Tim Harford – The Under Cover Economist Strikes Back – 2013

tim harford

 

The great depression gave birth to macroeconomics. Economists asked themselves what was happening, and why, and whether anything could be done.

A new breed of economists sought to understand the economy as a whole: Keynes, Kuznets who constructed the national accounts for the US.

The MONIAC – the Monetary National Income Analogue Computer – : the first ever computer model of a country’s economy. An array of Perspex pipes and tanks with pink dyed water constructed by Phillips. On display in NZ central bank.

Tempting as it is to think that it would be plain common sense to run a modern economy by extrapolating from our personal experiences of running a household, we shall see that such thinking can lead us badly astray. Running an economy is more challenging than balancing a current account.

GDP of the world = US$70 trillion/year.

Recession : when GDP gets smaller for few months. Depression : when after the fall, GDP stagnates (or falls) for years.

At other times, though, an economy just sickens and takes to its bed for no obvious reasons. Frustratingly for economists, this happens all the time.

Recession may well have simple technical causes and simple, technical solutions (such as printing money when not enough is in the economy).

Coke was at the same price for 70 years – nominal price rigidity – Advertisement (some of them permanent) were made for that price and vending machines accepted only nickel (5cents). Changing the price would have been very expensive for Coca Cola.

Yap’s stone money used to be serious business. Stone were carved in Palau by Yap people. The stone would belong to the one who paid for the expedition. The stone value would increase if people had died during its making or transport. They were used to buy land or wives. Yap people divorce ownership of the stone from physical control of the object. A stone at the bottom of the sea (after the boat that carried it sank during a storm) still belongs to its owner and has been used to buy other objects.

Public trust in the Pound is now maintained by the operation of monetary policy.

Financial times : the Mars bar is a fantastically stable unit of account: all sort of prices have remained stable compared to the price of Mars bar over decades.

Hyperinflation is typically an inflation of more than 50% a month. Hungary 1946 had the highest inflation rate ever – prices would treble everyday.

Handy rule of thumb – the rule of 72 – divide 72 by the annual inflation and the result is approximately the number of years it will take for price to double.

When prices adjust downward, this gives everybody the incentive to postpone spending, so demand remains depressed.

If you give $100 to a ninety year old lady with a decent pension, she is likely to keep it in a coockie jar. At the moment a lot of money is ending up in cookie jars. When inflation is at 4% you usually have interest rates that protect the value of your savings.

Nominal wages, pensions and interest usually follow inflation. IMF floated the idea of a inflation at 4% (in 2010). It makes deflation less likely and help price adjust better (better than if inflation is too low). If prices are too sticky than higher inflation creates more distortion in the economy.

Nominal GDP targeting : add real GDP growth + inflation.  If growth is low, then inflation can increase (up to the target) . If economy grows too quickly, then monetary policy can help reduce inflation (and slow growth down).

Liquidity trap : if central bank print money and people hold back spending. IN theory, creating inflation would promote spending and help get out of the liquidity trap.

Keynes: fiscal stimulus – increase growth through increase demand (more money in the economy, more spending).

You get a higher multiplicator for your spending if you borrow the money rather than increasing taxes.

In a slump, people are not keen to borrow. So the government is not competing with other borrowers. So you can borrow to finance you stimulus programme without increasing interest rates;

If the situation is dire then the multiplier is high (when interest rate are low, unemployment is high, machines are idle…) only in these circonstances the multiplier is high. And discriminating against foreign product makes sense for the whole economy. The point of a stimulus plan is to spend money and the best way to do it is for the state to go it itself.

Most recession are not deep and in most cases when government ramps up spending the economy will push back: inflation will raise, interest as well.

Multiplier is larger in economies that don’t trade much.

When times are good you should identify large projects, public investments with reasonable benefits…and keep them on shelves. When recession comes, dust them off and put them into action.

Modern economies tend to have a typical growth rate (trend) function of demography, new technology, working practices. Stimulus is useful only when the recession brings the rate of growth below its trend. When the growth goes back to the trend, then stimulus package should stop – or it will simply fuel inflation.

Future Jobs Funds in the UKff: subsidise job by paying employers to employ young people for 6 months. The multiplicator was 5-6, for £3100 invested the economy grow by £18,000.

Easterlin’sparadox: while richer people are happier than poorer people, richer society are not happier than poorer society. This may be explained by different interpretation of the concept ‘happy’ across countries. The data may have been inconsistent. The jury is out if the paradox really exist. According to Easterlin, people don’t care about absolute income, only about income relative to others.

Bhutan Gross National Happiness came as a political response by Bhutan’s king face with lack of economic progress in 1986…

Zero growth economy would mean that each generation would be no richer than the previous one. Debt would still be used as it is just moving purchasing power around using debt (borrowing young and working later to reimburse the debts). But people would have to be more careful about debt that they have been.

A person can lack money to participate to a society: this is poverty in a sense.

The idea to give cash on condition that they do something you would like them to do (send kids to school): you get social impact and give money to the poor to spend. But children in dysfunctional families will still not learn much…evaluations are needed to assess the impact.

Inequality: a gini coefficient of 100% means one person own all the money of the country. US has 45, Brazil 60%, UK 34 and Finland 27…

Macroeconomics is hard. You have 10 billion product varieties, seven billion people, countless unobservable transactions. The economy is shaped by psychology, history, culture, unforeseen new technologies, geological and climatic events, computer traders too quick for humans to perceive, and much else. No wonder we struggle.f