Luther King Jr. Day” by Timothy Taylor outlines the economic discrimination still faced my many in four points. He describes the common misinterpretations about the wage gap and other principles. This ties in directly to our discussions on models. Models can never be perfect or completely accurate; however, as Taylor states, some of the models pertaining to education and pay gaps need reworking. I found his comments on copy-right laws most interesting. It is shocking to me that Dr. King’s “I Have a Dream Speech” is not available to public consumption. This seems to be almost the opposite of what King himself would want. Education has been proven to be the best way to move forward, but today we cannot hear King’s words or see the reaction of the crowds. Taylor comments on the early age at which an education gap begins. Although access to King’s work would not come close to closing this gap, it is sad to think that those already losing out on education are being robbed even further.
Toggle Commented Jan 24, 2016 on ECON 102 Reading at Jolly Green General
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Jan 24, 2016