J. Bradford DeLong's Blog, page 2174
October 17, 2010
Fifty One Herbert Hoovers
Fiscal Expansion on the spending side has simply not been tried.
Paul Krugman:
Why Have Deficits Exploded?: For all those commenters saying that we must have had a surge in government spending — I mean, look at the deficit! — a simple picture.
Government spending has continued to rise more or less on its pre-crisis trend. Revenue has plunged, because the economy is deeply depressed.
Other questions?
Econ 1: Files for October 18 Working with Supply and Demand Lecture
* October 18 Working with Supply and Demand:*
Slides
Open publication - Free publishing - More microeconomics
It May Be a Week or Two too Early to Assign This Problem, But...
Proposed additional problem for U.C. Berkeley Econ 1, Fall 2010, Problem Set 5:
12) Let us now leave Euphoric State and the town of Avicenna. Let us drive across the bridge over the bay to the city of Holy Frank. And then let us drive 50 miles south along the Royal Road to the town of Old Stick. In Old Stick we find Crony Capitalism University--endowed by one of the early governors of Euphoria with money he diverted from the railroad connecting the state of Euphoria with the outside world.
Let us say that every year 1000 freshmen arrive at CCU and all immediately think about buying a BMW convertible. They are, you see, mostly from Angel-Queen City and have not walked anywhere since they started kindergarten. CCU is half a long mile in the Euphoric sun down an avenue of palm trees from even the shops of Old Stick. Suppose that the selling price of BMW convertibles is $55,000. Suppose that each of the 1000 freshmen thinks that the value of a BMW convertible as transportation is $50,000. But there is a catch. Each student who owns a BMW convertible feels $10 worth of utility happier--call it spite--for each of his or her 1000 peers who does not own a BMW convertible. Each student who does not own a BMW convertible feels $10 of utility unhappier--call it envy, or regret--for each of his or her 1000 peers who does own a BMW convertible. Thus the first student to show up would feel no regret if he or she did not buy (for nobody else owns one) but would receive 999 x $10 = $9,990 worth of spite plus $50,000 worth of transportation if he or she were to buy a BMW convertible:
a) Will the first freshman student to show up at CCU buy a BMW convertible?
b) How many of the 1000 freshmen students to show up at CCU will buy BMW convertibles?
c) What will be the total consumer surplus received by the 1000 freshman students of CCU from their purchase of BMW convertibles?
d) Suppose that there is ample parking around CCU--this is suburban Euphoria, after all--but all of it is on university land. Suppose you are the chair of the Department of Economics at CCU, and the President of CCU asks you how much the university should charge freshmen for parking spaces. What do you think is the right price to charge for parking? And why?
Skeptical of the Federal Reserve
Matthew Yglesias writes:
Yglesias » Degrees of Monetary Skepticism: I had a little exchange on Twitter yesterday about “monetary policy skeptics”... it’s useful to draw some distinctions.... [Some] people... are “skeptical” in the sense of “skeptical that monetary policymakers will in fact do what’s necessary” (this is the view of Atrios, Goldman Sachs’ Jan Hatzius, etc.)[, while others are]... “skeptical” in the sense of “skeptical that monetary measures can be made to work” which I believe is the view of Mark Thoma and Dean Baker and others.... [A] lack of clarity on these points sometimes confuses people about what happened in Japan....
[S]ome readers... [think] that the Bank of Japan spent a lot of time trying to create inflation and failed. That’s not really what happened. Instead, the Bank of Japan spent a fair amount of time trying to fight deflation and had limited but real success. They always indicated, however, that they wanted “price stability” not inflation and certainly not catchup level-targeting of anything. This kind of stop/start policymaking does exactly what it’s supposed to do... it can’t really lift the price level or the economy. But that’s not to say policymakers don’t have the ability to say that unorthodox measures will remain in place until full employment resumes... they’ve simply chosen not to do so.
The two shade into each other. If the Federal Reserve could undertake small, simple, powerful interventions to return the economy to full employment, it would probably do so. But if it requires very large and very complicated interventions--well, is it because the measures it is willing to do are too weak too work, or is it because it is not willing to do what is needed? To some degree the answer is both.
And, no, I don't think buying $1 trillion of long-term Treasury and GSE bonds will do it. You are just acting on the duration and the government interest rate risk premiums, and that's probably not enough to give you real traction on the private spending side.
Blue Texan on the Republican Base
At FireDogLake, Blue Texan:
All Together, Now: The Tea Party Isn’t About Economic Insecurity: In his op-ed today, the normally razor sharp Frank Rich makes the same mistake I keep seeing over and over from the chattering classes.
Don’t expect the extremism and violence in our politics to subside magically after Election Day.... The only development that can change this equation is a decisive rescue from our prolonged economic crisis.
Meh.
Anyone who thinks the Teabaggers’ unhinged “anger and bitterness” will subside in the face of an improving economy really needs to take a closer look at objective polling on the Teabaggers and review the 1990s. The ’90s was a time of economic prosperity, but because there was a Democrat in the White House, the far-right was in full freakout mode. Back then, Clinton/Gore’s black helicopters were coming for their guns and right-wing “patriots” like Tim McVeigh and Eric Rudolph roamed the countryside. But they weren’t called the “Tea Party.” They were the Angry White Men.
These angry white men are one legion in a grassroots movement that has rewritten the political equation of the 1990s, and in the process helped to transform the Republican Party … An army of conservative grassroots groups has mobilised middle-class discontent with government into a militant political force, reaching for an idealised past with the tools of the onrushing future: fax machines, computer bulletin boards, and the shrill buzz of talk radio. They have forged alliances with the Gingrich generation of conservatives and strengthened their hand as the dominant voice within the GOP family.
Sounds familiar, yes? It’s the same crowd.... Teabaggers are lily white and well off... not the people getting kicked out of their houses... not unemployed... not bearing the brunt of the Great Recession. They’re just doing what they do when Democrats are in charge. Obama’s death panels and FEMA camps have replaced Clinton’s black helicopters.
And of course, the fact that this president’s middle name is Hussein and he’s Muslim and black, well, that’s just a few extra scoops of nuts on the wingnut sundae. These are John Birch Society types, and the crashing of the global economy — a direct result of the plutocratic “free market” [sic] orgy they helped usher in — is just a convenient excuse to act out. That’s all it is.
October 16, 2010
Liveblogging World War II: October 17, 1940
Wendell Willkie:
: I AM delighted to be here in St. Louis. I have a very pleasant recollection of my visit here prior to the Republican National Convention. Tonight I want to talk to you upon a subject about which my convictions are very deep and very strong. It is of course true that the people who live on the sea coasts of these United States, on the Atlantic and the Pacific, are closer to the problem of foreign affairs than are the people who live in the interior. But I am sure the people who live on the sea coasts will agree that a policy for the United States cannot be a true policy, it cannot be a realistic policy, unless it gives full expression to the ideals and the hopes of this great American interior....
[T]onight I want to confine my discussion to the last four or five years. In those four or five years the Administration in Washington has been very active in foreign affairs. It has been active, so it tells us, in promoting the cause of peace. And it has tried to persuade the American people of the wisdom of its foreign policy. There are some people in America today who admit frankly that this Administration has failed in its most elementary duties at home. They admit frankly that the New Deal has demoralized American industry, created widespread unemployment and brought America to the verge of bankruptcy. And yet these same persons tell us that this Administration has been so wise and so effective in its foreign policy that it ought to be re-elected for a third term....
I do not think the New Deal has been either wise or effective in foreign affairs. I do not think it has contributed to peace. As a matter of fact, I believe it has contributed to war. And I believe so because of a fundamental misunderstanding, a fundamental failure to understand, the role that America must play among the nations of the earth.... Winston Churchill in 1937... said that if the Washington Administration had permitted economic recovery in the United States Hitler would have been checked. But what did the Washington Administration do? Now please don't take it in the language of Wendell Willkie,take it in the language of Winston Churchill, one year later,namely, in 1938, and again I quote him. "Economic and financial disorder in the United States,"said Mr. Churchill in 1938, "not only depresses all sister countries, but weakens them in those very forces which either mitigate the hatreds of race or provide the means to resist tyranny. The first service which the United States canrender the world cause is to become prosperous and also to become well armed."...
Those oceans are indeed broad. We can say with the utmost confidence, standing here in the center of America: We do not want to send our boys over there again. And we do not intend to send them over there again. And if you elect me President we won't. But by the same token I believe if you re-elect the third-term candidate they will be sent. We cannot and we must not undertake to maintain by arms the peace of Europe....
The role of the United States among the nations is not the settlement of boundary disputes or of racial disputes. It is not the maintenance of a balance of power in Europe. The role of the United States... is to create purchasing power and to raise the standard of living, first for ourselves, and as a result of raising it for ourselves, thereby raising the standard of living for others. That is the aim. When we fail in that aim we weaken the democratic world....
What do we find standing between our free institutions which we cherish and the barbaric philosophy of slavery to the State? We find, we find Great Britain. We find the heroic British people standing... Canada.... Australia and in Asia. As we stand here looking out to the east and to the west we find the British people living on the very rim of our freedom. So I ask again: What is the role under these circumstances that the United States should play in this war-torn world? What is this role to which the New Deal says it is so indispensable?
Is it that we should send an expeditionary force over there? Is it that we should join again in a foreign war? Is that the role to which the New Deal thinks itself indispensable? Is that the reason for the provocative statements, the gratuitous insults, the whispers, the rumors that keep coming out of Washington? I ask the question frankly. I ask it in deadly earnest. Because you and I know that that is not our role. We cannot send an expeditionary force out to that rim. We have no such force. And even if we had that force it would do no good. It isn't what those people need. It isn't even what they've asked us for.
The reinforcement of that rim of freedom can be accomplished in one way. And only in one way. It can be accomplished only by a thing that the New Deal does not understand, namely, production. We must produce more, and more, and more. We must produce airplanes. We must produce hundreds of other things. That is our role. That is the role that we must employ to reinforce that rim of freedom.... We are not even making those things in any substantial quantity.... And why is this?... It is because for the past five years this Administration which knew, which could not help from knowing what was happening in the world, failed utterly and failed completely to grasp the real function of America in a war-torn world. This Administration failed to see—failed most tragically to see—that the key to war, as well as the key to peace, is America, American production, production....
[E]verything we send to Britain is a sacrifice to our own defense. We must make the awful choice as to whether to supply Britain or ourselves first. We cannot supply either one adequately, much less both. I have said before that I am in favor of aiding Britain at some sacrifice to our own defense program. But I want to point out here, that it is a sacrifice, and that sacrifice is entirely due to the New Deal's fault....
America has contributed to make this crisis in the world today. And the men responsible for that fact are the men of the third-term party, who are seeking re-election, strange as it may seem, on the international issue.... Our role, therefore, in peacetime is to produce, to raise the purchasing power, to lift the standard of living, not alone of ourselves but of others.... And our position in wartime is exactly the same. It is still production—production to reinforce the rim of freedom far beyond our borders. The failure of America to produce, whether in peace or in war, makes havoc of the democratic world.
Let us be very clear about that. The fact that the New Deal stopped the recovery that was coming about in 1937 helped wreck France and England and helped to promote Hitler...
Econ 1: First Very Rough Draft of Problem Set 5
In the central part of the state of Euphoria there is a small city, the home of Euphoric State University, called Avicenna--the word is a corruption of the Arabic Ibn Sina, the byname of the great eleventh century Iranian Abu Ali al-Husayn ibn Abd Allah ibn Sina: academic administrator, Quran reciter, astronomer, chemist, geologist, psychologist, theologian, mathematician, physicist, physician, poet, and paleontologist. For the next several questions, we will look at the daily market for espresso-based drinks in Avicenna. Suppose that the demand for espresso drinks is: Q = 10000 - 1000P, where P is the price of an espresso-based drink in dollars. Suppose that the supply is: Q = -5000 + 4000P, where P is the price of an espresso-based drink in dollars.
1) Calculate the market equilibrium
a) What is the market equilibrium price?
b) What is the market equilibrium quantity?
c) What is the producer surplus?
d) What is the consumer surplus?
2) Now suppose that PDC becomes alarmed at the number of strokes that are being treated at the public hospitals of Euphoria, and becomes aware of the link between caffeine consumption and blood pressure on the one hand and between blood pressure and strokes on the other. They decide to impose on consumers a $1/drink tax on espresso drinks and devote the money to hospital stroke-care units.
a) What is the equilibrium price that consumers pay?
b) What is the equilibrium price that producers receive?
c) What is the equilibrium quantity?
d) How much money is raised for hospital stroke care units?
e) What is the producer surplus?
f) What is the consumer surplus?
g) What is the change in the producer surplus relative to the market equilibrium?
h) What is the change in the consumer surplus relative to the market equilibrium?
i) What are the arguments that this tax on espresso drinks is a good idea?
j) What are the arguments that this tax on espresso drinks is a bad idea?
3) Now let us return to the market equilibrium. PDC now notes that baristas have low security of employment and often suffer from spells of unemployment. They decide to impose on producers a $1/drink tax to establish a social welfare fund for baristas.
a) What is the equilibrium price that consumers pay?
b) What is the equilibrium price that producers receive?
c) What is the equilibrium quantity?
d) How much money is raised for barista social welfare?
e) What is the producer surplus?
f) What is the consumer surplus?
g) What is the change in the producer surplus relative to the market equilibrium?
h) What is the change in the consumer surplus relative to the market equilibrium?
i) What are the arguments that this tax on espresso drinks is a good idea?
j) What are the arguments that this tax on espresso drinks is a bad idea?
4) What are the differences between your answer to (2) and your answer to (3)?
5) Return to the market equilibrium. Suppose that all the producers--and we know they are all the producers because they own all the espresso machines in Avicenna--decide that they don't want to work as hard, and that they will make their supply "inelastic": they will share demand equally among themselves and simply go home for the day when the total number of espresso drinks served hits 4000.
a) What is the equilibrium price?
b) What is the equilibrium quantity?
c) What is the producer surplus?
d) What is the consumer surplus?
e) What is the change in the producer surplus relative to the market equilibrium?
f) What is the change in the consumer surplus relative to the market equilibrium?
For the next several questions, let us remain in Avicenna but return to our yoga-lessons example. To simplify the math let's ignore the granularity in lesson supply, and say that the supply curve is simply: Q = 2 x P, where P is the price of a lesson in dollars and Q is the number of slots for yoga students in the classes that the yoga instructors teach. And to simplify the math let's write the daily demand curve as: Q = 126 - 5P, where P is the price of a lesson in dollars and Q is the number of students taking lessons.
6) Calculate the market equilibrium:
a) What is the market equilibrium price?
b) What is the market equilibrium quantity?
c) What is the producer surplus?
d) What is the consumer surplus?
7) Now suppose PDC--Production Distribution Coordination--gets into the act. Somebody gives an eloquent speech about how it is unfair that people are charged as much as $18/lesson for yoga, and PDC enacts a price ceiling: nobody is allowed to charge more than $10/lesson for yoga classes--and the lessons will be taken by those who are the first to sign up.
a) What quantity are suppliers willing to provide at a price of $10/lesson?
b) How many people will want to sign up for yoga lessons?
c) What is the average valuation the people who want to sign up place on yoga lessons?
d) Suppose that the average person who succeeds in signing up has the average valuation among all those who wish to sign up. What, then is the consumer surplus?
e) What is the producer surplus?
f) Who has gained and who has lost from this decree relative to the market equilibrium, and how much?
g) Can you think of a reason why this decree from the PDC might be popular?
h) Suppose it is your job to argue that the decree should be repealed. What would you say?
i) In ancient Athens there was a crime--punishable by death or fine--of having convinced the Assembly of Athens to pass an unjust decree: γραφὴ παρανόμων. Do you think those who persuaded PDC to pass this decree should be tried and punished for this crime? Why or why not?
8) Now suppose that somebody stands up at PDC and gives a persuasive speech that yoga is an alien fitness discipline and that we should be encouraging all-American forms of exercise--like hot-dog eating contests. As a result, PDC passes a decree that no more than 20 people should take yoga lessons a day. However, they do not restrict the price that those lucky enough to be allowed to offer the 20 lessons can charge.
a) To what price will consumers bid up the price of yoga lessons?
b) What will the consumer surplus be?
c) What is the average reservation price that the people who want to sign up to teach yoga will place on yoga lessons?
d) Suppose that the average teacher who succeeds in signing up to give the 20 lesson slots has the average valuation among all those who wish to sign up. What, then, is the producer surplus?
e) Who has gained and who has lost from this decree relative to the market equilibrium, and how much?
f) Can you think of a reason why this decree from the PDC might be popular?
g) Suppose it is your job to argue that the decree should be repealed. What would you say?
h) In ancient Athens there was a crime--punishable by death or fine--of having convinced the Assembly of Athens to pass an unjust decree: γραφὴ παρανόμων. Do you think those who persuaded PDC to pass this decree should be tried and punished for this crime? Why or why not?
9) In the far north of the state of Euphoria there is a small town called Ihavefoundit. There is one theater in Ihavefoundit--and there is no connectivity to the outside world whatsoever. This means that the 1000 or so residents of Ihavefoundit who have a fondness for watching classic Japanese cinema with subtitles have only one way to do so: somebody has to rent a copy of a movie and rent the theater--paying $1000 to do both of those things--and then show the movie, charging admission. No matter how many people show up to the theater the cost of showing the movie remains the same: $1000. And the reservation prices of the Japanese cinema-loving residents are given by the demand curve: Q = 1000 - 100P, where P is the price charged to see the movie in dollars.
a) Suppose that the profit-making Entrepreneurial Company enters the business and is the only--the monopoly--seller of opportunities to see classic Japanese cinema in the benighted, fog-bound, and redwood-infested town of Ihavefoundit. For each price between $10/ticket and $0/ticket, counting down by $1/ticket each time, what are the profits earned by Entrepreneurial Company?
b) What price maximizes profits for the monopolist Entrepreneurial Company?
c) What is the consumer surplus for that price?
d) What is the total social surplus for that price?
10) Let us remain in the far north of Euphoria, but this time classic Japanese cinema is going to be shown by the Redwood Collective for Culture. The RCC is--let us suppose--an efficient organization, able to actually rent a theater, rent a print of the movie, collect money, and not have it stolen. The only constraint on the RCC is that it has to break even.
a) At what price charged per ticket does the RCC break even--collect the $1000 it needs to run its operations?
b) What is the consumer surplus when the RCC breaks even?
c) How does that compare to the consumer surplus in problem (9), when the profit-maximizing Entrepreneurial Company showed the movies?
d) How does that compare to the sum of the consumer and producer surplus in problem (9), when the profit-maximizing Entrepreneurial Company showed the movies?
e) Which comparison--that of consumer surplus with the RCC to consumer surplus with the profit-making EC in part (c), or that of consumer surplus with the RCC to consumer plus producer surplus with the profit-making EC in part (d)--is the best one to keep in mind in guiding your analysis of whether classic Japanese cinema in Ihavefoundit should be shown by a private company or by a nonprofit organization?
11) Suppose that the government of the state of Euphoria gives the RCC a $500 grant to show a movie.
a) At what price now charged per ticket does the RCC break even?
b) What is the consumer surplus now when the RCC breaks even?
c) By how much has consumer surplus increased as a result of this $500 grant?
d) What are the arguments that this $500 grant is a good use of the government's money?
e) What are the arguments that this $500 grant is a bad use of the government's money?
J. Bradford DeLong's Blog
- J. Bradford DeLong's profile
- 90 followers
