Schiller Text Covers Economic Theory

¶ … Schiller text covers economic theory vs. economic reality. The chapter starts off by saying that economic theory supposedly tells the government how to keep the economy growing and keep the economy at full employment but that of course never happens. For example, the United States has not been at full employment since the mid-2000's when the rate hovered around 4-5%. The rate has been near or above 8% (and as high as 10%) for the better part of a decade now. The book uses this lesson as a means to prove that while many people in the economic and political sphere may think they know how to prevent massively swinging economic cycles, they do not as they have been happening quite a bit since the Great Depression alone, let alone the cycles that have occurred in the last 20 years or so.

The book then summarizes the different types of policies that can be enacted to combat or prevent economic wobbling and then real-world historical examples are given at the bottom in table 16.2 after the generic examples in 16.1. The book then talks about automatic stabilizers and discretionary policy on page 327. A headline about a record deficit in February 2010 and the general use of monetary policy is described on page 328. In a nutshell, some economic safety nets kick in automatically while others are on an ad hoc basis when the automatic stabilizers aren't doing the job. An example of the latter would be the stimulus acts that are commonly enacted or at least talked about when the economy is faltering or contracting.

Monetary policy is the management of the money supply by the federal government that is used to discourage bad things in the economy and encourage good ones. The rules vs. discretion policy on page 329 is more of the same general subject. There are also some monetary policy milestones given on table 16.3 on that same page. The 2008-2009 cut of interest rates is listed an example and the author of this report does recall that during the late Bush administration and very early Obama administration. Those rates are still in the basement to this very day as they really can't go much further down.

Supply-side policy is discussed on page 330. The book notes that even social safety net reform measures have supply-side implications and welfare reform in the 1990's is cited as an example. Much that same argument has been happening lately with the consistent extensions of unemployment insurance and no abating to the use (and some say abuse) of the SSD system when people are seemingly going from unemployment to SSD when unemployment is exhausted and for seemingly no other clear reason other than the government dole running dry.

The book then talks about inflation, including that caused by an over-heating economy, as well as stagflation which is when inflation and recession are happening at the same time. The overall history of the United States vis-a-vis employment, inflation, GDP growth and so forth is shown over the last century and macro performance is shown on page 335 on the bottom. Talk of why government actions don't always work is discussed on page 336 and the recent "low-gear" performance since the last recession "ended" in 2009 is a good example. Effective measurement of economic performance and when the government should stay (or not stay) out of things is discussed at the end of the chapter.

Chapter 16 Web Activities

1. Economist Russ Roberts and filmmaker John Papola have created a video of a rap-off between economists John Maynard Keynes and F.A. Hayek. View the video at http://www.econstories.tv/. Read the lyrics on the same page, and then read the line-by-line discussion of the lyrics at the Daily Kos website, accessible at http://www.dailykos.com/story/2010/3/1/8929/21462.

a. Summarize the basic arguments of Keynes.

Keyne's viewpoint on macroeconomic theory is government intervention is the solution, and not the problem, and that it is possible to prevent the massive swings in the economy that are currently the norm with massive swings back and forth from boom and bust rather than staying within a happy medium between the two. Any Keynesian would point to the Great Depression and how the absence of government intervention caused the Great Depression and that a lack of perfection in administering the economy since was the main causes of the late 70's/early 80's recession and the "Great Recession From 2007 to 2009. Keynes believed that the government could be used to steer markets and cause growth.

b. Summarize the basic arguments of Hayek.

Hayek was a supply-side guy in this argument. Rather than be a proponent of government intervention, he said markets should control and police themselves more often than not rather than the government getting involved unnecessarily and thus making things worse. In addition, Hayek argued that government getting involved with steering and moving markets just makes things worse and that the government should not be involved in such pursuits.

c. Which arguments (those of Keynes or those of Hayek) does the author at Daily Kos find most convincing?

The DailyKos is a known liberal site and it's no surpise that they come down on the Keynes side of the argument. They do not openly insult Hayek but they are clearly biased for Keynes when they way that Keynesian though "just makes sense" and that Keynes is a so-called god amongst men as it relates to macroeconomic theory.