tag:blogger.com,1999:blog-57349434775937867902024-03-05T08:59:28.744+02:00IB Economics (and, not only)economics is a dirty job but someone's got to do itconstantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.comBlogger404125tag:blogger.com,1999:blog-5734943477593786790.post-25715522834568578822022-11-26T20:15:00.001+02:002022-11-26T20:15:39.123+02:00A primer on income inequality (including links to Emanuel Saez lectures)<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiWT0KB4qYYTVCPcx0OKr0rkRt1DLpReqJhRJSYSEzSZfTOvhmrvTafD7HLPCSW94qFSjhKjxPqhI57HM4kzyFRYuE1TnAmu73R0a58EPfg1wULYOAqxfr9vQ81yoclNnfkiaDtGTSZEJdl5_zRdiTHYelwzkzzK7rNFtIWSqyi5Bvjlr6eNolEufez/s1782/Latin%20America%20Gini.PNG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1488" data-original-width="1782" height="267" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiWT0KB4qYYTVCPcx0OKr0rkRt1DLpReqJhRJSYSEzSZfTOvhmrvTafD7HLPCSW94qFSjhKjxPqhI57HM4kzyFRYuE1TnAmu73R0a58EPfg1wULYOAqxfr9vQ81yoclNnfkiaDtGTSZEJdl5_zRdiTHYelwzkzzK7rNFtIWSqyi5Bvjlr6eNolEufez/w320-h267/Latin%20America%20Gini.PNG" width="320" /></a></div>I would like to bring to the attention of IB Higher and Standard Level Economics students as well as colleagues an article by Max Roser and Esteban Ortiz-Ospina in <a href="https://ourworldindata.org/" target="_blank">Our World in Data</a> with tons of useful information for all of us, titled <a href="https://ourworldindata.org/income-inequality" target="_blank">Income Inequality</a> <p></p><p> <br />Most sections include data that can be used to incorporate in part (b), paper 1, essays that relate to income distribution.</p><p>A section in this site of particular interest to IB Economics candidates is titled 'How has inequality in high-income countries evolved over the last century'</p><p></p><p>Here we see that income concentration in the US and other other English-speaking countries follows a U-shaped long-term trend. But...</p><blockquote><p>...in equally rich European countries, as well as in Japan, the development is in fact quite different. The income share of the rich has decreased over many decades, and just like in the English-speaking countries, it reached a low point in the 1970s. In contrast to the English-speaking countries, however, top income shares have not returned to earlier high levels; they have instead remained flat or increased only modestly. The evolution of top income inequality followed an L-shape here. Income inequality in Europe and Japan is much lower today than it was at the beginning of the 20th century.</p></blockquote><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj3yUrXoWpHzqT2-e4E43piNzhDMBjhEx6c5KeVF91nPepMGP52-5EWzIrL4tdnZF1L1Yyjz273d5aCUnD0Z0w3D95mz84yWOIRERrznHjk-ae6vXVs9wzukpJcGyoNXofDYYDVYa6lG1AM60Km1bbF_56XX5pK2R1Wii92aDm2MJaDTUvzxGixl5Of/s1782/income%20concentration%20U%20shapes%20and%20L%20shaped.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1275" data-original-width="1782" height="229" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj3yUrXoWpHzqT2-e4E43piNzhDMBjhEx6c5KeVF91nPepMGP52-5EWzIrL4tdnZF1L1Yyjz273d5aCUnD0Z0w3D95mz84yWOIRERrznHjk-ae6vXVs9wzukpJcGyoNXofDYYDVYa6lG1AM60Km1bbF_56XX5pK2R1Wii92aDm2MJaDTUvzxGixl5Of/s320/income%20concentration%20U%20shapes%20and%20L%20shaped.PNG" width="320" /></a></div><br /><p>On the 'U- shaped path of income concentration in the US it is also worth watching a 6 minutes Stanford University video featuring Emanuel Saez of Berkeley, one of the most important researchers of income inequality. In this short video, he provides excellent data and visuals on the fall and subsequent rise in income inequality in the US over the past 100 years. It can be found here: <a href="https://www.youtube.com/watch?v=w2VwVH4WNYY" target="_blank">The Takeoff in Income Inequality: Emmanuel Saez</a>. </p><p>A longer (16 minutes, Berkeley lecture - teach-in) version can be found here (I show it to my HL class every year): <a href="https://www.youtube.com/watch?v=1nCCGnUtf9I&t=16s" target="_blank">Economic Inequality Teach In: Emmanuel Saez</a> . </p><p>Back now to the 'Our World in Data: Income Inequality' article by Roser and Ortiz-Ospina. The following are also sections that are all worth exploring:</p><p></p><ul style="text-align: left;"><li>High-income countries tend to have lower inequality</li><li>Top income shares </li><li>Inequality in the US has been growing substantially in recent decades </li><li>Inequality in different world regions </li><li>Relative poverty </li><li>How are the incomes of the rich changing relative to the incomes of the poor? </li><li>How does income inequality differ from consumption inequality?</li></ul><p>In my opinion, income inequality (as well as wealth inequality and inequality of opportunity) topics are a must for a well prepared IB Economics candidate. Hopefully the above can provide some useful background information that will help students prepare for May & November exams. </p><p>Rising inequality in our world is of course way more important than exam preparation... </p><p><br /></p>constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com0tag:blogger.com,1999:blog-5734943477593786790.post-77011440502665373252022-11-26T19:22:00.000+02:002022-11-26T19:22:15.407+02:00On growth<p> <br />I have been planning to upload a post about an excellent article published by <a href="https://www.chathamhouse.org/" target="_blank">Chatham House</a> since early October (and it is the end of November..,). No excuses, just apologies.</p><p><br /></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjj0yA5eHPpDeTn40xXlNJP3dCHk5SpPYtoV_VTnZphc0eWuVlFLnYGbMY2QF7ff2Uywsax5KR5-uP3g78_CW9HTEs1l5BizWxhtRtziIRJAIOvyuG2U2nMxmI2q_lxvaNm5bZyWGEXKVKxv-6yoeR6-rod1vWCe_BIeHsOj_RUnWM3j77R77P3Vcx_/s1942/growth1.PNG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1089" data-original-width="1942" height="179" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjj0yA5eHPpDeTn40xXlNJP3dCHk5SpPYtoV_VTnZphc0eWuVlFLnYGbMY2QF7ff2Uywsax5KR5-uP3g78_CW9HTEs1l5BizWxhtRtziIRJAIOvyuG2U2nMxmI2q_lxvaNm5bZyWGEXKVKxv-6yoeR6-rod1vWCe_BIeHsOj_RUnWM3j77R77P3Vcx_/s320/growth1.PNG" width="320" /></a></div><p></p><p>The article seems dated (it focuses on Truss' 'mini budget'...) but in reality it is not at all. It is excellent for IB Economics students (both HL and SL). It is why growth, the size of the pie, may not matter as much as the distribution of the pie and why focusing on growth rates may divert our attention from other more important metrics of our collective well-being and may be terribly misleading. </p><p>This paragraph is revealing:</p><blockquote><p>Looking at GDP growth alone, a highly unequal society, which is polluting and depleting its natural assets can – at least in the short-term – appear a success story. In fact, once GDP growth is accepted as a good thing in itself, it can be used to support other political agendas and interests. Faith in the ‘rising tide lifts all boats’ theory of growth can sugar-coat policies that marginalize other important elements of economic health such as fairness and resilience to shocks.</p></blockquote><p>This short article is packed with links. Many of these will help students increase the stock of real world examples they need to effectively discuss or evaluate in Paper 1, part (b), essays. All these links of course will help them appreciate the importance of this course no matter what they plan to study later in college. One of the most interesting links directed me to the <a href="https://weall.org/wego" target="_blank">Wellbeing Economy Governments</a> site.</p><p>The article is titled 'Why it is time to change the narrative around growth' and can be found <a href="https://www.chathamhouse.org/2022/10/why-it-time-change-narrative-around-growth?utm_source=Chatham%20House&utm_medium=email&utm_campaign=13521056_CH%20-%20CH%20Newsletter%20-%2007.10.2022&utm_content=Growth-CTA&dm_i=1S3M,81SWW,7S79XQ,WXTAG,1" target="_blank">here</a>.</p>constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com0tag:blogger.com,1999:blog-5734943477593786790.post-72342725100227372652022-10-26T19:31:00.003+03:002022-10-26T19:31:37.623+03:00Some notes to my IB Economics students on the MULTIPLIER EFFECT<p> <b>THE MULTIPLIER EFFECT</b></p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">A (Keynesian) idea whereby an increase in government
expenditures G will lead to a greater increase in national income (in real GDP)
<o:p></o:p></p>
<p class="MsoNormal" style="text-align: center;">i.e. <span lang="EL" style="mso-ansi-language: EL;">Δ</span>Y
> <span lang="EL" style="mso-ansi-language: EL;">Δ</span>G or, <span lang="EL" style="mso-ansi-language: EL;">Δ</span>Y = <b><span lang="EL" style="mso-ansi-language: EL;">κ</span></b><span lang="EL"> </span><span lang="EL" style="mso-ansi-language: EL;">Δ</span>G<o:p></o:p></p>
<p class="MsoNormal" style="text-align: center;">(where little <span lang="EL" style="mso-ansi-language: EL;">κ</span>
is the multiplier)<o:p></o:p></p>
<p class="MsoNormal">Let the government increase government expenditures by
$100mil. If national income increases by $300mil, the multiplier (little <span lang="EL" style="mso-ansi-language: EL;">κ</span>) is ‘3’: $300m/ = 3 x $100m<o:p></o:p></p>
<p class="MsoListParagraph"><o:p> </o:p><b>Why should we expect this to be the case? Because</b>:</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"></p><ul style="text-align: left;"><li>Your spending is my income. </li><li>Economic activity takes place in successive rounds (as
clearly illustrated by the ‘circular flow of income’ diagram; use in an essay
if you consider it necessary)</li></ul><o:p></o:p><p></p>
<p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">If the government spends $100 to build a tiny road in my
neighborhood and I’m the only worker / engineer, it means that my income
increases by $100. <o:p></o:p></p>
<p class="MsoNormal">Part of this <i>additional</i> income earned, I will spend on
domestic goods and services, say $80. For example, from the additional $100 I earned, I
will spend $80 for a dancing company to come at my birthday party and dance for
my guests. National income will have increased by $100 + $80 = $180 (and note
that two ‘goods’ will have been produced: a tiny road and a dancing
performance). <o:p></o:p></p>
<p class="MsoNormal"><i>Generalizing</i>: If out of each dollar earned as additional income
people spend 80 cents then the so-called <b>Marginal Propensity to Consume (MPC)</b> is
0.80 <o:p></o:p></p>
<p class="MsoNormal" style="text-align: center;"><b>MPC = <span lang="EL" style="mso-ansi-language: EL;">Δ</span>C /
<span lang="EL" style="mso-ansi-language: EL;">Δ</span>Y, equal to say ‘b’</b><o:p></o:p></p>
<p class="MsoNormal">Let the dancers now spend 0.8 of their <i>additional </i>income on violin
lessons for their offspring.<span style="mso-spacerun: yes;"> </span>They thus spend
$64 (0.8x80) on the violin teachers.<span style="mso-spacerun: yes;">
</span>Violin teachers now have <i>additional </i>income equal to $64 and national
income has increased by a total of $100+$80+$64 = $244.<span style="mso-spacerun: yes;"> </span>They in turn will spend part (0.8) of their <i>additional
</i>income on feta cheese…and so on and so forth…<o:p></o:p></p>
<p class="MsoNormal">More generally (a geometric series; sum of; converges as 0 <
b < 1):<o:p></o:p></p>
<p class="MsoNormal" style="text-align: center;"><span lang="EL" style="mso-ansi-language: EL;">Δ</span>Y = <span lang="EL" style="mso-ansi-language: EL;">Δ</span>G + b<span lang="EL" style="mso-ansi-language: EL;">Δ</span>G + b^2<span lang="EL" style="mso-ansi-language: EL;">Δ</span>G + b^3<span lang="EL" style="mso-ansi-language: EL;">Δ</span>G + …<o:p></o:p></p>
<p class="MsoNormal" style="text-align: center;"><span lang="EL" style="mso-ansi-language: EL;">Δ</span>Y =
(1+b+b^2 +b^3 +b^4 +…) x <span lang="EL" style="mso-ansi-language: EL;">Δ</span>G<o:p></o:p></p>
<p class="MsoNormal" style="text-align: center;"><span lang="EL" style="mso-ansi-language: EL;">Δ</span>Y = (1/(1-b))
x <span lang="EL" style="mso-ansi-language: EL;">Δ</span>G, so little <span lang="EL" style="mso-ansi-language: EL;">κ</span>:<o:p></o:p></p>
<p class="MsoNormal" style="text-align: center;"><span lang="EL" style="mso-ansi-language: EL;">κ</span> = {1 / (1-MPC<span style="font-size: x-small;">d</span>)] = {1/(MPW)], <span style="mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;">where MPW = MPS + MPT + MPM<o:p></o:p></span></p><p class="MsoNormal"><span style="mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;">(as if I spend out of $100 of additional income on domestic goods, the rest (i.e. $20) I have either saved (S) or paid in taxes (T) or spent, but on imports M): all three (S,T, M are withdrawals / leakages from the circular flow)</span></p><p class="MsoNormal">(MPS is the marginal propensity to save, MPT is the marginal tax rate and MPM is the marginal propensity to spend on imports: their sum [MPS+MPT+MPM] is the marginal propensity to withdraw : So (1-MPC<span style="font-size: x-small;">d</span>) = MPW (remember the circular flow again) </p>
<p class="MsoNormal"><b>Note</b>:</p><p class="MsoNormal"></p><ul style="text-align: left;"><li>The multiplier
effect holds <i>if any of the 3 injections increases</i> (remember that injections 'J' include
government expenditures G, but also exports X and private investment I) (note that
the export multiplier is responsible for the international transmission of the
business cycle)</li><li>The importance of
the Keynesian multiplier of government expenditures (G) is that it shows that expansionary
fiscal policy in the form of increased government expenditures (G) is very
powerful to help an economy grow - lift an economy out of a recession (but, remember the other side,
the crowding-out effect)</li><li>Expansionary fiscal
is not only a result of an increase in G but could also be a result of a
decrease in direct taxes T.</li></ul><p></p><blockquote style="border: none; margin: 0 0 0 40px; padding: 0px;"><p class="MsoNormal" style="text-align: left;">But, the multiplier
effect of an <i>equal </i>(to <span lang="EL">Δ</span>G)
<i>decrease in taxes</i> T is smaller. Why?</p></blockquote><blockquote style="border: none; margin: 0 0 0 40px; padding: 0px;"><p class="MsoNormal" style="text-align: left;">Because the first-round effect does not
exist. When a government decreases my taxes by $100, my income does not rise by
$100: it is my <i><u>disposable</u></i> income that rises by $100 so the multiplier process starts with the 2<sup>nd</sup>
round effect of an equal increase in G (since I will spend $80 of this increase in my <i>disposable</i> income on
the dancing company above). So, the tax multiplier will be [b/(1-b)] (the first term of the geometric series is now ‘b’, not ‘1’) It follows that if b is 0.8, then the government expenditure multiplier will be 1 / 0.2 = 5 but the tax
multiplier will be 0.8 / 0.2 = 4 (smaller)</p></blockquote><p class="MsoNormal"></p><ul style="text-align: left;"><li>The multiplier
operates also in the opposite direction.<b> </b>A decrease in government
expenditures (G) will lead to a greater decrease in national income (Y). When
Greece was ‘forced’ to borrow to avoid default during the Greek debt crisis, it
‘agreed’ to decrease government expenditures (G) as part of the agreement. The IMF had then estimated that the Greek
government expenditure multiplier, was, say equal to ‘2’, so that a decrease in Greek government
expenditures (G) by, say, €200mil., was expected to lead to a decrease of
Greece’s national income by €400mil. (2x200)</li></ul><p></p>
<blockquote style="border: none; margin: 0 0 0 40px; padding: 0px;"><p class="MsoNormal" style="text-align: left;"><span style="mso-bidi-font-style: italic; mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: minor-fareast;">BUT the
recession that ensued (the decrease in national income) proved much more severe than
expected:</span> Greece’s rGDP decreased by much more than estimated by the IMF, say, by €500
million, and consequently even more people lost their jobs and their income, forcing the IMF (and its
then Chief Economist, Olivier Blanchard - now at PIIE), to issue what was referred to as a
“<i>mea culpa</i>”: a new IMF paper re-estimated ‘correctly’ the Greek little ‘<span lang="EL" style="mso-ansi-language: EL;">κ</span>’.</p></blockquote><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">[Please check the Study Guide for other Real World Examples of the multiplier for use in part (b) of a Paper 1 essay]<o:p></o:p></p><p class="MsoNormal"><b>Endnote</b>:</p><p class="MsoNormal">In Keynes' General Theory we read (p. 128, Palgrave 2007 edition):</p><p class="MsoNormal">"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave to the private enterprise...to dig the notes up again...there need be no more unemployment <i><u>and, with the help of the repercussions,</u></i> the real income of the community...<i>would probably become a good deal greater than it is</i>."</p>constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com0tag:blogger.com,1999:blog-5734943477593786790.post-88586852262329432182022-10-14T12:00:00.001+03:002022-10-14T12:00:10.289+03:00National (Public) Debt - some notes: perhaps useful for IB Economics students<p> <b>Another 'new kid on the block' for IB Economics students (new syllabus)</b></p>
<p class="MsoNormal">What is the national (public) debt?<o:p></o:p></p>
<p class="MsoNormal">It refers to what a government owes to all of its lenders: ‘Public debt
is created through government borrowing from individuals, corporations, institutions,
and other governments’ [from the New Palgrave Dictionary of Economics]<o:p></o:p></p>
<p class="MsoListParagraphCxSpFirst" style="mso-list: l1 level1 lfo2; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Wingdings; mso-bidi-font-family: Wingdings; mso-fareast-font-family: Wingdings;"><span style="mso-list: Ignore;">è<span style="font: 7pt "Times New Roman";">
</span></span></span><!--[endif]-->Debt is created when a government records a
‘budget deficit’: when G > T (when government expenditures exceed government
income which is mostly tax revenues (T) but may also be any one-off proceeds from
privatizations (the transfer [=sale] of state-owned assets to the private
sector) and any profits from state-owned enterprises)<o:p></o:p></p>
<p class="MsoListParagraphCxSpMiddle" style="mso-list: l1 level1 lfo2; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Wingdings; mso-bidi-font-family: Wingdings; mso-fareast-font-family: Wingdings;"><span style="mso-list: Ignore;">è<span style="font: 7pt "Times New Roman";">
</span></span></span><!--[endif]-->It follows that the public debt is the sum of
all past budget deficits <i>minus</i> any budget surpluses [‘the public debt a
stock at any given point in time and represents the <i>net</i> accumulation of
the associated deficits over all previous time periods’; from the New Palgrave]<o:p></o:p></p>
<p class="MsoListParagraphCxSpMiddle" style="mso-list: l1 level1 lfo2; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Wingdings; mso-bidi-font-family: Wingdings; mso-fareast-font-family: Wingdings;"><span style="mso-list: Ignore;">è<span style="font: 7pt "Times New Roman";">
</span></span></span><!--[endif]-->Given that a government borrows by issuing
bonds<span style="mso-spacerun: yes;"> </span>(=selling to whoever is willing to
buy these i.e. to lenders) it follows also that the debt is equal to the value
of all outstanding bonds (i.e. bonds that are held by its creditors and thus have
not yet ‘matured’ and been paid off)<o:p></o:p></p>
<p class="MsoListParagraphCxSpLast" style="mso-list: l1 level1 lfo2; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Wingdings; mso-bidi-font-family: Wingdings; mso-fareast-font-family: Wingdings;"><span style="mso-list: Ignore;">è<span style="font: 7pt "Times New Roman";">
</span></span></span><!--[endif]-->Government bonds may be held by domestic
creditors (=lenders) or by foreigners (= external debt; denominated typically but
not necessarily in USD); bonds are held by individuals, firms, banks,
universities, pension funds, money managers etc. etc.<o:p></o:p></p>
<p class="MsoNormal">To compare the size of the debt of a country with other
countries or to determine the extent to which it is ‘sustainable’ , the
absolute ‘dollar’ size of the debt is expressed as a proportion of GDP (scaling
for the size of the economy).<span style="mso-spacerun: yes;"> </span>We thus focus
on the <b>debt to GDP</b> ratio.<o:p></o:p></p>
<p class="MsoNormal">(perhaps subscribe for free to Finance & Development, an
IMF publication; the IMF will send you at your address every quarter the newest
issue: <a href="https://www.imf.org/en/Publications/fandd">https://www.imf.org/en/Publications/fandd</a></p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">Perhaps read read: (a) <a href="https://www.imf.org/en/Publications/fandd/issues/2022/03/Balancing-act-Gaspar">https://www.imf.org/en/Publications/fandd/issues/2022/03/Balancing-act-Gaspar</a>
(b) <a href="https://www.imf.org/en/Publications/fandd/issues/2022/03/Deciding-when-debt-becomes-unsafe-Blanchard">https://www.imf.org/en/Publications/fandd/issues/2022/03/Deciding-when-debt-becomes-unsafe-Blanchard</a>
<o:p></o:p></p>
<p class="MsoNormal">Perhaps <b>also</b> check out the post on Jason Furman here: <a href="http://www.ibeconomics.org/2021/09/the-national-debt-expressed-as.html">http://www.ibeconomics.org/2021/09/the-national-debt-expressed-as.html</a></p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"><b>Note</b>:<o:p></o:p></p>
<p class="MsoNormal">A <b>more appropriate metric of debt</b> is the ‘<u>debt
service over GDP’.</u><span style="mso-spacerun: yes;"> </span>The reason is
that debt is a ‘stock’ variable (measured at a point in time, (say, December 31<sup>st</sup>
of the year) whereas GDP is a ‘flow variable’ (measured over a time period,
typically over a year).<span style="mso-spacerun: yes;"> </span>If Janice earns income
of $100000 per year and has borrowed to buy a house $300000 dollars (so owes banks
$300000 (her debt)), then her debt to her income ratio is 300000/100000 or 300% of her
income - <b>but</b> if she needs $10 000 per year to service her debt then the debt
service to her income ratio is 20% and what matters to Janice is what she pays
off annually to her creditor (the bank). That is why the debt service to GDP ratio is more informative than the simple debt to GDP ratio.<o:p></o:p></p>
<p class="MsoNormal"><b>Cost of high debt </b></p><p class="MsoNormal"><span style="text-indent: -0.25in;"><i>Cost of debt servicing:</i> </span></p><p class="MsoListParagraphCxSpFirst" style="mso-list: l0 level1 lfo1; text-indent: -0.25in;"><o:p></o:p></p>
<p class="MsoListParagraphCxSpMiddle" style="mso-list: l2 level1 lfo3; text-indent: -0.25in;"><!--[if !supportLists]--><span style="mso-bidi-font-family: Verdana; mso-fareast-font-family: Verdana;"><span style="mso-list: Ignore;">-<span style="font: 7pt "Times New Roman";">
</span></span></span>a. Opportunity cost of the funds sacrificed as
these funds could have been invested by the government in pro-growth and
pro-development goals i.e. on infrastructure investments, on education and on
health care services; debt servicing thus restricts the ‘<i>discretionary
spending</i>’ ability of the government <o:p></o:p></p>
<p class="MsoListParagraphCxSpMiddle" style="mso-list: l2 level1 lfo3; text-indent: -0.25in;"><!--[if !supportLists]--><span style="mso-bidi-font-family: Verdana; mso-fareast-font-family: Verdana;"><span style="mso-list: Ignore;">-<span style="font: 7pt "Times New Roman";">
</span></span></span>b. Policymakers cannot as easily adopt expansionary
fiscal policy (G up; and/or T down) since It would lead to more debt accumulating
<o:p></o:p></p>
<p class="MsoListParagraphCxSpMiddle" style="mso-list: l2 level1 lfo3; text-indent: -0.25in;"><!--[if !supportLists]--><span style="mso-bidi-font-family: Verdana; mso-fareast-font-family: Verdana;"><span style="mso-list: Ignore;">-<span style="font: 7pt "Times New Roman";">
</span></span></span>c. If debt is mostly domestically held (as it is in
Japan) and if the country (unlike Greece- a member of the Eurozone) can issue its own currency, then, if
debt is getting dangerously high, the government may be tempted to ‘monetize’
its debt i.e. to print more money to pay off its creditor; but then there is
higher risk of inflation (remember Friedman’s helicopter money drop: ‘too much
money chasing after too few goods’); on the other hand, if an attempt is made to pay off foreign
lenders (in USD) by printing more domestic currency then the currency will massively depreciate also creating higher inflation
as prices of imported goods will rise.<o:p></o:p></p>
<p class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo1; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt "Times New Roman";">
</span></span></span><!--[endif]--><i>Impact on credit rating:</i><o:p></o:p></p>
<p class="MsoListParagraphCxSpMiddle">Credit rating agencies (CRAs) measure the credit
risk of debt for all types of investors. 'Their measurement of credit risk
includes default probabilities…and serve an economic purpose as they reduce <i>asymmetric
information</i> about issuers that investors face when making investments’(from
the New Palgrave). Three agencies (Moody’s, Finch, Standard & Poor’s: the ‘big
three’) rate the debt of countries and assign a ‘grade’.<span style="mso-spacerun: yes;"> </span>Top rated debt (bonds) is AAA which means
ultra-safe: creditors will definitely get their money back. But if these
agencies come to a realization that a country’s debt is becoming riskier then
it will downgrade it. But then lenders will demand a ‘risk premium’ i.e. to
earn higher interest rates. This automatically makes the debt burden heavier so
a ‘feedback loop’ may be initiated that may lead to default<span style="mso-spacerun: yes;"> </span>[and here comes the IMF with its rescue
packages (conditional lending at preferential interest rates) that (once 'agreed' upon) hopefully signal to private investors that the country is back on track
to become creditworthy].<o:p></o:p></p>
<p class="MsoListParagraphCxSpMiddle" style="mso-list: l0 level1 lfo1; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt "Times New Roman";">
</span></span></span><!--[endif]--><i>Impact on future taxation and government
spending:</i><o:p></o:p></p>
<p class="MsoListParagraphCxSpMiddle">This is where ‘austerity policies’ come
into play: the debtor country is forced (‘agrees’= more like some ‘arm twisting’)
to slash G and to raise T in order to achieve ‘primary budget surpluses’ (a
primary budget surplus is recorded when government spending excluding debt
servicing is less than government income (T) so that the government can start
lowering its debt; Greece was required for a number of years to achieve primary budget surpluses equal to 3% of its GDP which were huge and inflicted significant pain on mostly low income
Greek households</p><p class="MsoListParagraphCxSpMiddle"><o:p></o:p></p>
<p class="MsoListParagraphCxSpMiddle" style="mso-list: l2 level1 lfo3; text-indent: -0.25in;"><!--[if !supportLists]--><span style="mso-bidi-font-family: Verdana; mso-fareast-font-family: Verdana;"><span style="mso-list: Ignore;">-<span style="font: 7pt "Times New Roman";">
</span></span></span><!--[endif]-->Note an influential paper by Alberto Alesina and
Silvia Ardagna that tried to show that fiscal contraction will not have the
expected Keynesian result (to lead to recession) but will lead to expansion
(referred to as ‘<i>expansionary fiscal contraction</i>’); Why? Because according to A&A the private sector would see
that the government is rationalizing (cutting) its spending that would result in greater
confidence levels and thus more investment and consumption from the private sector. Proved to not really be the
case. Krugman called this the ‘confidence fairy’)(see <a href="https://www.bruegel.org/blog-post/expansionary-fiscal-contractions-and-uk-experiment">https://www.bruegel.org/blog-post/expansionary-fiscal-contractions-and-uk-experiment</a>)<o:p></o:p></p>
<p class="MsoListParagraphCxSpMiddle" style="mso-list: l2 level1 lfo3; text-indent: -0.25in;"><!--[if !supportLists]--><span style="mso-bidi-font-family: Verdana; mso-fareast-font-family: Verdana;"><span style="mso-list: Ignore;">-<span style="font: 7pt "Times New Roman";">
</span></span></span><!--[endif]-->Also note paper by Kenneth Rogoff and Carmen Reihhart of Harvard that showed that when the debt to GDP level exceeds 90% then an economy will
fall into recession. A graduate student at UMass @Amherst trying as an exercise
in econometrics to duplicate their results couldn’t. He and his advisor found
that R&R had (a) excluded from their sample countries which if they were
included would NOT have led to recession but to continued growth and (b) that
there were coding ‘errors’ in their excel files. Paper was largely discredited
but it had already damaged many in debt-ridden economies.<o:p></o:p></p>
<p class="MsoListParagraphCxSpMiddle" style="mso-list: l2 level1 lfo3; text-indent: -0.25in;"><!--[if !supportLists]--><span style="mso-bidi-font-family: Verdana; mso-fareast-font-family: Verdana;"><span style="mso-list: Ignore;">-<span style="font: 7pt "Times New Roman";">
</span></span></span><!--[endif]-->The ‘mea culpa’ of the IMF:<span style="mso-spacerun: yes;"> </span>The IMF had underestimated the Greek
multiplier so that the agreed upon cut in Government expenditures by the Greek government led to a
much bigger than projected decrease in national income (which meant that many
more than expected suffered a loss in jobs/ income). Olivier Blanchard, then Chief
Economist at the Fund (now at PIIE), was forced to issue a correction of the multiplier which
was referred to as Blanchard’s ‘mea culpa’.<o:p></o:p></p>
<p class="MsoListParagraphCxSpLast"><o:p> </o:p></p>constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com0tag:blogger.com,1999:blog-5734943477593786790.post-82679806148568519772022-10-10T14:31:00.003+03:002022-10-10T14:44:50.620+03:00The notes to my IB economics (HL) on the Phillips Curve <p>For whatever they're worth I am posting here the notes that I have prepared for my students on the Phillips Curve. </p><p class="MsoNormal"><b>The Phillips Curve (notes by CZ - The IB at Athens College [901])<o:p></o:p></b></p><p class="MsoNormal">1958: A.W. Phillips (LSE) published an empirical
paper:<o:p></o:p></p><p class="MsoNormal">He collected annual UK data on the rate of unemployment and
the percentage change in <i>money</i> wages for 96 years: 1861 – 1957 (money
wage: whatever is written on your paycheck)<o:p></o:p></p><p class="MsoNormal">He noticed an inverse relationship between the annual percentage change in <i>money</i> wages and the annual UK unemployment rate: years when UK unemployment was low (= ‘tight’
labor), money wages increased significantly whereas years when unemployment was
high (=’slack’ labor market), money wages increased by a little or not at all
(compared to the previous year) or may even had decreased.<o:p></o:p></p><p class="MsoNormal">BUT:<o:p></o:p></p><p class="MsoListParagraphCxSpFirst" style="mso-list: l3 level1 lfo1; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]--><b>If</b> the wage bill for firms represents a
big chunk of their total production costs<o:p></o:p></p><p class="MsoListParagraphCxSpLast" style="mso-list: l3 level1 lfo1; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]-->And, <b>if</b> prices are set by firms as a
‘markup’ on unit costs (i.e. say, 10% or 50% more than the average cost of
producing, say, ‘pencils’) <o:p></o:p></p><p class="MsoNormal">THEN, if money wages rise a lot, price<b>s</b> will rise a
lot (i.e. inflation accelerates) and if money wages increase a little (or,
decrease) then inflation will be lower (i.e. disinflation)<o:p></o:p></p><p class="MsoNormal">Thinking along these lines many economists (Samuelson,
Lipsey et al.) checked for many countries & for different time periods the data on the behavior between the annual rate of inflation and the rate of unemployment.
And, OMG, they found that in many countries over many periods of time an inverse
(=negative) relationship existed <i>between inflation and unemployment</i>: if
unemployment was decreasing, inflation was increasing and if inflation was
decreasing, unemployment was increasing.</p><p class="MsoNormal"><o:p></o:p></p><p class="MsoNormal">This inverse relationship between the annual rate of
inflation and the rate of unemployment is referred to as the (original)
Phillips curve.<o:p></o:p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhPyFJpgt79-Hfr-KeRoDPSNxL7XNDHJxMaS7XeiJdMkXEW4tswfyn2e9sINmiDO7cUYuc79DZiT7elecwK2t1JiAfeSKIR1tnFosH8PlVYAV-UcgcD4mMSpOIXPYaeHE8IVPNanaycsmpsaqncuYMd-h-gMZb1SeZv13hjLJ611c3w_uvwF8trEcuy/s1226/Original%20PC.PNG" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1181" data-original-width="1226" height="308" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhPyFJpgt79-Hfr-KeRoDPSNxL7XNDHJxMaS7XeiJdMkXEW4tswfyn2e9sINmiDO7cUYuc79DZiT7elecwK2t1JiAfeSKIR1tnFosH8PlVYAV-UcgcD4mMSpOIXPYaeHE8IVPNanaycsmpsaqncuYMd-h-gMZb1SeZv13hjLJ611c3w_uvwF8trEcuy/s320/Original%20PC.PNG" width="320" /></a></div><br /><p class="MsoNormal"><span style="text-indent: -0.25in;">This empirical relationship was fully compatible
with the ruling at the time Keynesian theory (remember that in the Keynesian model the level of equilibrium
real output - of economic activity - is 'demand-driven': it is ‘<i>effective</i>’
(aggregate for us) demand that determines the level of economic activity [the equilibrium
real output]):</span></p><p class="MsoListParagraph" style="mso-list: l1 level1 lfo2; text-indent: -0.25in;"><o:p></o:p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-Brk3bmiDpb0W4OBEnGRVIUjuCHuKsEoFeuhAhWHetjNuQEn-tY3Udu14Fn88_8aQqgNTSv2b_vwf50kAJAUMOxgrtagkVb5aRT-hv2phtHHaaVsP5qyk8HEN_xTKnrBLNa7k3ezCh5j3splKPt2400ttYzfh0OXu6WzBPVsLGcCZNPJPUWa8K4gq/s1399/PC%20and%20Keynesian.PNG" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1159" data-original-width="1399" height="292" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-Brk3bmiDpb0W4OBEnGRVIUjuCHuKsEoFeuhAhWHetjNuQEn-tY3Udu14Fn88_8aQqgNTSv2b_vwf50kAJAUMOxgrtagkVb5aRT-hv2phtHHaaVsP5qyk8HEN_xTKnrBLNa7k3ezCh5j3splKPt2400ttYzfh0OXu6WzBPVsLGcCZNPJPUWa8K4gq/w352-h292/PC%20and%20Keynesian.PNG" width="352" /></a></div><br /><div class="separator" style="clear: both; text-align: justify;"><span style="text-align: left;">If AD rises (from AD1 to AD2), then real GDP rises (from Y1
to Y2) so unemployment falls but inflation increases (APL1 to APL2); if AD
decreases (from AD1 to AD3) then unemployment rises but inflation decreases (APL1 to APL3).</span></div><p class="MsoNormal"><o:p></o:p></p><p class="MsoNormal">The original PC illustrated a <b>trade-off</b> between
inflation and unemployment and if this relationship is stable through time for
a country, then it was as if it presented policymakers a ‘<b>menu of choices’</b>:
they could choose that combination on the country’s Phillips Curve that was
considered the most desirable.<o:p></o:p></p><p class="MsoNormal">They could choose and achieve the desired combination using <i>demand-side
policies</i> (fiscal (i.e. <span lang="EL">Δ</span>G, <span lang="EL">Δ</span>T) and monetary (i.e. <span lang="EL">Δ</span>r).<o:p></o:p></p><p class="MsoNormal">They even thought back then that they could ‘<b>fine-tune</b>’ the
economy (which was of course considered by many as ‘hubris’).<o:p></o:p></p><p class="MsoNormal"><b><span style="background: yellow; color: red; mso-highlight: yellow;">BUT</span></b>, in the early 1970s this ‘stable’ relationship between
the rate of inflation and the rate of unemployment of a country collapsed.<o:p></o:p></p><p class="MsoNormal">Economies started witnessing something that was <i><u>incompatible</u></i>
with the Keynesian model: BOTH the rate of inflation AND the rate of
unemployment were increasing! It was as
if the Phillips Curve was shifting outwards (to the right).<o:p></o:p></p><p class="MsoNormal">This phenomenon was referred to as <b>stagflation</b> (=<b>stag</b>nation
+ in<b>flation</b>).<o:p></o:p></p><p class="MsoNormal">Arthur Okun (Okun’s Law: a 1% decrease in real GNP growth was associated with a 0.3% increase in unemployment) back
then devised his <u>Economic Discomfort Index</u> — which Ronald Reagan renamed
the <b>Misery Index</b> — the <u>sum</u> of the unemployment rate and the
inflation rate. <o:p></o:p></p><p class="MsoNormal">This collapse was the result of the 1<sup>st</sup> oil
crisis, as in 1973, OPEC to ‘punish’ the West for supporting Israel, restricted the supply
of oil and thus quadrupled overnight the price of a barrel of oil (think now of the price of natural gas surging given that Russia is restricting natural gas exports
and its impact on European and other economies). <o:p></o:p></p><p class="MsoNormal">We now realize (with our current AD <i><u>and</u></i> AS tools) that
because production costs increased across the board, the SRAS decreased and
shifted left leading to higher inflation AND higher unemployment.<o:p></o:p></p><p class="MsoNormal"><b><span style="color: red;">MOST IMPORTANTLY</span></b>, in
1968, Milton Friedman (the most renowned Monetarist; Nobel prize) published a
most influential paper titled “<i>The Role of Monetary Policy</i>” where he
introduced the term Natural Rate of Unemployment (NRU).<o:p></o:p></p><p class="MsoNormal">His analysis of the Phillips Curve relationship distinguished
between the ‘short run’ and the ‘long run’ (Remember: <i>short run when only some,
but not all adjustments are possible; long run is when all adjustments are
possible</i>)<o:p></o:p></p><p class="MsoListParagraphCxSpFirst" style="mso-list: l3 level1 lfo1; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]-->He claimed that if there is a trade-off between
the 2 variables it exists ONLY in the short run; in the long run, there is only
one rate of unemployment, the natural rate, which is compatible with ANY rate
of inflation as long as this rate of inflation does not change (does not accelerate). Thus, in the long run the Phillips Curve
according to Friedman is VERTICAL at the NRU.<o:p></o:p></p><p class="MsoListParagraphCxSpMiddle" style="mso-list: l3 level1 lfo1; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]-->He included in his analysis ‘expectations’ about
next year’s inflation that workers form <span style="font-family: Wingdings; mso-ascii-font-family: Verdana; mso-char-type: symbol; mso-hansi-font-family: Verdana; mso-symbol-font-family: Wingdings;">à</span> the ‘<i>expectations-augmented Phillips Curve</i>’ or,
the “<i>Phelps-Friedman Critique</i>’ {Ed Phelps came up with pretty much the
same analysis independently}<o:p></o:p></p><p class="MsoListParagraphCxSpMiddle" style="mso-list: l3 level1 lfo1; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]-->Friedman claimed that workers form their
expectations ‘<i>adaptively’</i>: they form their expectations about next
year’s inflation by looking at last year’s inflation (‘<i>backward’</i> looking
expectations) (really, a weighted average of previous rates)<o:p></o:p></p><p class="MsoListParagraphCxSpMiddle" style="mso-list: l3 level1 lfo1; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]-->Workers thus suffer from “<i>money illusion</i>”
i.e. they do not realize immediately that their <b>real</b> wage (the
purchasing power of their money wage) decreased when inflation accelerated <span style="font-family: Wingdings; mso-ascii-font-family: Verdana; mso-char-type: symbol; mso-hansi-font-family: Verdana; mso-symbol-font-family: Wingdings;">à</span>
their expectations of inflation are slow to adjust (‘adaptive’)<o:p></o:p></p><p class="MsoListParagraphCxSpMiddle" style="mso-list: l3 level1 lfo1; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]-->If the government tries to lower unemployment
below the NRU using expansionary fiscal (and perhaps easy monetary), inflation
will accelerate and workers will <i><u>not</u></i> immediately realize that inflation
is higher than expected and thus their <i><u>real</u></i> wage has decreased:
they will thus accept jobs offered by businesses who face lower real costs <span style="font-family: Wingdings; mso-ascii-font-family: Verdana; mso-char-type: symbol; mso-hansi-font-family: Verdana; mso-symbol-font-family: Wingdings;">à</span>
unemployment does fall but inflation is now higher.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjrrfZ6pFtTMe7KTaxCBNp86r80KIgh02iOAYEyb1yLJOiEHs1P1DwPRtJpI9-flaSa2cpWb7TtNXMVkXt93jqp9wpSCgJ_WGs1x_DuTqpd_O6yht0bh9s1ijRzdQMqvw6ZFzPaGL6Em9GRATcnyFpo-MpuuTMXR4mO6wlDpDmM0nX1ks6zNBJS3PF1/s1162/LRPC.PNG" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1162" data-original-width="1073" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjrrfZ6pFtTMe7KTaxCBNp86r80KIgh02iOAYEyb1yLJOiEHs1P1DwPRtJpI9-flaSa2cpWb7TtNXMVkXt93jqp9wpSCgJ_WGs1x_DuTqpd_O6yht0bh9s1ijRzdQMqvw6ZFzPaGL6Em9GRATcnyFpo-MpuuTMXR4mO6wlDpDmM0nX1ks6zNBJS3PF1/s320/LRPC.PNG" width="295" /></a></div><br /> <span style="text-indent: -0.25in;">When expectations of inflation adjust (long run)
so that expected inflation equals actual inflation, workers will demand higher money
wages (remember that money wages are flexible fully adjust to changes in the
APL in the monetarist model) until the real wage is ‘</span><i style="text-indent: -0.25in;">restored’</i><span style="text-indent: -0.25in;"> back to its
original equilibrium level so that in the long run, unemployment will return to
its natural rate </span><b style="text-indent: -0.25in;">BUT</b><span style="text-indent: -0.25in;"> with higher inflation (this analysis is the ‘mirror
image’ of the AD/SRAS/LRAS model explaining how an inflationary gap
is closed in the Monetarist model – see the SG)</span><p></p><p class="MsoListParagraphCxSpMiddle" style="mso-list: l3 level1 lfo1; text-indent: -0.25in;"><o:p></o:p></p><p class="MsoListParagraphCxSpMiddle" style="mso-list: l3 level1 lfo1; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]-->To maintain thus unemployment below the NRU with
expansionary demand side policies a government would have to engineer <i>ever
accelerating inflation,</i> which of course does not make much sense.<o:p></o:p></p><p class="MsoListParagraphCxSpMiddle" style="mso-list: l3 level1 lfo1; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]-->Friedman’s policy recommendation is thus: “Ms. Policymaker,
do not try to lower unemployment below the NRU using expansionary policies; if
you are successful, your success only will be short-lived (temporary) because workers’
expectations of inflation will [eventually] adjust and thus unemployment will return
to its NRU but with higher inflation”<o:p></o:p></p><p class="MsoListParagraphCxSpMiddle" style="mso-list: l3 level1 lfo1; text-indent: -0.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;">·<span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;">
</span></span><!--[endif]-->Friedman quoted Abraham Lincoln that ‘you can
fool some of the people all of the time, all of the people some of the time BUT
NOT all of the people, all of the time”. </p><p class="MsoListParagraphCxSpMiddle" style="mso-list: l3 level1 lfo1; text-indent: -0.25in;"> Remember: <span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol; text-indent: -0.25in;"><span style="font-family: "Times New Roman"; font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal;"> </span></span><!--[endif]--><span style="text-indent: -0.25in;"><u>Short run</u>: when actual inflation exceeds
expected inflation </span></p><p class="MsoListParagraphCxSpMiddle" style="mso-list: l3 level1 lfo1; text-indent: -0.25in;"><span style="text-indent: -0.25in;"><span style="font-size: xx-small;"> </span><u>Long run</u>: when expectations of inflation have adjusted so that expected inflation is equal to
actual inflation. </span></p><p class="MsoListParagraphCxSpLast" style="mso-list: l3 level1 lfo1; text-indent: -0.25in;"> Note that now in a part (a) essay asking to
explain the NRU we now have three points to explain:</p><p class="MsoNormal" style="margin-left: 0.25in; text-align: left;">1. It is the unemployment that exists when the economy is at its potential level of real output</p><p class="MsoNormal" style="margin-left: 0.25in; text-align: left;">2. It is the unemployment that exists when the labor market is in equilibrium (see in the OUP Study Guide p. 92 the Dornbusch & Fisher LD/AJ/LF labor market diagram with the <i>real </i>wage on the vertical) </p><p class="MsoNormal" style="margin-left: 0.25in; text-align: left;">3. From the above analysis we now realize that the NRU is the lowest unemployment that can be achieved without inflation accelerating <b style="text-indent: -0.25in;">(</b><span style="text-indent: -0.25in;">NAIRU=non-accelerating
inflation rate of unemployment)</span></p><p class="MsoListParagraphCxSpLast" style="mso-list: l0 level1 lfo3; text-indent: -0.25in;"><o:p></o:p></p><p class="MsoNormal">Also note that unemployment in the US after the 2009 crisis was continuously
decreasing: it reached 5%, then 4.5%, then 4.3%, then 4.0% then 3.8% without inflation accelerating.<o:p></o:p></p><p class="MsoNormal">So many economists as unemployment was decreasing were afraid that if the Fed did not hit soon
enough the brakes (i.e. start tightening monetary policy i.e. raising ‘r’),
inflation would start showing its ugly face.<o:p></o:p></p><p class="MsoNormal">Janet Yellen, who was then the Chair of the Fed, resisted
these calls and kept interest rates very low (continuing ‘quantitative easing’)
<span style="font-family: Wingdings; mso-ascii-font-family: Verdana; mso-char-type: symbol; mso-hansi-font-family: Verdana; mso-symbol-font-family: Wingdings;">à</span>
unemployment thus continued to fall, reaching a 50-year record low at 3.5%
WITHOUT inflation exceeding the 2% target.[BTW, Yellen's successor, Ben Bernanke, today shared with two other economists the 2022 Nobel Prize in Economics]</p><p class="MsoNormal">Thus, thousands of American households found a job <span style="font-family: Wingdings; mso-ascii-font-family: Verdana; mso-char-type: symbol; mso-hansi-font-family: Verdana; mso-symbol-font-family: Wingdings;">à</span> if
the Fed had tightened earlier, as several economists and politicians were insisting, many poor US households would have remained unemployed (on the other hand, quantitative easing [QE] increased income inequality as explained
elsewhere)<o:p></o:p></p><p class="MsoNormal">Back then, many economists had started wondering whether the
PC is ‘dead’, whether it was ‘hibernating’, why has it ‘flattened’ etc.<o:p></o:p></p><p class="MsoNormal">Explanations for the observed phenomenon varied. A couple of accessible to IB Higher Level Economics students include: </p><p class="MsoNormal"><span style="text-indent: -0.25in;">a.</span><span style="font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal; text-indent: -0.25in;">
</span><!--[endif]--><span style="text-indent: -0.25in;">Discouraged workers re-entering the labor market
and finding jobs so that U, the numerator, in the unemployment statistic didn’t rise but the labor force number (the
denominator) increased, decreasing
the rate of unemployment {w/o need for firms to raise wages and thus prices to
attract workers}.</span></p><p class="MsoNormal"><span style="text-indent: -0.25in;">b.</span><span style="font-size: 7pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal; text-indent: -0.25in;">
</span><!--[endif]--><span style="text-indent: -0.25in;">Expectations of inflation back then were well ‘</span><b style="text-indent: -0.25in;">anchored</b><span style="text-indent: -0.25in;">’
at the 2% target rate so that neither firms felt the need to raise prices, nor
did workers feel the need to demand higher money wages: all stakeholders
expected inflation to remain at 2%.</span></p><p class="MsoListParagraphCxSpLast" style="mso-list: l2 level1 lfo4; text-indent: -0.25in;"><o:p></o:p></p><p class="MsoNormal">This explains why NOW, the Fed and analysts fear that inflationary
expectations are ‘<b><i>unmoored</i></b>’ (=de-anchored) which, if true, implies
that US inflation will continue to rise. A Central Bank <i><u>must</u></i> be
credible – which is why Powell (the Chair of the US Fed) sounds so firm about
the Fed’s intentions. [many claim and they seem to be right that the Fed should have tightened monetary policy earlier - it was 'behind the curve']<o:p></o:p></p><p class="MsoNormal">PLEASE watch Aspen’s Roundtable on the US Economy and pay close
attention to what exactly Neel Kashkari (President of the Federal Reserve Bank
of Minneapolis) says: <o:p></o:p></p><p>
</p><p class="MsoNormal"><a href="http://www.ibeconomics.org/2022/08/a-most-interesting-roundtable-organized.html">http://www.ibeconomics.org/2022/08/a-most-interesting-roundtable-organized.html</a>
<o:p></o:p></p><p> </p><div class="separator" style="clear: both; text-align: center;"><br /></div><br /><div class="separator" style="clear: both; text-align: center;"><br /></div><br />constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com1tag:blogger.com,1999:blog-5734943477593786790.post-3906767591114228822022-08-15T17:03:00.005+03:002022-08-15T17:18:59.753+03:00The End of Magic Money<p> </p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGcjm_EnEOXCgMAPZpgj8UlEGHLcMUuqqhDkPGZgj-WiiqFyfDQmOgwKvzUQ6TKXJ-Apumnw3RRr5gzQXgwY65g7tJe3bhwsIZ0Bmj9GC_r-OB5LjKIAAC3FGrzGFl8Z483ojr1mv4h5MTXr2G8HLBRFaiRj2qgohd0CZMVhmxpwFEKdo5HK7WypDD/s1170/Magic%20money.PNG" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1170" data-original-width="1078" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGcjm_EnEOXCgMAPZpgj8UlEGHLcMUuqqhDkPGZgj-WiiqFyfDQmOgwKvzUQ6TKXJ-Apumnw3RRr5gzQXgwY65g7tJe3bhwsIZ0Bmj9GC_r-OB5LjKIAAC3FGrzGFl8Z483ojr1mv4h5MTXr2G8HLBRFaiRj2qgohd0CZMVhmxpwFEKdo5HK7WypDD/s320/Magic%20money.PNG" width="295" /></a></div><br />In the July 2022 issue of Foreign Affairs there is an interesting article titled "<b>The End of Magic Money: Inflation And The Future Of Economic Stimulus</b>". In it the author explains how, "under the right conditions, magic money can undoubtedly be deployed successfully" and how US policymakers were successful in dealing with the 2008 financial crisis and how the first response to Covid-19 was also impressive. <p></p><blockquote><p>"The pandemic caused U.S. GDP to collapse in the second quarter of 2020: output shrank at an annualized rate of 32 percent. This fall was four times deeper than the hit from the financial crisis in the fourth quarter of 2008; indeed, it was the sharpest ever contraction in the post–World War II period. <i>The Fed responded aggressively, creating twice as much money as it had from 2008 to 2009. Likewise, the president and Congress delivered a budget stimulus that was twice as big as the 2009 version</i>."</p></blockquote><p>This 'mega-stimulus' worked perfectly as the economy 'bounced back' to pre-pandemic levels 'with no sign of inflation' writing that "<u>If the authorities had been able to stop there</u>, <i>they would have pulled off a textbook example of macroeconomic stabilization</i>".</p><p> According to the author, Sebastian Mallaby, "<b>Starting in the spring and summer of 2021, the Fed committed three mistakes, opening the door to today’s price surge</b>". As a result of the March 2021 $1.9 <i>trillion</i> fiscal stimulus, Brookings forecast that by the end of 2021 the US economy '<i>would be operating above its maximum sustainable level'. </i>All IB economics students should precisely understand what exactly this implies. <b>That was the first error</b> according to Mallaby. The Fed did not tighten at that point, preferring to take a 'wait-and-see approach (which is understandable, given the uncertainty faced at that point). For many it should have 'hiked interest rates, <i><b>snuffing out</b></i> the inflation before it became serious'. Back then many academics claimed (most notably Krugman) that the rise in inflation was 'transitory' (see my earlier post on the debate between 'team transitory' and 'time persistent'; the Summers-Krugman debate, where Laurence Summers proved right: <a href="http://www.ibeconomics.org/2021/07/a-primer-on-inflation-must-read-for-all.html" target="_blank">A primer on inflation</a>). </p><p>Then Mallaby goes on to explain <b>the second error</b> the Fed made. in March 2022 it increased interest rates by <i>only</i> 25 basis points (0.25%), the smallest possible increase. Why? According to Mallaby it was because the Fed is "attached to 'forward-guidance', the practice of signaling interest-rate moves well ahead of implementing them". He calls this the 'speak-wait-act triple jump approach' which may be useful is inflation is too low (the ZLB problem monetary policy faces; you can check if you wish the Oxford IB Economics Study Guide volume on this: pages 98, 118, 122-123, 131, 140-142) but is not useful when the central bank faces the 'opposite challenge of high inflation'. Sometimes 'speed is the priority' when dealing with inflationary pressures arising. </p><p>The <b>third error</b> relates to the fear that a sizable increase in interest rates would spook financial markets. 'Calling market tops is hard, and the Fed's caution is understandable'. But 'asset prices <i>were screaming</i> that the economy was running hot'. According to Mallaby again, the Fed should have 'factored financial signals into its decisions' and tightened earlier.</p><p>The circumstances are such that 'magic money...for the foreseeable future is off the table'. Achieving price stability (the 2% average that Neel Kashkari of the Minneapolis Fed reiterated in <a href="http://www.ibeconomics.org/2022/08/a-most-interesting-roundtable-organized.html" target="_blank">the Roundtable</a> - see my post) is of paramount importance and this will perhaps be more difficult now because 'globalization has stalled' and many many economies are 'stockpiling strategic commodities and "friend-shoring" supplies which is inflationary.</p><p><b><i>The article IMO is excellent for IB Economics students as it provides them with examples of macroeconomic policies that helps their understanding and can be used in Paper 1 essays.</i></b></p><p>This is the link: <a href="https://www.foreignaffairs.com/articles/united-states/2022-07-11/end-magic-money" target="_blank">The End of Magic Money</a> Worth your time.</p><p>(if not a Foreign Affairs subscriber you can enter your email and they'll send a paywall-free link directly to your inbox).</p>constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com0tag:blogger.com,1999:blog-5734943477593786790.post-51919513553357674212022-08-15T13:41:00.209+03:002022-08-18T10:01:57.537+03:00The logic of carbon pricing<div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvLpWzqvnxb_uYirv-k4bQAcJjRcIYXH6bTa_paLnNRCqkOn5R0l2xRQa65LOVjiwY0suU7bNP6St0GqFZr3P0H2FWdUx2fmV8kzJ2M2EYUC4-R11Czq1c6DT9HZrnnwMaUpEuMyMrzoyvSbQ8HRRPQXSLKFASFr-8nseGOhKkDtRrkRX0jf8vUzVL/s1841/Carbon%20pricing.PNG" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="740" data-original-width="1841" height="129" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvLpWzqvnxb_uYirv-k4bQAcJjRcIYXH6bTa_paLnNRCqkOn5R0l2xRQa65LOVjiwY0suU7bNP6St0GqFZr3P0H2FWdUx2fmV8kzJ2M2EYUC4-R11Czq1c6DT9HZrnnwMaUpEuMyMrzoyvSbQ8HRRPQXSLKFASFr-8nseGOhKkDtRrkRX0jf8vUzVL/s320/Carbon%20pricing.PNG" width="320" /></a></div>The new IB Economics syllabus expects a lot from students on</div><div> </div><div><ul style="text-align: left;"><li>Negative externalities of production</li><li>Common pool resources</li><li>Government intervention in response to externalities and common pool resources including carbon pricing</li></ul></div><div>This piece (see link below) by Max Roser published in June 2021 on carbon pricing in Our World in Data <i>is exactly what an IB Economics c</i><i>andidate (HL and SL) should read to understand the logic behind it</i>.</div><div><br /></div><div>Quoting from the article:</div><blockquote><div><div>Consequences include the negative economic impacts of climate change through its effects on people’s livelihoods, and the damage to infrastructure through rising sea levels, thawing permafrost, and extreme weather events. They pose a large threat to the life of animals and ecosystems on our planet and include the destruction of coral reefs, forest fires, the loss of ice shields, and the expansion of deserts. They include an increase in extreme weather events, like heat waves, droughts, floods, and storms. And especially for the world’s poorest people they pose a threat to their lives, as they increase the risk of hunger and food insecurity.</div><div><br /></div><div>Climate change isn’t the only negative consequence of burning fossil fuels. The air pollution that is caused by burning fossil fuels kills an estimated 3.6 million people in countries around the world every year. </div><div><br /></div><div>This is the price <b>we are already paying</b> for burning fossil fuels.</div></div></blockquote><div> The author goes on to explain that</div><blockquote><div><div>There are two ways in which a carbon price can be implemented: a carbon tax or a ‘cap and trade’ system:</div><div><br /></div><div>In a ‘<b>cap and trade</b>’ system the carbon price changes over time. A maximum level of pollution (a ‘cap’) is defined and manufacturers need licenses to emit carbon. How expensive these licenses are is determined by a trading system. The price of a license increases as emissions approach the cap. </div><div>A <b>carbon tax</b> is simply a levy that is applied to all goods and services which lead to carbon emissions in their production. </div></div></blockquote><blockquote><div><div>In both systems the price of any product increases with the amount of carbon emitted in the production of it. The result is that products with a low carbon footprint (like taking the train or solar energy) do not get more expensive, while goods that do create a lot of emissions (like a flight or coal energy) do get more expensive.</div><div><br /></div><div>This helps us reduce emissions and pollution in two ways: it makes carbon-intensive goods much more expensive, meaning consumers will opt for cheaper low-carbon alternatives when they are available; and in markets where they’re not available yet producers will be incentivised to develop low-carbon alternatives.</div></div></blockquote><div>The link for this excellent Max Rosen article is here: <a href="https://ourworldindata.org/carbon-price" target="_blank">The Argument for a Carbon Price</a></div><div><br /></div><div><br /></div><div>Carbon pricing can take the form of either a carbon tax or a 'cap and trade' system. An excellent (brief and simple) article<b> comparing the two</b> is by Charles Frank of Brookings:</div><blockquote><div>A carbon tax is one way to put a price on emissions. Cap-and-trade is another. A carbon tax and cap-and-trade are opposite sides of the same coin. A carbon tax sets the price of carbon dioxide emissions and allows the market to determine the quantity of emission reductions. Cap-and-trade sets the quantity of emissions reductions and lets the market determine the price. Which of the two is better?</div></blockquote><div>Frank breaks down his simple analysis into four sections:</div><div><ul style="text-align: left;"><li>which has greater uncertainty and imposes more risks?</li><li>which is easier and less costly to administer?</li><li>which is more likely to be politically palatable?</li><li>what mix of policies combines the best of cap-and-trade and a carbon tax?</li></ul></div><div>There are of course real world examples for students to use.</div><blockquote><div>The link to this Brookings article is here: <a href="https://www.brookings.edu/blog/planetpolicy/2014/08/12/pricing-carbon-a-carbon-tax-or-cap-and-trade/" target="_blank">Pricing Carbon: A Carbon Tax or Cap-and-Trade</a></div></blockquote><div><br /></div><div>Finally, Ian Parry, the Principal Environmental Fiscal Policy Expert at International Monetary Fund, has these has this list of <a href="https://www.imf.org/Publications/fandd/issues/2021/09/five-things-to-know-about-carbon-pricing-parry" target="_blank">Five Things to Know about Carbon Pricing</a> for IB Economics students. Brief and easy.</div><div><br /></div><div>PS: Complementary to the above is of course ending fossil fuel subsidies. Students can check out this one: <a href="https://ourworldindata.org/fossil-fuel-subsidies" target="_blank">greenhouse gas emissions we should not pay people to burn fossil-fuels</a>, again by Max Roser at Our World in Data.</div><div><br /></div><div>Hope these help IB Economics students thinking about this issue and tackling effectively related exam questions.</div><div><br /></div><div><b>Nota Bene!👇</b></div><div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZ0flORj8pxMi0iawlHkcw2kSAyKYgJSvIFhpWTvspF1v-zMSm0gNStMV0SwqsNjwO6URPz6GqyRlLRSmZSzHnHNI89bH2zLwo24-ysiV3SfM3E3y4ynDAasRRk4xOQCES9NkkETz3EDiSXhcHadsF50PsWh8WbTG1_Zia8xmlPZxKikXVPZiNVp0n/s1132/Krugman%20Aug22.PNG" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1132" data-original-width="811" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZ0flORj8pxMi0iawlHkcw2kSAyKYgJSvIFhpWTvspF1v-zMSm0gNStMV0SwqsNjwO6URPz6GqyRlLRSmZSzHnHNI89bH2zLwo24-ysiV3SfM3E3y4ynDAasRRk4xOQCES9NkkETz3EDiSXhcHadsF50PsWh8WbTG1_Zia8xmlPZxKikXVPZiNVp0n/w143-h200/Krugman%20Aug22.PNG" width="143" /></a></div><br />I just read an Opinion in the New York Times by <a href="https://stonecenter.gc.cuny.edu/people/krugman-paul/" target="_blank">Paul Krugman</a> written on 16/8/22 and titled '<u>Why We Don’t Have a Carbon Tax</u>'. I decided to add his opinion here to help students have a (slightly) different view in related Paper 1 essay questions. </div><div><br /></div><div>Bottom line is that he does not consider carbon pricing a panacea to the climate change challenge we face. He writes about the Inflation Reduction Act that Biden in the US just signed (according to Krugman 'despite its name, [it] is mainly a climate bill') which '<i>relies almost entirely on <b>subsidies</b> <u>intended to promote clean energy</u>, offering tax credits for renewable energy, aid to keep nuclear plants operating, incentives to buy electric vehicles and make homes more energy efficient and more'</i>. He continues arguing that 'an <i><u><b>exclusive</b></u></i> focus on carbon taxes was “dubious economics and bad political economy.' A carbon tax would be bad <i>political </i>economy because 'people aren’t just consumers and taxpayers, they’re also workers. And any policy that reduces greenhouse gas emissions will <i>displace </i>jobs in fossil fuel industries.' It would be interesting to point here to the objection that Larry Summers voiced in the roundtable concerning this <i>displacement </i>(<a href="https://www.youtube.com/watch?v=iLxEfg3SeM4&t=920s">go to 34:53</a>) where at 35:17 he ask the rest to put this <i>displacement </i>issue in perspective saying that '<i>there are only 50000 coalminers in the United States of America right now. That is one sixth of the number of manicurists</i>...'! Following Krugman's arguments he concludes the piece by writing '<b>Does this mean that we should never impose a carbon tax? No, not at all.</b> [But,]There’s still a good case for giving people a direct financial incentive to limit emissions, and <i>such a thing may become politically possible</i> as the economy decarbonizes <i>and green energy <u>becomes a more powerful interest group</u></i>.'</div><div>This excellent (short and sweet) complementary article to the above can be reached by clicking here: </div><div><a href="https://www.nytimes.com/2022/08/16/opinion/carbon-tax.html" target="_blank">Why we don't have a carbon tax</a> (of course, he is referring to the US). Enjoy!</div><div><br /></div><div><b>PS1</b>: The 2019 Twitter thread Krugman refers to in the article is <a href="https://twitter.com/paulkrugman/status/1113442307427192833" target="_blank">here</a> </div><div><br /></div><div><br /></div><div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgxMZXIutmMY1e6YdQvD-Jn0D7umr5iTJ6k8_6nkDCfEwYdpxDrk--8mbvOXUUSHBgQhnQpFQzIJzHUNPtrg0LlVPQ6sCluxb1BlSsj4S2nIycFDHRNhl-E_aIfNWlZ_qVpuPU2x5s7MFVyNkMm2Y1diaFNP10clrGtqOGZYqNRftkhyMmxojI3bdYy/s942/Blanchard.PNG" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="942" data-original-width="622" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgxMZXIutmMY1e6YdQvD-Jn0D7umr5iTJ6k8_6nkDCfEwYdpxDrk--8mbvOXUUSHBgQhnQpFQzIJzHUNPtrg0LlVPQ6sCluxb1BlSsj4S2nIycFDHRNhl-E_aIfNWlZ_qVpuPU2x5s7MFVyNkMm2Y1diaFNP10clrGtqOGZYqNRftkhyMmxojI3bdYy/w132-h200/Blanchard.PNG" width="132" /></a></div><br /><b>PS2</b>: <a href="https://www.piie.com/experts/senior-research-staff/olivier-blanchard" target="_blank">Olivier Blanchard</a>, the senior fellow at PIIE (also ex-chief economist at the Fund and MIT professor) another heavyweight also weighs in on the <b>carbon tax vs green subsidies debate</b> sparkled by IRA 'climate bill'; Blanchard argues that carbon pricing (carbon taxes) are necessary as (a) a subsidies only approach may prove way too costly for the Government (b) the effectiveness of such subsidies varies significantly and (c) carbon taxes are needed to finance such subsidies</div><div>This debate is great for IB Economics students. The debate is now on Twitter:</div><div> <a href="https://twitter.com/ojblanchard1/status/1559902295407616000" target="_blank">Olivier Blanchard here</a></div><div>and <a href="https://twitter.com/paulkrugman/status/1559947797704708101" target="_blank">Paul Krugman here</a> <br /><br /></div>constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com0tag:blogger.com,1999:blog-5734943477593786790.post-26590762034067303152022-08-12T19:48:00.001+03:002022-08-15T14:40:10.904+03:00A Roundtable on the US Economy to watch (easy and useful)<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjs_9WR5ylyuMzXZqYuHRTDx1diHl_DlQfZdFmuCkPJfDMbID0ucsSwZxBCN8dyH6eAJxp8OAN0gVLDJfmmuuWEF3cuzfh1kbs-7FsKZQa7y1RtzZFAycDlMDVKZsmHA0x031g6uv91QZ49vAtdbxgyUQgmtAFphjwGfagwmDF1M_VyuHaPwN_QKOrB/s1067/Aspen.PNG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="545" data-original-width="1067" height="163" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjs_9WR5ylyuMzXZqYuHRTDx1diHl_DlQfZdFmuCkPJfDMbID0ucsSwZxBCN8dyH6eAJxp8OAN0gVLDJfmmuuWEF3cuzfh1kbs-7FsKZQa7y1RtzZFAycDlMDVKZsmHA0x031g6uv91QZ49vAtdbxgyUQgmtAFphjwGfagwmDF1M_VyuHaPwN_QKOrB/s320/Aspen.PNG" width="320" /></a></div><br />A most interesting roundtable organized the other day at the <a href="https://www.aspeninstitute.org/programs/" target="_blank">Aspen Institute</a> on whether the US economy is headed towards stagflation. <p></p><p>Excellent for IB HL Economics candidates. </p><p>Exposure to what is going on in a major economy by <a href="http://larrysummers.com/" target="_blank">Lawrence Summers</a> of Harvard, <a href="https://www.minneapolisfed.org/people/neel-kashkari" target="_blank">Neel Kashkari</a> of the Minneapolis Fed, <a href="http://econweb.umd.edu/~kearney/melissa_website/index.html" target="_blank">Melissa Kearney</a> Professor at the U. of Maryland and of the Aspen Economic Strategy Group and <a href="https://www.blackrock.com/corporate/about-us/leadership/larry-fink" target="_blank">Lawrence Fink</a>, the CEO of BlackRock that manages $10 trillion in assets. The discussion was moderated by Greg Ip, of the WSJ and author of the great book <a href="https://www.amazon.com/Little-Book-Economics-Economy-Works/dp/1118391578" target="_blank">The Little Book of Economics</a>. Many connections with the current Economics syllabus. </p><p><br /></p><p>The video link is here: <a href="https://www.youtube.com/watch?v=iLxEfg3SeM4&t=920s" target="_blank">Is the US Headed for Stagflation</a></p><p><br /></p><p><br /></p>constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com0tag:blogger.com,1999:blog-5734943477593786790.post-790675087248461002022-08-12T18:14:00.001+03:002022-08-12T18:14:09.982+03:00How do we measure living standards<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi9fb3XN9eAv_YucPQq5aej_gqeG6cJ8DCPNRFafQ5A1d17dozWApsUPhWmLq2l1x-v_HqNJ0o_fuAXrrQf_WW_yiA5VcxTlWIakOCwfQsQqvWteo5Kc7Oc5gnfsjJ9AG-Mc3TfplQUIwVog6Ch__9af3Reg1zE2M3cUrfrYd7aaDfDXgUHNedEdv2k/s1239/assortment-with-happy-emotion_23-2148860256.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1239" data-original-width="826" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi9fb3XN9eAv_YucPQq5aej_gqeG6cJ8DCPNRFafQ5A1d17dozWApsUPhWmLq2l1x-v_HqNJ0o_fuAXrrQf_WW_yiA5VcxTlWIakOCwfQsQqvWteo5Kc7Oc5gnfsjJ9AG-Mc3TfplQUIwVog6Ch__9af3Reg1zE2M3cUrfrYd7aaDfDXgUHNedEdv2k/s320/assortment-with-happy-emotion_23-2148860256.jpg" width="213" /></a></div><br />Very often in HL and SL IB Economics exams, candidates are asked questions that relate to living standards and how can we compare across countries or through time. The new syllabus pays even more attention to this topic so it is recommended that student research it more.<p></p><p>One thing to keep in mind is that even Simon Kuznets, the economist who developed national income and product accounts, warned against using per capita income as a way to make such comparisons. </p><p>A December 2021 article by Benjamin, Cooper and Kimball, titled Measuring the Essence of the Good Life is, in my opinion at least, a must read for any serious student of IB Economics walking into May or November final exams. It was published in <a href="https://www.imf.org/en/Publications/fandd" target="_blank">Finance & Development</a>, an IMF free publication. This publication has numerous (short!) articles that perfectly align with the requirements of our syllabus. And students (or an instructor) can request free hard copies. Many of my students have and they thoroughly enjoy it!</p><p>The link to this interesting and useful article is here: <a href="https://www.imf.org/Publications/fandd/issues/2021/12/Measuring-Essence-Good-Life-Benjamin-Cooper-Heffetz-Kimball?utm_medium=email&utm_source=govdelivery" target="_blank">Measuring the Essence of the Good Life</a> (8 minutes read)</p>constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com0tag:blogger.com,1999:blog-5734943477593786790.post-46990866914637659232021-10-30T20:12:00.000+03:002021-10-30T20:12:17.493+03:00Some behavioral economics links for IB economics students<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOf2zb4MNFrN91XTPXqe1x9eU_SNb2zg9J4Tlej9oQTwDBlgVmCovpyOpVCIHSmK-q4koRCBkr_kKtxPdph2Dil-kwuPcIwRC06tK6Tuliaji5UtSoqESeIr3dKtB5sFRt7nbJS_yOQZs/s2048/BE+post.PNG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1055" data-original-width="2048" height="165" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOf2zb4MNFrN91XTPXqe1x9eU_SNb2zg9J4Tlej9oQTwDBlgVmCovpyOpVCIHSmK-q4koRCBkr_kKtxPdph2Dil-kwuPcIwRC06tK6Tuliaji5UtSoqESeIr3dKtB5sFRt7nbJS_yOQZs/s320/BE+post.PNG" width="320" /></a></div><br />'Behavioral economics' is the new kid on the block for IB economics students (syllabus section 2.4). Specifically the new IB Economics syllabus expects candidates not only to be able to explain (AO2) but also to be able to respond to essay questions that have 'discuss', 'evaluate', 'examine', to what extent' etc. (AO3) as command terms (also using real world examples). The following is directly from the 2020 syllabus:<p></p><p><i>Behavioral economics—limitations of the assumptions of rational consumer choice</i></p><p></p><ul style="text-align: left;"><li>Biases—rule of thumb, anchoring and framing, availability</li><li>Bounded rationality</li><li>Bounded self-control</li><li>Bounded selfishness</li><li>Imperfect information</li></ul><p></p><p></p><p><i>Behavioral economics in action (HL only)</i></p><p></p><ul style="text-align: left;"><li>Choice architecture—default, restricted, and mandated choices</li><li>Nudge theory</li></ul><p></p><p>There are plenty of sources for instructors to use beyond IB dedicated Textbooks and Study Guides. I asked my Year 1 kids to prepare and present BE LOs in class. I gave them lots of articles, papers, interviews, talks on these issues to consult. I initially had assigned the works for all so that all would study and take notes on all issues (it would be like a flipped classroom thing that I rarely, if ever, attempt) and then, the day before the presentations, I narrowed down to a specific bias or issue for each student (or duet) to 'teach'. It worked out ok; a few kids did a superb job.</p><p>There is one more site that I did not give my students before this assignment (now they are obviously aware of it) that I think may prove very useful for all. It has tons of interesting and useful information, the surface of which I have only scratched.</p><p>These are a few links related to issues of (at least some) interest to IB Economics students:</p><p><a href="https://thedecisionlab.com/biases/anchoring-bias/" target="_blank">Anchoring bias</a> </p><p><a href="https://thedecisionlab.com/biases/availability-heuristic/" target="_blank">The availability heuristic</a><br /></p><p><a href="https://thedecisionlab.com/biases/framing-effect/" target="_blank">The framing effect</a><br /></p><p><a href="https://thedecisionlab.com/biases/restraint-bias/" target="_blank">The restraint bias (self-control) </a><br /></p><p><a href="https://thedecisionlab.com/biases/bounded-rationality/" target="_blank">On bounded rationality</a><br /></p><p><a href="https://thedecisionlab.com/biases/heuristics/" target="_blank">On heuristics - rules of thumb</a><br /></p><p><a href="https://thedecisionlab.com/thinkers/computer-science/herbert-simon/" target="_blank">On Herbert Simon</a><br /></p><p><a href="https://thedecisionlab.com/thinkers/economics/richard-thaler/" target="_blank">On Richard Thaler</a><br /></p><p><a href="https://thedecisionlab.com/thinkers/economics/daniel-kahneman/" target="_blank">On Daniel Kahneman</a><br /></p><p>All of the above and much more are found <a href="https://thedecisionlab.com/" target="_blank">here, at The Decision Lab</a>. Definitely worth visiting.</p><p>Another related and very interesting site worth visiting is <a href="https://beworks.com/" target="_blank">BEworks</a> (also a Canadian consulting firm; Dan Ariely is co-founder and chief behavioral scientist there - he has an interesting article in the 2021 BE works Choice Architecture Report that one may download for <a href="https://go.beworks.com/car2021" target="_blank">free</a>.</p><p><br /></p>constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com0tag:blogger.com,1999:blog-5734943477593786790.post-15739623218039131302021-10-24T16:25:00.002+03:002021-10-24T16:47:19.369+03:00"...bottom line is that climate policy has not progressed over the last three decades": The "wobbly" Paris Agreement and the "syndrome of free riding"<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjSnfXtlEQ6_UVxrPEe1WVVB-J6r3BdLb7PocxrHvr-fy1Tx22hKpzqvyT_h_bPefxvZoopGvuQ4f8x_9GaJ-lKHfCfIBRL_Dul4XvzeNz7Bb35dUGsv-F7di2xsticL0jsK_ntG63lsb4/s1608/Paris2.PNG" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1178" data-original-width="1608" height="234" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjSnfXtlEQ6_UVxrPEe1WVVB-J6r3BdLb7PocxrHvr-fy1Tx22hKpzqvyT_h_bPefxvZoopGvuQ4f8x_9GaJ-lKHfCfIBRL_Dul4XvzeNz7Bb35dUGsv-F7di2xsticL0jsK_ntG63lsb4/s320/Paris2.PNG" width="320" /></a></div><br />The two opening paragraphs of the article this post is all about should really catch the attention of all IB Higher level and Standard level candidates (and, teachers IMO). Section 2.8 of the new (current) syllabus is "Market failure—externalities and common pool or common access resources". Candidates are expected to know how to clearly and with the use of appropriate diagrams explain negative externalities of production as well as common access resources and to also explain responses that include <b>international agreements</b>. <p></p><p>Of particular interest and significance is <i>the next</i> learning outcome which is an AO3. AO3 means that these topics can feature in questions that use as command terms 'evaluate', 'discuss' and 'examine', typical in part (b) of Paper 1 (HL&SL) essays where <b>real world examples are expected</b> (and will make the difference in allocating marks). Here is the learning outcome: "Strengths and limitations of government policies to correct externalities and approaches to managing common pool resources including:...degree of effectiveness'. The syllabus continues with this AO3 learning outcome: Importance of international cooperation" that includes "Challenges faced in international cooperation" as well as "Monitoring, enforcement".</p><p>It should be clear from the above that IB Economics students (HL&SL) should invest some time on studying the 2015 <b>Paris Agreement</b> as they should be able to present, explain <i>and evaluate / discuss</i> this agreement as a most important 'example' of <i>international cooperation</i> (you can read the official agreement <a href="https://unfccc.int/sites/default/files/english_paris_agreement.pdf" target="_blank">here</a> and read about it in a nutshell from the UNCC <a href="https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement" target="_blank">here</a>). </p><p>The article I was referring to in the opening sentence of this post was published in <a href="https://www.foreignaffairs.com/" target="_blank">Foreign Affairs</a>. It is by <a href="https://economics.yale.edu/people/faculty/william-nordhaus#quickset-people_tabs_0" target="_blank">William Nordhaus</a>, who received in 2018 the Nobel Prize "<i>for integrating climate change into long-run macroeconomic analysis</i>" (see also <a href="https://williamnordhaus.com/" target="_blank">this</a> to get an idea about his most impressive career/work and interests). The article is titled "<a href="https://www.foreignaffairs.com/articles/united-states/2020-04-10/climate-club?utm_medium=newsletters&utm_source=fatoday&utm_campaign=What%20America%20Owes%20the%20Uyghurs&utm_content=20210716&utm_term=FA%20Today%20-%20112017" target="_blank">The Climate Club: How to Fix a Failing Global Effort</a>". These are the opening paragraphs:</p><blockquote><p>Climate change is the major environmental challenge facing nations today, and it is increasingly viewed as one of the central issues in international relations. Yet governments have used a flawed architecture in their attempts to forge treaties to counter it. The key agreements, the 1997 Kyoto Protocol <i>and the 2015 Paris climate accord, have relied on voluntary arrangements, which induce free-riding that undermines any agreement</i>.</p><p><i>States need to</i> reconceptualize climate agreements and <i>replace the current flawed model with an alternative that has a different incentive structure</i>—what I would call the “Climate Club.” <i>Nations can overcome the syndrome of free-riding in international climate agreements if they adopt the club model and include penalties for nations that do not participate. Otherwise, the global effort to curb climate change is sure to fail</i>.</p></blockquote><p>The problem with the Paris Agreement is that after 25 "<a href="https://www.un.org/en/climatechange/cop26" target="_blank">climate meetings (COPs</a>) (and <a href="https://unfccc.int/process/bodies/supreme-bodies/conference-of-the-parties-cop" target="_blank">here</a>) there is very little progress in meeting the goals as "there is no binding international agreement on climate change". </p><p>As mentioned in the title of this post, at the heart of the problem is the 'syndrome of free riding':</p><blockquote><p>The reason is free-riding, spurred by the tendency for countries to pursue their national interests. Free-riding occurs when a party receives the benefits of a public good without contributing to the costs. In the case of international climate change policy, countries have an incentive to rely on the emission reductions of others without making costly domestic reductions themselves.</p></blockquote><blockquote><p>Nations have failed to stop nuclear proliferation, overfishing in the oceans, littering in space, and transnational cybercrime. </p></blockquote><p>and, Nordhaus continues:</p><blockquote><p>When it comes to climate change policies today, nations speak loudly but carry no stick at all.</p></blockquote><p>Are we doomed? Are there 'solutions' as a dear colleague likes saying? </p><blockquote><p>The key to an effective climate treaty is to change the architecture, from a voluntary agreement to one with strong incentives to participate. </p><p>Successful international agreements function as a kind of club of nations. Although most people belong to clubs, they seldom consider their structure. A club is a voluntary group deriving mutual benefits from sharing the costs of producing a shared good or service. The gains from a successful club are sufficiently large that members will pay dues and adhere to club rules to get the benefits of membership.</p><p>The principal conditions for a successful club include that there is a public-good-type resource that can be shared (whether the benefits from a military alliance or the enjoyment of low-cost goods from around the world); that the cooperative arrangement, including the costs or dues, is beneficial for each of the members; that nonmembers can be excluded or penalized at relatively low cost to members; and that the membership is stable in the sense that no one wants to leave.</p></blockquote><p>So, what are the conditions?</p><blockquote><p>The first is that participating countries would agree to undertake harmonized emission reductions designed to meet a climate objective (such as a two-degree temperature limit). The second and critical difference is that nations that do not participate or do not meet their obligations would incur penalties. </p></blockquote><p>Please, <b>do read the article for the specifics that Nordhaus proposes</b>.</p><p>And, do jot down a few points to remember in a May or November IB Economics exam.</p><p>Remember, that questions relating to issues of global importance are always sought by examiners / question-setters. It only makes sense. </p><p>PS: You could also read about the main points of the Nordhaus article </p><blockquote><p><br /></p></blockquote><p><br /></p><p><br /></p><blockquote><p><br /></p></blockquote><p><br /></p>constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com0tag:blogger.com,1999:blog-5734943477593786790.post-25965825636060770572021-10-18T12:56:00.001+03:002021-10-18T12:56:09.909+03:00Maxims for thinking analytically<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi4g4TMhReQ_Gtb2OlXYXuXKtAkakyNB5I6NstqRnmWuCzLg0nFVxuIVLMNVHub8ZUCOspQjgDi7PiHyLN16M9G5b8VVOyHOOu7AzrQyFckd_gFWkL9IxpqOqkPAILSHf8IYo6sZwxwmpw/s1024/Zeckhauser+maxims.PNG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1024" data-original-width="671" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi4g4TMhReQ_Gtb2OlXYXuXKtAkakyNB5I6NstqRnmWuCzLg0nFVxuIVLMNVHub8ZUCOspQjgDi7PiHyLN16M9G5b8VVOyHOOu7AzrQyFckd_gFWkL9IxpqOqkPAILSHf8IYo6sZwxwmpw/s320/Zeckhauser+maxims.PNG" width="210" /></a></div><br />A very interesting book recently came to my attention while I was visiting the US. It's title is "<i>Maxims for Thinking Analytically: The Wisdom of Legendary Harvard Professor Richard Zeckhauser</i>". It is exactly what the title suggests. I managed to read only about half of it as I bought it only a couple of days before my return flight so I had to mail it back home together with quite a few other books I had purchased (max 23 kilos allowed...). Still, not here...<br /><br />I can't wait to get it and finish reading it. Easy to read but forces you to reflect and to often re-evaluate decisions made without deeper thinking.<p></p><p>This is from a post in Jeffrey Frankel's blog <a href="https://www.belfercenter.org/publication/maxims-richard-zeckhauser-and-errors-commission" target="_blank">Views on the Economy and the World</a> (Frankel, a renowned macroeconomist, is a colleague of Zeckhauser at Harvard) on this book:</p><blockquote><p style="background-color: white; box-sizing: inherit; color: #1e1e1e; font-family: Merriweather, serif; font-size: 16px; margin: 0px 0px 20px;">I recommend it highly. This is not a collection of tangential papers published together in someone’s honor. Rather each chapter consists of an immortal maxim of Richard’s together with applications to real-world decision-making, whether at the personal or public-policy level. There are 19 such pithy insights, such as “Think probabilistically about the world,” or “Good decisions sometimes have poor outcomes,” or “Eliminate regret.” Dan skillfully weaves into each of his chapters concise contributions from a big set of Zeckhauser-admirers, including Max Bazerman, Jason Furman, Hsien Loong Lee, Jennifer Lerner, Barry Nalebuff, Larry Summers, among many others. My own contribution is to Chapter 10. Richard’s 10th maxim is: “Errors of commission should be weighted the same as errors of omission.” </p></blockquote><p>Worth reading the rest of Frankel's post and, of course, buying and reading Zeckhoauser's book!</p>constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com0tag:blogger.com,1999:blog-5734943477593786790.post-52917564406052829042021-09-04T05:20:00.002+03:002021-09-04T05:21:49.110+03:00The national debt expressed as a proportion of GDP - and the Furman & Summers point (among lots of other interesting points for IB Economics students) <p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjo1yn8zXJi8CPAfcM7JTKy6gM5SmfAP7eqz1xEUg_i4yJr694akQpzWGu4AnYpnnyTGm4-vAyT6oiWQ6dVphsAkacjWHjyMcIIxtGOBa9Kcf69v1jVo3dOX1P9cPucD2uwjbh-dqbOUfQ/s799/Furman.PNG" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="476" data-original-width="799" height="191" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjo1yn8zXJi8CPAfcM7JTKy6gM5SmfAP7eqz1xEUg_i4yJr694akQpzWGu4AnYpnnyTGm4-vAyT6oiWQ6dVphsAkacjWHjyMcIIxtGOBa9Kcf69v1jVo3dOX1P9cPucD2uwjbh-dqbOUfQ/s320/Furman.PNG" width="320" /></a></div><p></p><div>From my experience (not though from last year as all my classes were online) incorporating podcasts in teaching IB economics can be very effective. The podcast must of course be at an appropriate level for students taking IB HL (or, SL) economics.</div><div><br /></div><div>In addition, at least in my opinion, the teacher must only focus on specific bits of the podcast, either to start a classroom discussion on a specific issue of interest, or to assign homework that expects students to explain or evaluate a position expressed in the podcast. Focusing on bits is absolutely necessary if the podcast is long and/or if segments of it become too involved for their level.</div><div><br /></div><div><a href="https://www.mercatus.org/scholars/david-beckworth" target="_blank">David Beckworth</a>, a senior fellow at the <a href="https://www.mercatus.org/" target="_blank">Mercatus Center at George Mason University</a>, hosts the <a href="https://www.mercatus.org/bridge/tags/macro-musings" target="_blank">Macro Musings Podcasts</a> which are always excellent (for teachers) and sometimes appropriate (at least bits of them) for IB Economics students.</div><div> </div><div>One recent very interesting podcast was an interview of Jason Furman titled <a href="https://www.mercatus.org/bridge/podcasts/06282021/jason-furman-overheating-inflation-and-fiscal-policy-era-low-interest-rates" target="_blank">Jason Furman on Overheating, Inflation, and Fiscal Policy in an Era of Low Interest Rates</a> . </div><div><br /></div><div>Jason Furman is a senior fellow at the <a href="https://www.piie.com/" target="_blank">Peterson Institute for International Economics</a> and a professor of the practice of economic policy jointly at the <a href="https://www.hks.harvard.edu/" target="_blank">Kennedy School of Government</a> and at the department of economics at Harvard University.</div><div><br /></div><div>In this interview Furman, prompted by Beckworth, starts by explaining the two things that are a concern to him if inflation accelerates (namely that real wages decrease exacerbating inequality and the risk of recession if the central bank raises interest rates too quickly); he continues explaining the importance of anchored inflationary expectations (and there’s lots of discussion with Beckworth on the debate about whether inflation in the US is now transitory/temporary or persistent - in which case the central bank must start worrying); he also makes the case why a higher than 2% inflation target (perhaps even 4% even though Furman likes 3%) may be preferable – it gives policymakers more flexibility plus, given sticky nominal wages, the resulting decrease in the real wage will permit employment levels to be maintained; and then gets into some more esoteric issues (that are not accessible to IB Economics students in my opinion).</div><div><br /></div><div>What is though most interesting for IB economics students (higher level only) is found later on in their conversation when Furman presents the paper he co-authored with Larry Summers “A Reconsideration of Fiscal Policy in the Era of Low Interest Rates". </div><div><br /></div><div>This is the paragraph that is worth some discussion given that the <b>new IB Economics syllabus</b> has now included a discussion of what a sustainable level of national debt is and explicitly expects students to know that the size of the national debt should be expressed as a percentage of GDP (“<i>Measurement of government (national) debt as a percentage of GDP</i>”). This of course makes sense…</div><div>but, Furman goes on saying that:</div><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><div style="text-align: left;">…our biggest argument is that debt-to-GDP is a misleading metric because debt is a stock. It's what you have at a point in time. Income is a flow. If you compare your debt to today's income, it's incredibly high. If you compare it to your income over the course of the next decade, it's a whole lot lower. That's more than just a cutesy observation when you combine it with the fact that interest rates have fallen on a sustained basis. You look across the G7 and the real interest rate has fallen from about 4%, 30 years ago, to around 0%, just prior to the pandemic. And that means that you can, from a fiscal sustainability perspective, pay your debt off over a longer period of time…</div></blockquote><div>and continues by explaining…</div><blockquote style="border: none; margin: 0px 0px 0px 40px; padding: 0px;"><div style="text-align: left;">So we (F&S) argue that the right way to look at it is from a flow-flow perspective. What's the flow you need to pay each year, and what's the flow of income you have each year. We go a little bit further into a place that I don't haven't noticed others do, but maybe they have. I'm sure somebody has. Which is that the relevant way to think about interest is the real interest payments. If you're in a world of higher inflation, you're inflating away more of your debt. You don't mind the portion of interest that's just covering inflation. What your mind is the portion above and beyond that. And so, our preferred metric for fiscal sustainability is looking at real debt service as a share of GDP.</div></blockquote><div><br /></div><div>This Furman & Summers point about the right metric to judge the sustainability of a country’s debt can be explained I think to IB HL economics students. If explained and if understood then (strong) candidates could incorporate the discussion in a debt related paper 1 question related to debt sustainability. I think that could push their response easily towards a Level 5. </div><div><br /></div>constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com0tag:blogger.com,1999:blog-5734943477593786790.post-30150144934513322972021-08-01T12:37:00.000+03:002021-08-01T12:37:06.612+03:00All about investing (interesting for IB Economics students but NOT in the new IB Economics Syllabus)<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgAWPQnYzRlkyTAf0ReE7Y_UrqhyrpU5NeSiQa1MA_p0FO_mZ0aHSQSs1hFPssKnOO1-1PUU4_qMhnZF7YAqVeq_ixXeQ11zqc7qbH0VceXvKsZTV15KzFG0YTmwRRc7Me-LGbBqWnIP94/s1173/investing2.PNG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="865" data-original-width="1173" height="148" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgAWPQnYzRlkyTAf0ReE7Y_UrqhyrpU5NeSiQa1MA_p0FO_mZ0aHSQSs1hFPssKnOO1-1PUU4_qMhnZF7YAqVeq_ixXeQ11zqc7qbH0VceXvKsZTV15KzFG0YTmwRRc7Me-LGbBqWnIP94/w200-h148/investing2.PNG" width="200" /></a></div> Throughout these past years, students have invariably been asking to devote some time to issues of (financial) investment. They all want to know more about the stock market, how stock prices are determined, bonds, cryptocurrencies, you name it. I don't have the time to spend more than perhaps a period on these questions which is a pity. It is perhaps the only questions I do not (try at least) to provide an answer.<p></p><p>So, I was pleasantly surprised today when I found out that there is a series of short 'lessons' for high school students on exactly this stuff. <br /></p><p>It is the Planet Money 2021 Summer School series and you may find the first episode on <a href="https://www.npr.org/2021/07/28/1021770148/planet-money-summer-school-1-the-stock-market?utm_term=nprnews&utm_content=bufferef794&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer&fbclid=IwAR06Kwp7VPT5k5IAWAMhfKs2M4CFvjmbIsNeGd_wrB5N0dHPKP92GFRAGgw" target="_blank">the Stock Market here</a>.</p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi-Akr9WFlq6V1uiuZLBuzlk0ooUHZHYdhyphenhyphenBlAyZpkf6rwlc8IKD08Xx7Qw5Dp2YBB5BAw-3tmKQPEZfS6O7IEcFcS7aRm8YFGTUKWL8uoxd9GiZwepWyTmcm0UMscG1O2EipNzIlPacLA/s2048/Housing+shortage+2.PNG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1051" data-original-width="2048" height="103" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi-Akr9WFlq6V1uiuZLBuzlk0ooUHZHYdhyphenhyphenBlAyZpkf6rwlc8IKD08Xx7Qw5Dp2YBB5BAw-3tmKQPEZfS6O7IEcFcS7aRm8YFGTUKWL8uoxd9GiZwepWyTmcm0UMscG1O2EipNzIlPacLA/w200-h103/Housing+shortage+2.PNG" width="200" /></a></div><br />Planet Money has also many episodes that directly link to the new IB Economics Syllabus requirements like this most recent one on <a href="https://www.npr.org/2021/07/30/1022827659/three-reasons-for-the-housing-shortage" target="_blank">three reasons for the housing shortage</a> in the US but the new Paper 1 requires real world examples and some of what is explained applies elsewhere. The issue would relate to maximum prices (price ceilings), in this case why in many cities rent controls are imposed or discussed/ debated.<p></p><p>Planet Money has many episodes that are of direct interest to our IB Economics Syllabus. Check out past episodes <a href="https://www.npr.org/podcasts/510289/planet-money" target="_blank">here.</a></p>constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com0tag:blogger.com,1999:blog-5734943477593786790.post-49844207960582516842021-07-18T18:49:00.004+03:002021-07-19T20:00:04.513+03:00A primer on inflation: A must read for all IB Economics students<p> </p><p class="MsoNormal"><a href="https://www.stlouisfed.org/education/page-one-economics-classroom-edition" target="_blank"></a></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhio1yKt4hIjkTHtdhK3xyhR704DVKydTeDlanMM8TRwxpzWtPzVc7Y7a-wQW-MpLP3l-IgCSCjGBzZrWWJmPXG63f96YsFObwTtTNZUnwUjvNPYyAcN1kBfosun7M9tSJo_uP97w7ERaI/s1963/Page+One+St+Louis.PNG" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="361" data-original-width="1963" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhio1yKt4hIjkTHtdhK3xyhR704DVKydTeDlanMM8TRwxpzWtPzVc7Y7a-wQW-MpLP3l-IgCSCjGBzZrWWJmPXG63f96YsFObwTtTNZUnwUjvNPYyAcN1kBfosun7M9tSJo_uP97w7ERaI/s320/Page+One+St+Louis.PNG" width="320" /></a></div><br />Page One Economics is a tremendous resource for IB Economics teachers and students.<span style="mso-spacerun: yes;"> </span>I’ve been using it for a number of years, and
I always look forward to a new edition. The latest one <a href="https://files.stlouisfed.org/files/htdocs/publications/page1-econ/2021/07/15/inflation-expectations-the-phillips-curve-and-the-feds-dual-mandate_SE.pdf" target="_blank">Inflation Expectations, the Phillips Curve and Fed's Dual Mandate </a>written by Jane Ihrig, Ekaterina Peneva, and Scott A. Wolla is a jewel for us.<o:p></o:p><p></p>
<p class="MsoNormal">It starts off by clearly explaining what is meant by price
stability. Price stability is one of the main goals of macroeconomic policy.
Interestingly, it does not mean zero inflation.<span style="mso-spacerun: yes;">
</span>Instead, the Federal Reserve (the US central Bank), as well as all
central banks, considers that “a moderate, stable and <i>positive </i>rate of
inflation is most consistent with its price stability mandate.” Why not target
zero (0%) inflation?<span style="mso-spacerun: yes;"> </span>It is explained
beautifully in the article.<span style="mso-spacerun: yes;"> </span>To protect
the economy from deflation is one reason (deflation is when the average price
level is decreasing which induces households to postpone purchases and thus forces
firms to cut wages and/or jobs leading to a deflationary spiral).<span style="mso-spacerun: yes;"> </span>The rate of inflation cannot be pinned at any
level but tends to fluctuate, so entering negative territory is to be avoided. Also,
there is an upward bias in measuring inflation meaning that if measured
inflation is 0.5%, it could actually be minus 0.4% having entered deflation
territory (see the <a href="https://www.amazon.co.uk/Economics-Diploma-Coursebook-Digital-Access/dp/1108847064/ref=pd_lpo_1?pd_rd_i=1108847064&psc=1" target="_blank">Ellie Tragakes IB Economics textbook </a>on this overestimation bias or the Oxford Economics Study Guide).<span style="mso-spacerun: yes;"> </span>In addition, if inflation is extremely low for
a long period, typically interest rates are also close to zero leaving no room
for an interest rate cut if the economy faces the risk of recession.<span style="mso-spacerun: yes;"> </span>This is the ZLB ('zero lower bound' problem –
see the new <a href="https://www.amazon.co.uk/Oxford-IB-Study-Guides-Economics/dp/1382009429/ref=sr_1_3?dchild=1&keywords=ziogas+economics+study+guide+OUP&qid=1626600730&sr=8-3" target="_blank">Oxford IB Economics Study Guide</a> for a brief explanation of this).<span style="mso-spacerun: yes;"> </span>So, what do central banks mean by ‘price
stability’?<span style="mso-spacerun: yes;"> </span>If 0% inflation was not
desirable as a target, what rate of inflation should central banks aim for? We
know that high inflation is costly for many reasons.<span style="mso-spacerun: yes;"> </span>Inflation decreases the purchasing power of
all households with fixed money incomes (like wage earners or pensioners); it
increases income inequality as low income individuals can only save any income
they do not spend in bank savings accounts where the real interest rate earned (their real return of return) may be negative (remember, the <a href="https://www.ecb.europa.eu/explainers/tell-me/html/nominal_and_real_interest_rates.en.html" target="_blank">real interest rate</a> is the nominal
interest rate minus (expected) inflation) and they cannot borrow to
purchase (invest in) assets whose market value is expected to rise faster than inflation
(while richer folk can invest in real estate, art, gold, etc.); it distorts the
signaling power of relative price changes leading to allocative inefficiency; it leads to increased uncertainty that stifles investment and it renders exports
less competitive in foreign markets, among other costs.<span style="mso-spacerun: yes;"> </span>Where does this leave us? Well, the Fed, as
most central banks did, gravitated to a 2 percent ‘healthy compromise’. So, for
most central banks their announced target has been to achieve and maintain inflation
“<i>below</i>, <i>but close to 2 percent</i>”.<span style="mso-spacerun: yes;"> </span>The 2%
target has become the orthodoxy despite being a rather arbitrary choice.<span style="mso-spacerun: yes;"> </span>The story behind the choice is actually <a href="https://www.nytimes.com/2014/12/21/upshot/of-kiwis-and-currencies-how-a-2-inflation-target-became-global-economic-gospel.html" target="_blank">pretty funny</a>. <o:p></o:p></p>
<p class="MsoNormal">The St. Louis article, after explaining why now the US
central Bank has chosen the Personal Consumption Expenditures Price Index (PCEPI) over the CPI
(from my understanding the PCEPI also corrects for the substitution bias that plagues
the CPI – note here that IB Economics students should stick with the CPI as it is
the CPI that is in the new IB syllabus), continues with a short but <u>beautiful exposition</u> of the
Phillips Curve which all IB Economics students should read.<span style="mso-spacerun: yes;"> </span>The Phillips Curve reflects that (at least in
the short run) there is a trade off between inflation and unemployment </p><p class="MsoNormal"><i></i></p><blockquote><i>"which policymakers considered when setting monetary policy: They could pursue an economy with lower unemployment if they were willing to accept higher inflation. Conversely, if policymakers wanted to pursue lower inflation, they would have to accept higher unemployment and lower economic activity</i>."</blockquote><p></p><p class="MsoNormal">Interestingly enough this “tradeoff has
weakened”.<span style="mso-spacerun: yes;"> </span>There is evidence that the “Phillips
Curve has flattened”<span style="mso-spacerun: yes;"> (see <a href="https://research.stlouisfed.org/publications/review/2020/05/01/is-the-phillips-curve-still-alive" target="_blank">"Is the Phillips Curve alive?"</a>) </span>which allows them
to pursue lower unemployment without having to accept higher inflation.” Now,
in the US, “…policymakers are willing to allow employment to expand as long as
inflation expectations are anchored around the 2 percent target.” <o:p></o:p></p>
<p class="MsoNormal">The important phrase to note from the last quote is the
phrase ‘… <b>inflation expectations are anchored</b>’. Expectations about future
inflation are perhaps the most important determinant of inflation.<span style="mso-spacerun: yes;"> </span>Why? Because “they influence<span style="mso-spacerun: yes;"> </span>peoples’ decisionmaking <i>today</i>, which then
impacts <i>future </i>inflation.”<span style="mso-spacerun: yes;"> </span>Read the box
on page 4 of the St. Louis article as this is explained in a way that all IB Economics
students will understand. If a firm
believes that inflation will be around 2% this year and next year and the year
after, it will increase its prices and wages by 2%, and based on this
expectation, plan its investments. Similarly with households. It follows that if expectations are anchored at
2% then inflation will indeed prove to be 2%. </p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">This brings us to my earlier July 2 post on the
<a href="https://www.blogger.com/blog/post/edit/5734943477593786790/7309327118768851164" target="_blank">Summers-Krugman inflation debate </a>where Krugman distinguishes between '<i>transitory</i>' inflation and ‘<i>hard core</i>’
inflation.<span style="mso-spacerun: yes;"> </span>I mentioned in the earlier
post Krugman’s definition of transitory inflation as “easy come, easy go” but you
will find a fuller explanation in the box titled “What is transitory inflation”
on page 5.<span style="mso-spacerun: yes;"> </span>You will then understand why
the Fed has recently slightly changed its target to what is referred to as “flexible
<i>average</i> inflation target” <span style="mso-spacerun: yes;"> </span>(FAIT).<span style="mso-spacerun: yes;"> </span>Inflation can now exceed 2%, as long as, on the
average, it remains at 2%. This really boils down to as long as peoples’ expectations
about future inflation remain anchored at 2% and a higher rate of inflation
does not become ‘embedded’ in their expectations.<span style="mso-spacerun: yes;"> </span><o:p></o:p></p>
<p class="MsoNormal">This St. Louis article is a great resource for not just my but for all IB
Economics students.<span style="mso-spacerun: yes;"> </span>Not only will it
help them better understand inflation and policymaking (remember the Paper 3 new ‘<i>recommend a policy</i>’
part) but also provide them with plenty of real world information to satisfy a
number of possible Paper 1 macroeconomics questions.<o:p></o:p></p>
<p class="MsoNormal">Please read the St. Louis Page One Economics article!<o:p></o:p></p>
<p class="MsoNormal"><span style="mso-spacerun: yes;"> </span><o:p></o:p></p>constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com0tag:blogger.com,1999:blog-5734943477593786790.post-22994347599462229622021-07-10T21:41:00.002+03:002022-03-07T11:56:50.625+02:00IB Economics New Syllabus Paper 3 (micro calculations)<p> </p><h3 style="text-align: left;">Focus on micro P3 calculation topics (new IB Economics syllabus)</h3><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">The new IB Economics syllabus has changed quite significantly
concerning Paper 3.<span style="mso-spacerun: yes;"> </span>In terms of microeconomics
related calculations, there are significantly fewer.<span style="mso-spacerun: yes;"> </span>No need to bother anymore with linear demand and
supply functions (a good development IMO, since candidates taking any IB math level know how to fool around with linear functions and many of the related calculations in past paper 3 questions could often be solved by inspection - no need even for a simple calculator); no need to fool around with fixed and variable costs and their averages (which
again I think proved of little value); and, focusing on micro questions only, no need to know how to calculate MP, AP
and TP from tables (data) or from diagrams.<span style="mso-spacerun: yes;"> </span>IB Economics candidates now need to know what
marginal whatever and average whatever are (HL only), and this is achieved in the new syllabus from requiring them to understand how
to play (make calculations) only with MC, AC, MR, AR and also TR (from data tables). </p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">The new IB economics syllabus includes the following (micro related) calculations:<o:p></o:p></p>
<p class="MsoNormal"></p><blockquote><p class="MsoNormal">Calculation (HL only): consumer surplus and producer surplus
from a diagram<o:p></o:p></p>
<p class="MsoNormal">Calculation: PED, change in price, quantity demanded or total
revenue from data provided<o:p></o:p></p>
<p class="MsoNormal">Calculation: YED, change in income, quantity demanded from
data provided<o:p></o:p></p>
<p class="MsoNormal">Calculation: PES, change in price or quantity supplied from
data provided<o:p></o:p></p>
<p class="MsoNormal">Calculation (HL only): the effects on markets and stakeholders
of:<o:p></o:p></p>
<p class="MsoNormal">• price ceilings (maximum prices) and price floors (minimum prices)<o:p></o:p></p>
<p class="MsoNormal">• indirect taxes and subsidies.<o:p></o:p></p>
<p class="MsoNormal">Calculation (HL only): welfare loss from a diagram<o:p></o:p></p>
<p class="MsoNormal">Calculation (HL only): profit, MC, MR, AC, AR from data</p></blockquote><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">I will try to upload here some examples for these topics, taken mostly from
my OUP Economics Skills and Practice volume.<o:p></o:p></p>
<h3 style="text-align: left;">BUT…</h3><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgRG7oGZw5t9W24Zv_4BSQYgVjxiEYpowKdsxt3hXAJ9_SF5DVn4mdZtcll_8C-1u_bu9U9tgDWxUwxWSi4EZMWs2lJf9tVbfP6txiAvZHTu1LC8_XGHDVMb5flEQ8-Jr3HGyyGY-dpx6Y/s931/GST.PNG" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="444" data-original-width="931" height="96" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgRG7oGZw5t9W24Zv_4BSQYgVjxiEYpowKdsxt3hXAJ9_SF5DVn4mdZtcll_8C-1u_bu9U9tgDWxUwxWSi4EZMWs2lJf9tVbfP6txiAvZHTu1LC8_XGHDVMb5flEQ8-Jr3HGyyGY-dpx6Y/w200-h96/GST.PNG" width="200" /></a></div><br />To me, the trickiest point perhaps that (HL) IB economics candidates should
have in mind relates to indirect taxation.<span style="mso-spacerun: yes;">
</span>It is very simple, but it differs a bit from the treatment in the old
syllabus.<span style="mso-spacerun: yes;"> </span>The new economics syllabus is
not explicit about this (correct) twist but if one checks out the specimen
paper 3 provided to all teachers (and thus to all students) you’ll see what I
mean and why all HL IB economics candidates must have this in mind {see specimen question 2a(ii)}.<o:p></o:p><p></p>
<p class="MsoNormal">Assume I went out to buy myself a shirt.<span style="mso-spacerun: yes;"> </span>I come back home and my wife asks me how much
did I pay.<span style="mso-spacerun: yes;"> </span>I reply that I paid 93
euros.<span style="mso-spacerun: yes;"> </span>The tax rate (VAT) in Greece is (unfortunately)
24% on most items. (a GST or sales tax in other countries)<o:p></o:p></p>
<p class="MsoNormal">The questions are:<o:p></o:p></p>
<p class="MsoNormal">(a) how much was the tax paid (in euros)<o:p></o:p></p>
<p class="MsoNormal">(b) what was the price of the shirt I bought <i><u>net</u></i> of tax (i.e. <i><u>before</u></i>
the VAT/sales tax was applied).<o:p></o:p></p>
<p class="MsoNormal">We must realize that the 93 euros I paid included the
tax.<span style="mso-spacerun: yes;"> </span>So how do we go about answering the
above questions?<o:p></o:p></p>
<p class="MsoNormal">First some notation. Let:<o:p></o:p></p>
<p class="MsoNormal"></p><blockquote><p class="MsoNormal">* P(wt) be the price paid (say, for the shirt) <b>w</b>ith the
<b>t</b>ax <o:p></o:p></p>
<p class="MsoNormal">* t be the tax rate; in this case, say 24%<o:p></o:p></p>
<p class="MsoNormal">* Po be the price (of the shirt) net of tax i.e., before the
24% tax was applied</p></blockquote><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">Then it should be that:<o:p></o:p></p>
<p class="MsoNormal">P(wt) = Po + tPo (i.e., the net of tax price plus the amount
of the tax paid on the item)<o:p></o:p></p>
<p class="MsoNormal">P(wt) = Po (1+t)<o:p></o:p></p>
<p class="MsoNormal">So Po = P(wt) / (1+t)<o:p></o:p></p>
<p class="MsoNormal">Using our figures:<o:p></o:p></p>
<p class="MsoNormal">Po = 93/1.24 So Po = 75 euros (this is the net of tax price of the shirt on which the 24% sales tax was applied)<o:p></o:p></p>
<p class="MsoNormal">And thus, the tax I paid on the shirt I bought was P(wt) –
Po or, 93 – 75 = 18 euros<o:p></o:p></p>
<p class="MsoNormal">(or equivalently, tPo= 0.24*75 = 18 euros)</p><p class="MsoNormal">I will try
to post on a regular basis not only articles on issues that may be of interest
to IB Economics students but also questions that I will construct, mostly P3
questions and P2 questions that may help.<span style="mso-spacerun: yes;"> </span>I’ll also
try to provide some insights on Paper1, part(b), questions, focusing mostly on
the role of investigations that IB economics candidates should now regularly undertake in their classes to
be able to effectively <b>use</b> real world example<b>s</b> (note the plural and the verb ‘use’
– not list or mention) in their responses.<o:p></o:p></p>
<p class="MsoNormal"><o:p> </o:p></p>constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com0tag:blogger.com,1999:blog-5734943477593786790.post-39128514072315417242021-07-06T16:49:00.003+03:002021-07-07T14:49:31.195+03:00This is great for IB economics kids (and, not only)<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjAZUIcF7OvfmQ6XhvdCXcPF78c_FMOjcJDUEsZgxXFmjsrpTrSGMuXFMK47hgHmc7CaIYw8TEypG9KFI0FoxzBCgqia2K4TfDS2om152J6m7OT_FqFjaQY88akQHm30098NPr30am_BU0/s617/Our+world+in+data.PNG" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img alt="Our World In Data" border="0" data-original-height="407" data-original-width="617" height="132" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjAZUIcF7OvfmQ6XhvdCXcPF78c_FMOjcJDUEsZgxXFmjsrpTrSGMuXFMK47hgHmc7CaIYw8TEypG9KFI0FoxzBCgqia2K4TfDS2om152J6m7OT_FqFjaQY88akQHm30098NPr30am_BU0/w200-h132/Our+world+in+data.PNG" title="Foe Economics Extended Essays and Internals" width="200" /></a></div><br />Our World in Data has tons of information on a myriad of variables where all IB (not just Economics candidates) will find stuff they are interested in. For example:<p></p><p><a href="https://ourworldindata.org/outdoor-air-pollution" target="_blank">On outdoor air pollution</a><br /></p><p><a href="https://ourworldindata.org/child-mortality" target="_blank">On child and infant mortality</a><br /></p><p><a href="https://ourworldindata.org/life-expectancy" target="_blank">On life expectancy</a><br /></p><p><a href="https://ourworldindata.org/smoking" target="_blank">On smoking</a><br /></p><p><a href="https://ourworldindata.org/alcohol-consumption" target="_blank">On alcohol consumption</a><br /></p><p><a href="https://ourworldindata.org/fossil-fuels" target="_blank">On fossil fuels</a><br /></p><p><a href="https://ourworldindata.org/homelessness" target="_blank">On homelessness</a><br /></p><p><a href="https://ourworldindata.org/happiness-and-life-satisfaction" target="_blank">On happiness and life satisfaction</a><br /></p><p>and on much more</p><p>You can fool around <b>here</b>: <a href="https://ourworldindata.org/#entries" target="_blank">Our World in Data</a></p>constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com1tag:blogger.com,1999:blog-5734943477593786790.post-31365712300661415712021-07-06T14:12:00.001+03:002021-09-22T14:49:57.649+03:00Preannounced sales tax increases as a form of unconventional expansionary fiscal policy<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgc8LiVqc6bec8bsE8YO2xzuba0gWFmiFo7nWpdRAWEiIXeXHqKXW4yZGApt_IQyRdRZwDw0hcUE8S2uWtzgJZsKK4dTRJWPxVtLANv_GFUHI34DM5dT1DSBlC92OeqG4oDAWgKswGtx10/s460/saletaxxx.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="430" data-original-width="460" height="187" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgc8LiVqc6bec8bsE8YO2xzuba0gWFmiFo7nWpdRAWEiIXeXHqKXW4yZGApt_IQyRdRZwDw0hcUE8S2uWtzgJZsKK4dTRJWPxVtLANv_GFUHI34DM5dT1DSBlC92OeqG4oDAWgKswGtx10/w200-h187/saletaxxx.jpg" width="200" /></a></div><br />Fiscal policy is a short run demand
management stabilization policy that includes changes in government
expenditures (G) and/or in taxes (T). Mind you that it is changes in <b>direct</b> taxes that are considered part of the
fiscal policy arsenal. More specifically, if an economy is
about to enter, or is in a recession (or suffers from a large negative output gap), then the government can decrease direct
taxes (T). Disposable income (Yd) will increase and thus consumption expenditures (C)
and aggregate demand (AD) will increase leading to an increase in overall economic activity
(remember, disposable income (Yd) is income <i>minus </i>direct taxes <i>plus</i> transfer
payments {so: Yd = Y – T + Tr}, and is not the same as the real income which is money divided by the average price level). On the other hand, if an economy is overheating then
policymakers could increase (direct) taxes so that Yd decreases, decreasing consumption expenditures and thus AD (this analysis could also refer to corporate -profit- taxes but let's keep it simple). <p></p><p class="MsoNormal" style="line-height: normal;"><o:p></o:p></p>
<p class="MsoNormal" style="line-height: normal;">What about changes in <b>indirect
</b>taxes?<span style="mso-spacerun: yes;"> </span>We treat these at the IB
Economics course as possibly affecting the short run aggregate supply.<span style="mso-spacerun: yes;"> </span>If they increase <i>across the board</i> (say, an
increase in a country’s VAT / GST to 20%) this will increase production costs of firms and as
a result decrease the SRAS, shifting it to the left.<span style="mso-spacerun: yes;"> </span>This is the typical impact of a change in indirect taxation on an economy according to the IB Economics syllabus).<o:p></o:p></p>
<p class="MsoNormal" style="line-height: normal; text-align: center;"><b>BUT:</b><o:p></o:p></p>
<p class="MsoNormal" style="line-height: normal;">In a recent paper in the American
Economic Journal: Macroeconomics, titled “<a href="https://www.aeaweb.org/research/sales-tax-shopping-states?fbclid=IwAR0XmvzhIgnOFgTpcRT5jzh_znGLk2t_vyqM3-HiGU2eMWerToMLW30aE-U" target="_blank">Shopping for Lower Sales Tax Rates </a>” the
authors (Scott R. Baker et al.) show that “shoppers do actually adjust spending
on all kinds of items when state or local (sales) taxes change”. They used data
for more than 150,000 households across 40 states to examine whether spending
changed in response to increases in sales taxes (the full paper found <a href="https://www.aeaweb.org/articles?id=10.1257/mac.20190026&&from=f" target="_blank">here</a>).</p><p class="MsoNormal" style="line-height: normal;">The researchers found that “…in the month
before an increase, consumers stocked up on storable goods, like laundry
detergent and alcohol, while they were less expensive.” The same authors find
in another recent paper that <i>car sales increased by over 8% in the month before
a 1% increase in the sales tax rate</i>!<span style="mso-spacerun: yes;"> Click <a href="https://www.nber.org/books-and-chapters/tax-policy-and-economy-volume-33/do-household-finances-constrain-unconventional-fiscal-policy" target="_blank">here</a> for this paper.</span><o:p></o:p></p>
<p class="MsoNormal" style="line-height: normal;">The question is ‘so what?”<span style="mso-spacerun: yes;"> </span>Why would a HL or SL IB Economics candidate
be interested in this finding? Well, the answer is that it provides an
<i>alternative policy choice</i> to policymakers who face the threat of recession
and are constrained by interest rates at, or very close to zero (the ZLB -zero
lower bound- problem) and also by little room for conventional expansionary fiscal
policy.<o:p></o:p></p>
<p class="MsoNormal" style="line-height: normal;"></p><blockquote>"This research suggests
that sales tax adjustments can be a way to stimulate spending at a time when
monetary policymakers can’t turn to lowering interest rates because they are
already near zero."</blockquote><o:p></o:p><p></p>
<p class="MsoNormal" style="line-height: normal;"><b>Policymakers confronted with the
risk of a recession may announce that “..there's going to be a temporary sales
tax cut that's going to be paid for by a sales tax increase in the future” </b></p><p class="MsoNormal" style="line-height: normal;"><b>Their finding imply that this may “induce people to spend more now, buy cars,
or buy other things when they are in the low tax environment”. </b></p><p class="MsoNormal" style="line-height: normal;"><o:p></o:p></p>
<p class="MsoNormal" style="line-height: normal; text-align: center;"><b>NOTE</b><o:p></o:p></p>
<p class="MsoNormal" style="line-height: normal;">If you are to include this finding in a
paper 1 (essay) response, make sure you <b>first</b> clearly explain the
conventional tools for stimulating an economy.<span style="mso-spacerun: yes;">
</span>Only then you can explain this finding making sure you remember to quote the
title of the paper, the journal and one of the authors. <span style="mso-spacerun: yes;"> </span><o:p></o:p></p>
<p class="MsoNormal" style="line-height: normal;">Lastly, an absolutely excellent
short piece on fiscal policy where everything an IB Economics student need to
know is clearly explained is a 2020 article in the (<b>free</b>) IMF journal Finance and
Development titled <a href="https://www.imf.org/external/pubs/ft/fandd/basics/fiscpol.htm" target="_blank">Fiscal Policy: Taking and Giving Away”</a> by Mark Horton and Asmaa El-Ganainy. </p><p class="MsoNormal" style="line-height: normal;">May I remind IB Economics students that they should make sure to subscribe to the <a href="https://www.imf.org/external/pubs/ft/fandd/" target="_blank">Finance and Development</a> IMF publication. It has very many, easy and interesting articles that can help them achieve high grades in exams. </p><p class="MsoNormal" style="line-height: normal;"><o:p></o:p></p>
<p class="MsoNormal" style="line-height: normal;"><br /></p>
<p class="MsoNormal" style="line-height: normal;"><o:p> </o:p></p><br />constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com0tag:blogger.com,1999:blog-5734943477593786790.post-79061906228409587992021-07-04T13:27:00.002+03:002021-07-13T10:40:13.131+03:00Big tobacco: High taxes in the North and their unintended consequences in the South<p> </p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiwxR-fYin5aoSEafRnWohnb4XOeAR-9ia37YKkb1XmoiMrCaZ64EelEeNArB9Ogqypdb74BDQ-3UvRqVGDhwUDXqXuZXvtMzawjYB9qIJpZENYtGW672ZuK3BlP6SnM2b3TW6XMHOxzbs/s2207/Big+tobacco.PNG" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1100" data-original-width="2207" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiwxR-fYin5aoSEafRnWohnb4XOeAR-9ia37YKkb1XmoiMrCaZ64EelEeNArB9Ogqypdb74BDQ-3UvRqVGDhwUDXqXuZXvtMzawjYB9qIJpZENYtGW672ZuK3BlP6SnM2b3TW6XMHOxzbs/s320/Big+tobacco.PNG" width="320" /></a></div>Negative consumption externalities are a most important topic in the new IB economics syllabus. A negative consumption externality arises when the <i>consumption </i>of a good imposes costs on 3rd parties for which they do not get compensated. Tobacco (smoking) and alcohol (drinking) are prime examples. The consumption of both not only harms those who consume these 'goods' but also society at large. <p></p><p>Taxation on alcohol is considered ineffective (but a great way to collect high tax revenues which can also be used to finance other policies aimed at decreasing consumption of these 'demerit' goods). Why won't even a high an indirect tax be effective in lowering consumption of alcohol? Because taxes on alcohol lead to a "<i>chain of substitutions</i>". There are very many different types of alcohol (vodka, whisky, wine, beer, tequila, rum, cider, ouzo, you name it...) and each type has zillions of brands and qualities and thus prices range from very low to extremely high. A high tax on alcohol (say 50%) would induce this "chain of substitutions": many consumers, especially individuals in lower socio-economic status (SES) groups where greater prevalence of harmful alcohol consumption (binge drinking) is documented will simply switch to equally strong but cheaper and often lower quality alcohol or brands. Note though that the <i>minimum unit price</i> (MYP) policy implemented in Scotland and Wales (for which, BTW, you can <u>not</u> use a typical demand and supply diagram that we use to illustrate a minimum price on, say, corn, because the markets for vodka, whisky etc. are not perfectly competitive and there is no supply curve in markets where firms are price setters) is considered <i>most </i>effective especially if complemented by other policies, such as increased education and awareness in the population (note that also some techniques -<i>nudges</i>- associated with behavioral economics have also produced promising results).</p><p>Cigarettes are a different story. Why? Because even though there are again many brands of cigarettes, they are typically sold at roughly the same price. An indirect tax can thus prove effective but <i>only if</i> it is high enough (very high) so that the post-tax price rises to the elastic section of the demand for cigarettes curve. Remember that PED is affected by the number and closeness of available substitutes, whether the good is addictive (tobacco is very addictive) but also, and most importantly, by the proportion of income spent on the good. So a low indirect tax will not lead to a significant decrease in smoking (but it will fill the state's coffers with a lot of tax revenues) and will thus prove ineffective. But a very high tax has a greater chance of proving effective because if smokers continue to smoke as much, their monthly expenditure on cigarettes will become a much too high proportion of their monthly income and many will be forced to cut back and even kick the habit as all are aware of the fact that smoking is a killer. </p><p>But what about 'close substitutes'? That's a big one these days. In order for a tobacco tax to prove effective it must be imposed on all tobacco-related products and this will have to include heat-not-burn nicotine delivery systems (like IQOS, devised and marketed by -take a guess- Philip Morris International, one of the biggest 'big tobacco' companies) and e-cigarettes (like JUULs). In addition, the state must make sure that no illegal markets arise (relatively easy if there is the political will).</p><p>So, assume that with the high taxes that many countries have imposed and with the impact other necessary complementary policies sales of cigarettes do go down in many advanced economies</p><p>Well, unfortunately this would not be the end of the story for the huge tobacco multinationals.</p><p>Watch this (very short): <a href="https://www.youtube.com/watch?v=1m1OMq_4aFo" target="_blank">Big Tobacco Goes South</a> </p><blockquote><p><i>In the search for new consumers, Big Tobacco is setting its sights on markets in the Global South, using the same tactics that hooked smokers in rich countries decades ago. But with weak health-care systems and low regulatory capacity, the developing world will have a harder time fending off the industry’s marketing blitz</i>.</p></blockquote><p>Remember though that in many countries in the South, the State needs high tax revenues to be able to finance pro-development projects: so they are caught between a rock and a hard place...</p><p>PS: I've quit very many years now but the first couple of years of my graduate work in the States I was, unfortunately, a smoker. I still remember when, late one night, I ran out of cigarettes and, not having a car during my 1st year, I called a cab to get to the nearest ‘Store 24’ and buy me a pack. The driver took me there and when he saw what I bought, he remarked “Oh, you went to buy coffin nails, I see’. Still, haven’t forgotten his comment.</p><p><br /></p>constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com1tag:blogger.com,1999:blog-5734943477593786790.post-15426514338936639452021-07-02T20:50:00.003+03:002021-07-05T18:53:42.933+03:00IB Economics: new syllabus: sections 2.11 and 3.4 On market power, possible abuses of and impact on wages and income inequality<p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTq9nlHxXz1zppz20kWuIhjZBRWDvK5Upp1Ku-p_7cKvCrwigJiLCPhRLfzO1_N9BDZRzv5Nq3FnqAbk4Wsb51SRDpt8UXcrZsqHCPO8-ix_n-TlmsOCDdgOJIvrL7giYe_k_ZxNXQNvY/s700/inequality.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="450" data-original-width="700" height="129" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTq9nlHxXz1zppz20kWuIhjZBRWDvK5Upp1Ku-p_7cKvCrwigJiLCPhRLfzO1_N9BDZRzv5Nq3FnqAbk4Wsb51SRDpt8UXcrZsqHCPO8-ix_n-TlmsOCDdgOJIvrL7giYe_k_ZxNXQNvY/w200-h129/inequality.jpg" width="200" /></a></div><br />There is significant emphasis in the new IB Economics syllabus on market power, its abuse and the impact on income distribution. This <a href="https://www.project-syndicate.org/" target="_blank">Project Syndicate</a> video (Project Syndicate a source mostly of great short articles) explains the rise in concentration in many markets and the impact it has had on wages and consequently on income distribution in 2 minutes and 32 seconds. A nice intro perhaps on the risks of market power being abused and also of possible use in student inquiries on market power and income distribution. Very topical of course. We'll be focusing on abuse of market power and on income distribution issues a lot.<p></p><p>Watch here: <a href="https://youtu.be/HnCD6rUdv1Uhttps://youtu.be/HnCD6rUdv1U" target="_blank">The rise of monopsony power</a></p><p><br /></p>constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com0tag:blogger.com,1999:blog-5734943477593786790.post-73093271187688511642021-06-27T12:46:00.005+03:002021-06-27T20:16:51.507+03:00Causes of inflationary pressures and the Summers-Krugman ‘debate’ (useful for the Paper 1(b) real world example requirement)<p> </p><p class="MsoNormal"><o:p> </o:p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhU497HetdHjJ7tER4nleTFIpz6be1boSvmAhvhjXl4362aTXJ3IRYLS9mE9IWj1u7e-2EqeN0Rq5aRvxpuaGIYXRZOvE6_kSUVUU-v6bwdNJMzr6H8QMISDN52sINY-QCJaaGmoFeamoc/s1200/Summers+Krugman.jpg" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="792" data-original-width="1200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhU497HetdHjJ7tER4nleTFIpz6be1boSvmAhvhjXl4362aTXJ3IRYLS9mE9IWj1u7e-2EqeN0Rq5aRvxpuaGIYXRZOvE6_kSUVUU-v6bwdNJMzr6H8QMISDN52sINY-QCJaaGmoFeamoc/s320/Summers+Krugman.jpg" width="320" /></a></div><br /><p></p>
<p class="MsoNormal">Larry Summers is a most respected Harvard economist (check
out <a href="https://siepr.stanford.edu/sites/default/files/people/cv/5257-summers-cv.pdf " target="_blank">here</a> his very impressive cv – BTW, he entered MIT at 16!) <span style="mso-spacerun: yes;"> </span>who has lately been very much in the
news as he fears that inflation is knocking on the US economy’s door as a result of a the $1.9 trillion Biden American Rescue Plan. </p><p class="MsoNormal">Interestingly, Summers had re-introduced in 2013 a depression-era term, ‘<i>secular stagnation</i>' to describe the slow
growth, low interest rates and no sign of inflation that characterized the US
and other advanced economies (see his article titled “Accepting the Reality of
Secular Stagnation” in the March 2020 issue of “FINANCE & DEVELOPMENT” a
free publication of the IMF <i>that all IB Economics students should subscribe to</i>;
link to Summers F&D article <a href="https://www.imf.org/external/pubs/ft/fandd/2020/03/larry-summers-on-secular-stagnation.htm" target="_blank">here</a>). He then claimed that “it may have
become all but impossible to boost growth by using the age-old trick of
lowering interest rates to encourage more investment and consumer spending. The
answer, he argued, was for governments to spend more instead” (see this article
in The Conversation <a href="https://theconversation.com/secular-stagnation-its-time-to-admit-that-larry-summers-was-right-about-this-global-economic-growth-trap-112977">here</a>; see also <a href="http://larrysummers.com/wp-content/uploads/2014/06/NABE-speech-Lawrence-H.-Summers1.pdf" target="_blank">this Summer's article</a>. </p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">But, today, it was perhaps Mr. Summers’ <i>Washington
Post February 4 article <a href="https://www.washingtonpost.com/opinions/2021/02/04/larry-summers-biden-covid-stimulus/" target="_blank">"The Biden stimulus is admirably ambitious. But it brings some big risks, too"</a> </i>that started the debate about whether as a result of the increased government spending there is risk of inflation now in the US. He explained why in his opinion this risk is real:</p><p class="MsoNormal">“First, unemployment is falling, rather than skyrocketing as
it was in 2009, and the economy is likely before too long to receive a major
boost as covid-19 comes under control. Second, monetary conditions are far
looser today than in 2009 given extraordinary Federal Reserve policies, the
booming stock and corporate bond markets, and the weakness of the dollar.
Third, there is likely to be further strengthening of demand as consumers spend
down the approximately $1.5 trillion they accumulated last year as the pandemic
curtailed their ability to spend and as promised further fiscal measures are
undertaken.”</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">He pressed further in a <i>May 24 Washington Post</i>
article <a href="https://www.washingtonpost.com/opinions/2021/05/24/inflation-risk-is-real/" target="_blank">“The inflation risk is real” </a> where he wrote:<o:p></o:p></p>
<p class="MsoNormal">“Fed and Biden administration officials are entirely correct
in pointing out that some of that inflation, such as last month’s run-up in
used-car prices, is transitory. But not everything we are seeing is likely to
be temporary. A variety of factors suggests that inflation may yet accelerate —
including further price pressures as demand growth outstrips supply growth;
rising materials costs and diminished inventories; higher home prices that have
so far not been reflected at all in official price indexes; and the impact of
inflation expectations on purchasing behavior. Higher minimum wages,
strengthened unions, increased employee benefits and strengthened regulation
are all desirable, but they, too, all push up business costs and prices.”<o:p></o:p></p>
<p class="MsoNormal">But the US was in need of expansionary fiscal policy. So
what is Summers' policy advice? He specifically asks: “So how best can we (the US)
contain overheating risks and promote sustainable growth while also making
necessary investments in infrastructure, greening the economy and helping low-
and middle-income families?".<span style="mso-spacerun: yes;"> </span>He explains:<o:p></o:p></p><p class="MsoNormal">"First, starting at the Fed, policymakers need to help contain inflation expectations and reduce the risk of a major contractionary shock by explicitly recognizing that overheating, and not excessive slack, is the predominant near-term risk for the economy. Tightening is likely to be necessary, and it is critical to set the stage for that delicate process....Second...unemployment benefits enabling workers to earn more by not working than working should surely be allowed to run out. Third, it is essential to make long-term public investments to increase productivity and enable more people to work" (his point here is to have redirected a big chunk of the Rescue Plan to (long-term) public investments). </p>
<p class="MsoNormal">On the other side of the story, we find a most
prominent name, Paul Krugman, the 2008 recipient of the Economics Nobel Prize (also
a most impressive CV - click <a href="http://wps.fep.up.pt/wps/wp600.pdf " target="_blank">here</a>)<o:p></o:p></p>
<p class="MsoNormal">Krugman argues for a while now that the rise in the rate of
inflation is not to worry much about.<span style="mso-spacerun: yes;"> </span>He
considers that the size of the American Rescue Plan ($1.9 trillion) was necessary.<span style="mso-spacerun: yes;"> </span>He explains <a href="https://paulkrugman.substack.com/p/nonstimulus-arithmetic" target="_blank">here </a> in his revived blog that this plan should not be confused with typical expansionary fiscal policy
initiative to close an output gap as this was not “a conventional recession — a
decline in output due to insufficient aggregate demand”. He further explains that the size is not
too big, given the circumstances; and, that there may be some risk of
overheating but this risk is small and can be controlled by the Fed (the US
central bank) tightening policy (i.e. increasing interest rates).<span style="mso-spacerun: yes;"> </span><o:p></o:p></p>
<p class="MsoNormal">A February 2021 YouTube debate between Summers and Krugman can be
viewed <a href="https://www.youtube.com/watch?v=EbZ3_LZxs54" target="_blank">here</a> (longish- but try to watch until 40:48 ). You may find a summary <a href="https://www.bloomberg.com/news/articles/2021-02-12/summers-and-krugman-debate-stimulus-here-s-a-blow-by-blow-account" target="_blank">here</a>) <o:p></o:p></p>
<p class="MsoNormal">Krugman’s most recent (June 21, 2021) New York Times article
is titled “The Week Inflation Panic Died”<span style="mso-spacerun: yes;"> </span>(see <a href="https://www.nytimes.com/2021/06/21/opinion/inflation-economy-biden-fed.html" target="_blank">here</a>). He had been arguing that there are two types of inflation: “The key thing to
understand is that there are really two kinds of inflation.” The one type is ‘hard-core’
inflation which is when inflation becomes embedded in the economy (i.e. in the
expectations of firms and workers) and then “transitory inflation...which is easy
come, easy go” and policymakers should “worry only if core inflation looks as
if it’s getting too high (or too low)”, i.e. if it becomes embedded in expectations. He continues: “The Fed has been arguing
that recent price rises are similarly transitory. True, they’re not coming from
food and energy so much as from pandemic-related disruptions that caused
surging prices of used cars, lumber and other nontraditional sources of
inflation. But the Fed’s view has been that this episode, like the inflation
blip of 2010-11, will soon be over.<span style="mso-spacerun: yes;"> </span>And
it’s now looking as if the Fed was right. Lumber prices have plunged in recent
weeks. Prices of industrial metals like copper are coming down. Prices of used
cars are still very high, but their surge has stalled and they may have peaked.
Core inflation wins again.”<o:p></o:p></p>
<p class="MsoNormal">See also his April 16 article: <a href="https://www.nytimes.com/2021/04/16/opinion/economy-inflation-retail-sales.html" target="_blank">"Krugman Wonks Out: The Case for Supercore Inflation. It’s going to be a year of bottlenecks and blips"</a> and
his May 21, 2021 <a href="https://www.nytimes.com/2021/05/21/opinion/money-federal-reserve-deficit.html" target="_blank">“Krugman Wonks Out: What We Talk About When We Talk About Money”</a> <o:p></o:p></p>
<p class="MsoNormal">I'd like to add that I have been relying a lot for my IB Economics classes (when classes were not virtual...) on
podcasts.<span style="mso-spacerun: yes;"> </span>One that is very relevant (and, easy to understand) is this <i>Post Reports</i> podcast (June 17, 2021) <a href="https://podcasts.google.com/feed/aHR0cHM6Ly9wb2RjYXN0LnBvc3R0di5jb20vaXR1bmVzL3Bvc3QtcmVwb3J0cy54bWw/episode/NjBjYmI2MTM1MmZhZmYwMDA4M2I1OTQx?sa=X&ved=0CA0QkfYCahcKEwi41_nporXxAhUAAAAAHQAAAAAQAQ" target="_blank">Inflation, inflation, inflation</a> (listen only only up to
12:50 for this issue; a<i> must </i>for IB Economics students).</p><p class="MsoNormal">One last point: if the US central bank (the Fed) is forced to increase interest rates because the Summers' scenario of inflation materializes and manages to do so without staring a recession, then there is an interesting benefit for the US economy: it will once again be able to lower interest rates (from say 4% to 1%) to fight a future recession. The Fed now faces the ZLB (zero lower bound) constraint: with interest rates pretty much at 0%, there is virtually no room for cutting interest rates as deep negative interest rates are considered 'unchartered territory' (but if interested, see Rogoff's idea <a href="https://www.aeaweb.org/articles?id=10.1257/jep.31.3.47" target="_blank">here</a>)</p><p class="MsoNormal">Hope this provides some background information for investigations that you may conduct on several macro issues that may feature on an IB P1(b) econ exam.</p><p class="MsoNormal"><br /></p><p class="MsoNormal">PS: Concerning the distinction between 'embedded' inflation and transitory inflation (or '<i>blips</i>' as Krugman refers to them in one of the above articles) we can realize why inflation (in the IB and not only) is defined as a '<i><u>sustained</u> </i>increase in the general price level'. See for example Ellie Tragakes' excellent <a href="https://doi.org/10.1017/CBO9780511862731.011" target="_blank">textbook</a>, p.309. Unless inflation is considered <i>sustained</i> (i.e. at risk of becoming embedded in expectations), a central bank (like the Fed now) will not increase interest rates.</p>
<p class="MsoNormal"><o:p> </o:p></p>constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com0tag:blogger.com,1999:blog-5734943477593786790.post-69388091824237497952019-09-08T19:57:00.001+03:002019-09-08T19:57:35.406+03:00IMF: Back to Basics<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi3elKJg6A8wcPnKPAtHFuVJAHZF-rSwLwTuIs25lKhu9Cb7jWUMRPAgtr2FBG0Acy6G7lA63LfMSkDfxTanEBL8BAmAt8qZcdUEWRiNaiq255GGxCKS_V2n_GgFj2I4MlcLU5bKpWRAks/s1600/back+to+basics.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="363" data-original-width="330" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi3elKJg6A8wcPnKPAtHFuVJAHZF-rSwLwTuIs25lKhu9Cb7jWUMRPAgtr2FBG0Acy6G7lA63LfMSkDfxTanEBL8BAmAt8qZcdUEWRiNaiq255GGxCKS_V2n_GgFj2I4MlcLU5bKpWRAks/s200/back+to+basics.jpg" width="181" /></a></div>
Was looking at the <a href="https://blogs.imf.org/" target="_blank">IMF Blog</a> and I found a collection of all past <i>Back to Basics</i> short articles that aim at explaining fundamentals to students. I've used several in the past and most are wicked good and fully compatible with the IB Econ Syllabus. <br />
<br />
You can find these titles <a href="https://www.imf.org/external/pubs/ft/fandd/basics/index.htm" target="_blank">here</a>.<br />
<br />
Enjoy!</div>
constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com0tag:blogger.com,1999:blog-5734943477593786790.post-24622319846808809442019-09-08T15:19:00.001+03:002019-09-08T15:36:21.580+03:00Great for IB students: Trade diversion in action and the role of macro aggregates on trade balances<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_GuETyayOSgeZRBBkH9-IH6KpS-8AYgb8RF66Ssefv-YWMYz57zMaq4k5aE1DgGjo0Jv1op1Gv7F_XtEMgK3tvQlabapGpEFef2-upeLUpHuGMcSrqJyj39X59oajPKLe_qBYDdCby7k/s1600/word-cloud-with-international+trade.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="918" data-original-width="1300" height="225" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_GuETyayOSgeZRBBkH9-IH6KpS-8AYgb8RF66Ssefv-YWMYz57zMaq4k5aE1DgGjo0Jv1op1Gv7F_XtEMgK3tvQlabapGpEFef2-upeLUpHuGMcSrqJyj39X59oajPKLe_qBYDdCby7k/s320/word-cloud-with-international+trade.jpg" width="320" /></a></div>
Just listened to a most useful and clear trade talk/podcast that focuses on KORUS, the Korea-US Free Trade Agreement that went into effect in 2012. A University of California Davis professor explains in most simple terms concepts of international trade that all IB Econ students should be aware of.<br />
<br />
Kadee Russ discusses the results of a 2019 paper she co-authored with Deborah L. Swenson to the hosts of <a href="https://www.tradetalkspodcast.com/" target="_blank">Trade Talks</a>, a podcast about the economics of trade and policy, Soumaya Keynes and Chad P. Bown. It is a question and answer podcast that navigates us through real international trade patterns.<br />
<br />
Listen in class to <a href="https://www.tradetalkspodcast.com/podcast/99-the-surprising-story-of-the-us-trade-deficit-with-south-korea/" target="_blank">The Surprising Story of the US Trade Deficit with South Korea</a>. It is rewarding!<br />
<br />
(the NBER working paper for the more ambitious can be found (free) <a href="https://www.nber.org/papers/w25613" target="_blank">here</a>).<br />
<br />
<br />
<br /></div>
constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com0tag:blogger.com,1999:blog-5734943477593786790.post-36623812804692166262019-08-24T16:11:00.001+03:002019-08-24T16:13:30.995+03:00The limits of monetary policy?<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
Despite the work I have editing a new book (writing it with a colleague who happens to be an ex-student (IB) of mine), I just cannot ignore the news, especially when a lot has been going on lately in the world.<br />
<br />
What am I referring to?<br />
<ul style="text-align: left;">
<li>the escalating trade war between the US and China </li>
<li>the rising chances for a no deal Brexit</li>
<li>China and the Hong Kong protesters</li>
<li>Italy's political instability</li>
<li>and, unfortunately, quite a few other 'developments'</li>
</ul>
<div>
Since I need to maintain focus on IB Economics, I will refer to an article in today's NYT titled <a href="https://www.nytimes.com/2019/08/24/upshot/global-economy-political-chaos-risk.html?action=click&module=Top%20Stories&pgtype=Homepage" target="_blank">One Crazy Day Showed How Political Chaos Threatens the World Economy</a> What is of special interest to me and the course I teach are a couple of points made by Jerome Powell, Fed Chairman (the Fede is the Central Bank of the US) and by Mark Carney, the Governor of the Bank of England, about the limits of monetary policy.</div>
<div>
<br /></div>
<div>
This quote from the article refers to Jerome Powell:</div>
<blockquote class="tr_bq">
<blockquote class="tr_bq">
Mr. Powell delivered a nuanced speech signaling the Fed was committed to a “risk management” approach, of adjusting policy to try to prevent bad things from happening. His words kept the Fed’s options open.</blockquote>
<blockquote class="tr_bq">
But he made clear that a breakdown of global trade relations was not the kind of thing that the Fed’s interest rate policies were well suited to addressing.</blockquote>
<blockquote class="tr_bq">
“<i>While monetary policy is a powerful tool,” Mr. Powell said, “it cannot provide a settled rule book for international trade.</i>” The central bank can only adjust policy to try to respond to the ways trade policy changes affect the overall outlook. The implicit message: If erratic trade policy undermines the economy, the Fed’s tools are likely to have only limited ability to overcome the damage. Interest rate cuts in that situation would be like giving pain relievers to someone with a broken bone — better to have than not, but unable to solve the underlying problem.</blockquote>
</blockquote>
<div>
And this one to Mark Carney:<br />
<blockquote class="tr_bq">
<blockquote class="tr_bq">
Also speaking at the Jackson Hole symposium was the Bank of England governor, Mark Carney, who described a limited ability to use monetary policy to offset the damage from Britain’s potentially messy exit from the European Union this fall.</blockquote>
<blockquote class="tr_bq">
“In the end, <i>monetary policy can only help smooth the adjustment to the major real shock that an abrupt no-deal Brexit would entail</i>,” Mr. Carney said, and that ability would be constrained by the need to keep inflation under control.</blockquote>
</blockquote>
Food for thought! </div>
</div>
constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com0tag:blogger.com,1999:blog-5734943477593786790.post-89337667673992099332019-08-20T21:13:00.003+03:002019-08-20T21:13:58.551+03:00The new IB Economics Syllabus<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal">
<o:p> </o:p><span style="font-size: 13.5pt;">I assume that most probably, the new Economics Syllabus for first
teaching in August 2020 and first assessment in May 2022, will be out very
soon. </span></div>
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<span style="color: black; font-size: 13.5pt;">There are nine <i>key
concept</i>s around which the course will be structured: <i>scarcity,
choice, efficiency, equity, economic well-being, sustainability, change,
interdependence and intervention</i>. The initial decision to dump the
theory of the firm and market structures thankfully does not seem to be the
case as section 2.11, in the January 2019 updated syllabus outline, is on
Market Power. <o:p></o:p></span></div>
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<span style="color: black; font-size: 13.5pt;">Since to teach market power,
and to ensure that students do understand its meaning and implications,
the basics of the theory of the firm and of market structures are necessary, I
assume that they will also be present in the new syllabus. We'll
see. <o:p></o:p></span></div>
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<br /></div>
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<span style="color: black; font-size: 13.5pt;">Otherwise, there is little in
the latest outline to fully grasp the differences between the new and the
current syllabus. <o:p></o:p></span></div>
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<br /></div>
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<span style="color: black; font-size: 13.5pt;">In the area of assessment, what
makes me wonder a bit is where it is stated that in the 'new' Paper 3:<o:p></o:p></span></div>
<br />
<blockquote class="tr_bq" style="margin-bottom: .0001pt; margin: 0in;">
<span style="background-color: yellow; color: black; font-size: 13.5pt;"> "students will work with new quantitative and
qualitative data demonstrating a deeper understanding of a real-world issue
scenario, using the theories, models, ideas and tools of economics <b><u>and
culminating in policy advice</u></b>"</span></blockquote>
<br />
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<span style="color: black; font-size: 13.5pt;">"Policy
advice"! I know a few governments (</span><span style="color: black; font-family: "Segoe UI Emoji",sans-serif; font-size: 13.5pt; mso-bidi-font-family: "Segoe UI Emoji";">😜</span><span style="color: black; font-size: 13.5pt;">) that
would need some good policy advice now! This new expectation is both
interesting and will be a nightmare to mark (and to come up with an appropriate
MS and provide guidance to examiners ). We'll also see how this one
works. <o:p></o:p></span></div>
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<span style="color: black; font-size: 13.5pt;">The last item that makes me a
bit curious (I was initially going to use the word 'worried'...) refers to the
Internal Assessment. It states in the outline:<o:p></o:p></span></div>
<blockquote class="tr_bq" style="-webkit-text-stroke-width: 0px; font-variant-caps: normal; font-variant-ligatures: normal; margin-bottom: .0001pt; margin: 0in; orphans: 2; text-decoration-color: initial; text-decoration-style: initial; widows: 2; word-spacing: 0px;">
<span style="color: black; font-size: 13.5pt;"><br /></span></blockquote>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="background-color: yellow;"><span style="font-size: 13.5pt;">"Each of the three commentaries </span><b style="font-size: 13.5pt;"><i>should</i></b><span style="font-size: 13.5pt;"> </span><b style="font-size: 13.5pt;"><i><u>use</u></i></b><span style="font-size: 13.5pt;"> </span><b style="font-size: 13.5pt;"><i>a</i></b><span style="font-size: 13.5pt;"> different
key concept </span><i style="font-size: 13.5pt;">as a lens through which to analyse</i><span style="font-size: 13.5pt;"> their
commentaries"</span></span></div>
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<span style="color: black; font-size: 13.5pt;"><br /></span></div>
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<span style="color: black; font-size: 13.5pt;">The 10 'key concepts' are in
italics above. First of all, I would assume that a commentary can 'use'
more than one 'key concept'. But I am not at all sure what exactly the
verb 'use' means. Most, if not all of these concepts permeate all of
economics. And, of course, the question is how can a teacher or a
moderator judge whether (and to <i>what extent</i>) a commentary does
indeed '<i>use</i>' a key concept'?. We'll also see this one in practice.<o:p></o:p></span></div>
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<br /></div>
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<span style="color: black; font-size: 13.5pt;">A more general point.
I've been teaching for a long-long time Economics (IB for 25+ years) and I have
a decent (terminal degree) background in pure Economics. I have to admit
that I am not so sure what much of the language used in curricula and other IB
guides/documents really means. I am afraid that the program has been
hijacked by many who have basically a solid background in Education (but a
minimal background in a discipline) and who are forcing <i>fashionable</i> concepts
and terms without a clear knowledge of how exactly these apply to each
discipline. More like buzzwords...<o:p></o:p></span></div>
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<br /></div>
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<span style="color: black; font-size: 13.5pt;">I do know that a solid
background in Physics is needed to teach Physics and a solid background in
Economics is needed to teach Economics. Sometimes, it seems, this
background is just not there. Einstein had said that 'if you can't explain
it to a six year old, then you don't understand it yourself'.<o:p></o:p></span></div>
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<span style="color: black; font-size: 13.5pt;">I am afraid that lots we lately
find in many IB documents cannot be explained to a six year old.<o:p></o:p></span></div>
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<br /></div>
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<span style="color: black; font-size: 13.5pt;">PS: I had promised that I would
maintain this blog last year (and, I am afraid the year before). I
didn't. Let's see if I keep a new promise to maintain it this time.
The fact that real world examples are lately in such high demand by examiners
and what's going on in the real world will be even more important when teaching
the new syllabus, makes me hopeful that I will at least try harder this time
around. The goal is to facilitate both students and colleagues of IB
Economics . </span><span style="color: black; font-family: "Segoe UI Emoji",sans-serif; font-size: 13.5pt; mso-bidi-font-family: "Segoe UI Emoji";">😁</span><span style="color: black; font-size: 13.5pt;"><o:p></o:p></span></div>
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constantine ziogashttp://www.blogger.com/profile/14024605662231024336noreply@blogger.com1