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Halpern, Koren, and Szeidl argue in the article that importing foreign inputs can lead to an increase in productivity on the domestic scale in countries like Hungary. The authors refer to the ideas of quality and imperfect substitution to back up their argument of increased productivity. The authors found from their research that foreign owned firms benefited more from importing cheaper inputs and that firms benefited more when the foreign, substitute inputs were similar to the domestic inputs. Perhaps the foreign firms are rewarded with more success when importing foreign imports because they already have had experience in these foreign markets. This allows them to seek out the cheapest inputs possible while still maintaining the quality of the inputs. If the inputs are cheaper than the production costs of the firm’s are lower. Cheaper production costs allow the firms to make more money and therefore increase both consumer and investing spending, leading to an increase in GDP and long run economic growth. Therefore, importing cheaper foreign imports not only raises the productivity of the economy but also sustains long run growth. This entire article and the argument is based off the economic principles of opportunity cost and comparative advantage. For example, the US is very good at producing aircraft machinery and technology and China is better at producing consumable goods. The US has a lower opportunity cost so it should trade its airplane machinery to China so they can build planes. In return the US will receive inputs from which they have a higher opportunity cost than China. Trade allows countries to specialize in production, and trading inputs among global economies allows specialized countries to increase productivity, GDP, and long run growth simultaneously.
In the article from the “Economic Policy Institute” numerous world leading economists and Nobel prize winning economists from top universities like Princeton and MIT stated their concerns about the balanced budget amendment proposed by the US Government. A balanced budget amendment seems like a practical idea in order to cut deficit spending and stabilize the economy, but according to the article this is not true. Amongst the public the word deficit spending has a very negative connotation. Many Americans think that the United States government is trillions of dollars in debt and the only way to combat this debt is to cut spending and investment. However, as we learned in class spending and investment are the key factors that determine long run growth and that cause the economy to rise from economic lows. An increase of government spending and investment causes the aggregate demand curve to shift out. This outward shift of the demand curve causes unemployment to drop and GDP to rise which is good for the economy as a whole not bad. The economy of a country is not the same as a private business. If private businesses are experiencing financial problems, they can cut expenses in order to increase their net income. However, a similar behavior used in an attempt to increase the welfare of global economies could actually do more bad than good because of the paradox of thrift. If everyone cuts back on their spending the economy actually shrinks. One person’s spending is another’s income and if people stop spending, then the other people who depend on their spending get laid off. An overall spending cap which would follow with the passing of this amendment would have a dual negative effect on both continued expansion and correcting recessions. The spending cap would limit congresses’ ability to decrease taxes and increase spending in order to raise the aggregate demand curve and correct the economy from a recession. On the flipside during times of expansion, increases in spending and investment which lead to higher GDP and lower unemployment would be deemed as breaking the ground rules of the amendment, leading to less spending and therefore less expansion. Global economies are a very hard topic to deal with but the writers of this article are the world’s leaders in their field, so the US government would be wise to listen to their words of wisdom.
Professor DeLong begins his article by reassuring Joe Stiglitz’s claim about how the world on a macro-scale is slipping into an elongated depression brought about by a deficiency in aggregate demand. I agree with Stiglitz on his claims stating that the world has been shifting into a “Great Malaise” since 2010 but I do not agree with him entirely when he states his ideas in order to cure the recession. Stiglitz says that our economy relies on “an increase in aggregate demand, far-reaching redistribution of income and a deep reform of our financial system” but then goes on to say that the obstacles to a growth in the global economy “are not rooted in economics but in politics and ideology.” In my limited and unprofessional opinion, I see a contradiction in these statements. The apparent “longest depreciation” that is upon us is heavily rooted in economic policy, I believe. In order to apply economic policy, we must understand it in order to apply policies to correct the recession. DeLong writes that “we will be unable to reliably adopt good policies and be unable to sustain them unless we understand our situation.” Politics and ideology are key in order to correct our ailing economy and the stifling economies of other world powers like Japan and China, but in order to apply these fiscal and monetary policies we must understand economics. Economics tells is that if there is a fall in the aggregate demand it can be corrected and brought back to equilibrium through government intervention. We have learned that when the economy strays from equilibrium it will correct itself in the long run. But according to Keynes in the long run “we are all dead” and the time it takes in order for this shift back to equilibrium to occur depends on many variables, as many occurrences do in macroeconomics. Therefore, there is a time where government intervention is necessary in order to boost the aggregate demand and relieve the economy from the depression. If unemployment is rising, there is deflation, and GDP is falling the government can increase spending and reduce taxes in order to increase aggregate demand. Looking back to Lynn and Boone’s article in the Cornell Chronicle changes in the minimum wage also has positive affects on the economy and aggregate demand. Lynn and Boone argue that if the government mandated a slight increase in minimum wages that it could lead to a higher GDP and aggregate demand. If unskilled workers make more money it improves their state of mind and increases their marginal product of labor therefore increasing output. Also if they are paid more it enables them to pay for an education in order to learn a trade to further increase GDP. An increase in education leads to an increase in income which leads to an increase in consumer spending and investing which is key for long run economic growth and the correction of our ongoing recession. The “Longest Depression” is an inevitable problem that is affecting our global economy. Government intervention is sometimes necessary to adjust the aggregate demand back to equilibrium. This intervention is rooted in macroeconomics and an understanding is required in order to apply policy and correct the economy.
A minimum wage is a government mandated floor on the price of labor. Susan Kelly in the Cornell Chronicle shares with us the opinions of Christopher Boone, assistant professor of human resources, and co-author Michael Lynn. The two argue that a slight increase in the minimum wage in the United States can actually increase the revenues of restaurants that are typically opposed to wage increases. Traditionally restaurant owners are not in favor of a rise in the minimum wage because if they are paying their employees more, than they have higher expenses. If their expenses are raised because of a higher minimum wage than their net income decreases. In order to get their net income to increase back to its original value the restaurant must increase sales revenues by an increase in prices. Restaurant owners argue that if they increase their prices than customers demand for their food will decrease and they will go out of business. There is also the opportunity cost of an increase in the minimum wage which is the loss of labor workers that were willing to work for that lower wage. Boone argues this traditional logic by saying that higher paid workers will be happier and will therefore produce a higher marginal product of labor and have a better chance of remaining in the workforce. Lynn further backs Boone by stating that large increases in the minimum wage such as what happened in Los Angeles, San Francisco, and Seattle are not ideal but small increases are. Lynn is a self made man who waited tables and bartended probably earning minimum wage in order to make a living and pay for college. Higher minimum wages offer more opportunity for the less skilled workers even though this increase may seem irrelevant for the highly skilled and educated workers. As we have discussed time and time again in macroeconomics the answers to problems like these just depend sometimes. Boone and Lynn recorded the average federal minimum wage and the minimum wages in both New York and California and the numbers were vastly different. Different areas have different standards of living and different consumer’s preferences making a definitive answer to this argument impossible. I am very interested to learn about the differences that increases in the minimum wage have on urban areas versus rural areas.
In class we argued and attempted to determine whether the doubling of the unemployment rate during the Great Depression was a form of structural or cyclical unemployment? In order to discuss this complicated question, we discussed the differences between the two different types. Structural unemployment is caused when a change occurs such as a shift from a labor intensive economy to a technology intensive economy. Firms require a certain human capital to match the transition from labor to technology. The shift of human capital however requires time to catch up in order to adapt to the transition. This period of time leads to structural unemployment and an increase in wages for skilled workers. Krugman argues however that this is not the case. He claims that according to structural unemployment there should a shift in the supply curve to match the shift in the demand curve. A shift in the supply curve is not referred to once in the article. A leftward supply shift represents the decreased supply of qualified workers. Without a dramatic wage increase for the skilled workers and a supply curve shift there has to be a different cause for the unemployment. Krugman backs up his hypothesis of cyclical unemployment when he attacks the ignorant beliefs of the rising elite circles. Economics is not an exact science, and as we have said numerous times in class a lot of the time “it depends.” To go out on a whim and claim the fact that structural unemployment occurred during the Great Depression instead of cyclical unemployment is invalid. This argument is extremely fascinating and as always it is very common in economics that the answer is wavering and should be taken with a grain of salt. I would appreciate the ability to continue comparing the differences among structural and cyclical unemployment and their tradeoffs.
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Feb 8, 2016
The New York Times article brings up the very important economic topic of negative interest rates. Although this idea seems very unorthodox there can be some benefit behind it, which is evident with the fact that many European banks and now Japanese banks have switched to negative interest rates. By 2015 about a third of the debt issued by European governments had negative yields which emphasizes this global shift to negative interest rates. Negative interest rates prompt banks into loaning out larger sums of money to businesses and other countries. If there is more money in the hands of consumers, than they can spend more which will give producers the ability to pay their labor forces. If the labor forces are being properly paid, then the unemployment rates will stay low and keep the economy out of a recession. The flipside of this topic is that consumers may not borrow from the banks because they perceive a recession ahead. Economists know that negative interest rates are a sort of last ditch effort and that the country may be close to an economic downturn. If people begin to save their money, then the producers may not make enough income to pay their labor forces and the unemployment rate will skyrocket. Lastly the article mentions that one reason for Japans shift to negative interest rates is the peaking Chinese economy and the falling crude oil prices. The article is strongly interconnected with the Washington Post article posted a couple of days ago because of the fact that they both focus on how China’s economy can have a macro effect on the rest of the world’s economies and cause countries like Japan to take drastic measures to try and keep their economy afloat.
Toggle Commented Feb 1, 2016 on ECON 102 at Jolly Green General
Drew Harwell and Renae Merle’s article in the Washington Post touches on many aspects that we talked about during class. The two mention how China’s economy has come to a relative standstill, and how this can affect other world economies. China’s affect on the rest of the world can be derived from the principles of comparative advantage and specialization. Each country focuses development on the products with the lowest opportunity cost and trades to obtain the ones that they are not specialized at producing. This specialization interlocks all of the countries around the world into a trading network. The fall of China will bring down many of it’s trading partners, one being the US and have an affect on the global growth of the world’s economies. The article mentions that markets in Europe, Hong Kong, and Wall Street all tumbled. It is so coincidence that they all simultaneously faced extreme lows. Another factor pertaining to the danger of the slowing global growth is the decreased demand for oil. When a recession is believed to be impending, consumers looking out for their own stability, decide to save their earnings. This phenomenon is refereed to as the paradox of thrift. When consumer’s earnings are withheld from firms and retailers, who are trying to sell their products, it forces them to have to layoff their employees. Unemployment stems from a decreased demand and can cause a recession. Macroeconomics describes the economy as a whole and this article shows how countries’ economies are interlocked on a macro scale and one countries’ struggling economy can lead to another’s downfall.
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Jan 22, 2016