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Mary Hampton McNeal
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This Microeconomic Insights article explores how importing inputs of production facilitates economic growth in Hungary. Although many Hungarian firms do not import foreign inputs, those that do see significant increases in production, according to Halpern, Koren, and Szeidl. When tariffs and other importing barriers are relaxed in conjunction, the increase in productivity is particularly significant. Interestingly, foreign firms in Hungary see larger productivity gains from the use of imported inputs, which the authors suggest could be due to greater efficiency in the production process. Perhaps the greatest take-away from this article is that greater access to foreign inputs for production does not harm the domestic economy, but rather leads to growth and productivity gains for firms. The article even addresses how the negative impact on domestic input suppliers is mitigated because overall demand for inputs increases due to the increased productivity. Overall, this article supplies compelling evidence in favor of greater usage of foreign imports that makes a lot of recent political discourse—namely, how we must “win the trade war” and limit foreign imports—seem foolish.
The phrase “balanced budget” has been tossed around a lot lately. As this article explained, a balanced budget amendment would require the government to spend only what it receives in taxes. If you buy into the idea that incurring a deficit is always bad, then this amendment would make sense. However, we have discussed in class how expansionary fiscal policy can help shift aggregate demand outwards in periods of economic contraction, which would not be possible with this amendment. A balanced budget amendment would not allow the government to practice expansionary fiscal policy, because doing so temporarily increases the deficit. This would make periods of economic recession longer and more brutal. As we have discussed in class several times this semester, the government is not a business or a household. The government is more like the biggest insurance company in the world, and as such it does not need to be constrained by an arbitrary spending cap.
In “Future Economists Will Probably Call This Decade the ‘Longest Depression,’” Brad Delong describes how economist Joe Stiglitz was correct in asserting that insufficient fiscal policy and chronically depressed aggregate demand would prolong the Great Recession. Stiglitz correctly predicted that aggregate demand would not recover to the level it was at prior to 2008 because the policies used to stimulate it were not aggressive enough. DeLong describes the various ways in which the economy has not recovered to its pre-crash equilibrium, such as unemployment. DeLong believes that one of the reasons we are stuck in a “Great Malaise” is that many people believed the idea that the market would be self correcting in this case. DeLong himself even believed this. As we modeled in class Tuesday and Thursday, the economy will ultimately correct to long run equilibrium. However, allowing unemployment to remain high while the market to adjust itself causes human suffering, a point that we touched upon in class Tuesday. Essentially, DeLong believes that we remembered just enough about the Great Depression to know that post-crash government intervention in the form of fiscal policy was necessary, but not enough to know just how aggressive that fiscal policy had to be. A final point that stuck out to me was DeLong’s proposal for tighter financial regulation. Professor Goldsmith noted several times in his lecture about the real estate bubble that better regulations could have prevented the sale of subprime mortgage trenches. DeLong finds that tighter regulations are necessary in order to not repeat the mistakes of the past, and I am inclined to agree.
In the article “Restaurant Industry Unharmed by Modest Minimum Wage Hikes,” Susan Kelley discusses a study by Michael Lynn and Christopher Boone. The study found that a modest increase in minimum wage does not seem to significantly affect restaurant employment or overall success, despite the restaurant industry’s claims that an increase in minimum wage would produce disastrous results. The article closed with Boone’s suggestion that perhaps the negative effect of an increase in minimum wage, namely slightly lower profit margins for restaurants, is mitigated by some positive intangibles such as higher employee satisfaction. The article didn’t mention the positive effects that higher wages for restaurant workers could have on the overall economy. However, based on what we have learned about MPC and the way initial purchases make their way through the economy, it seems that the increase in restaurant workers’ discretionary spending could only have positive effects on the overall economy. If a modest increase in minimum wage did not have a significant negative impact in the highly volatile restaurant industry then it could perhaps it would have minimal negative effects in other industries as well.
After our discussion on Thursday, Paul Krugman’s article “Structural Humbug Revisited” makes a great deal of sense. I have heard many versions of the structural argument about there being a dearth of skilled workers in the tech industry, but I never thought that it added up. As Krugman points out and we discussed in class, a supply side movement to the left would result in higher salaries for the smaller number of qualified workers. This is not the effect that we saw in the Great Recession, and it is not an effect we see now. Ceteris paribus, if the rise of unemployment seen in the Great Recession were truly structural, wages would have risen in the sectors purportedly experiencing a shortage of skilled workers. The best explanation that I can arrive at to explain why the unemployment was described as structural for so long is that it supported ideology favoring less government intervention. If the sharp increase in unemployment were truly structural, then there would have been little place for government macroeconomic intervention. Those who dislike strong government macroeconomic policy likely supported the theory that the unemployment was structural, and perpetuated the myth.
I read, “How Ignoring Climate Change Could Sink the U.S. Economy” earlier this week, and after rereading it today I appreciate Rubin’s proposal to require companies to include the externality of climate change in their financial reports even more. One of Rubin’s points that stuck out to me most in light of our recent conversations is his description of GDP as an inadequate measure of productivity. In class, we talked about how GDP only tells us the total goods and services produced domestically in an economy. Rubin says this is not a sufficient measure of output because it does not adjust for the externality of the pollution created while manufacturing those goods. Although it would be extremely difficult to accurately project the future ramifications of current pollution, I agree with Rubin that companies should be required to attempt to factor in this negative externality. For investors to make informed decisions, they need to know how a given company’s assets are going to be affected by impending climate change. Even though it will be difficult to estimate, I think that a conversation should begin about adjusting our current financial reporting to reflect future environmental ramifications. As Rubin pointed out, insufficient data leads to insufficient macroeconomic policy.
Toggle Commented Feb 7, 2016 on ECON 102 at Jolly Green General
I chose to comment on this article because it reminded me of an article I read in September of last year about a committee member on the Federal Reserve floating the idea of a negative interest rate for the U.S. The article, “Could Negative Rates Be Next on the Fed’s Policy Menu” by Alex Rosenberg, said that the idea of a negative interest rate was not being considered very seriously. This makes sense, especially in light of Japan’s decision. The negative interest rate would not have been a vote of confidence in the economy from the U.S., and it is not a vote of confidence from Japan in its economy. Based on Kuroda’s blunt explanation, the decision to set the interest rate below zero makes a degree of sense. Deflation could cause businesses to cut back, because there would be no incentive to produce. The policy is intended to prevent deflation and has the added benefit of encouraging businesses to borrow money in order to expand, which will create more jobs. In theory, it sounds as though the policy could be a good thing. However, it is a bold move that could have unintended ramifications. I am very interested to see the outcome.
Toggle Commented Jan 31, 2016 on ECON 102 at Jolly Green General
I found the casual format of Wren-Lewis’s post very engaging. One of the goals I have for this course is to be able to understand when a politician’s economic policy proposals are impractical. Fittingly, this post discusses the practicality of the conservative ideal of fiscal austerity. In Wren-Lewis’s opinion, there are “economic quacks” who reinforce right wing agendas by claiming that fiscal austerity is more effective than deficit spending. Wren-Lewis discusses how James Bartholomew cited papers by Alesina that had been popular at one time but ultimately discredited, as well as how Bartholomew pointed to very specific cases in which fiscal policy did not create the intended outcome. Essentially, it seems that you can find support, albeit weak support, for any economic policy you want to peddle. This makes me nervous as a voter in the upcoming election, because I would not want to be misled by the dubious economic proposals of the candidates. The main thing that I drew from this article is that there will always be an economist willing to support the economic proposals of a political candidate or party. An educated voter has to deduce whether the facts truly support these economic policy proposals. This is a task that I hope I will be more prepared for after this course.
Toggle Commented Jan 24, 2016 on Another one for 102 students at Jolly Green General
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Jan 24, 2016