Grasping Reality on TypePad, by Brad DeLong

• A. Identifications
• B. Supply and Demand
• C. Natural Monopoly
• D. Elasticities
• E. "Say's Law"
• F. The Income-Expenditure Framework
• G. The Government Budget
• H. Next Time
• I. Review Your Work

.pdf | .pages

Back in 2009 University of Chicago Professor and (now) Nobel prize-winner Eugene Fama wrote:

Bailouts and stimulus plans are funded by issuing more government debt.... The added debt absorbs savings that would otherwise go to private investment.... [S]timulus plans do not add to current resources in use. They just move resources from one use to another.... I come back to these fundamental points several times below....

The Sad Logic of a Fiscal Stimulus: In a "fiscal stimulus," the government borrows and spends the money on investment projects or gives it away as transfer payments to people or states. The hope is that government spending will put people to work.... Unfortunately, there is a fly in the ointment.... [G]overnment infrastructure investments must be financed -- more government debt. The new government debt absorbs private and corporate savings, which means private investment goes down by the same amount....

Suppose the stimulus plan takes the form of lower taxes... we can't get something for nothing this way either... lower tax receipts must be financed dollar for dollar by more government borrowing. The government gives with one hand but takes them back with the other, with no net effect on current incomes...

Fama’s argument is that the government cannot increase its total planned expenditure without somebody else decreasing their planned expenditure—that any cash the government spends must be either borrowed from or taxed from private individuals, who then must cut their planned expenditure by as much as the government increases its. This is, it seems to me, the doctrine called “Say’s Law”. Write a 20-minute essay trying to convince Professor Fama he is wrong.

Consider the demand curve:

P = 30 - Q/30000

1. What is the elasticity of demand at Q = 900000?
2. What is the elasticity of demand at Q = 450000?
3. What is the elasticity of demand at P = 30?
4. What point on the demand curve maximizes total revenue?
5. Why wouldn't a monopolist ever produce a quantity more than 450,000?

Suppose that it is December 2018 and you are in charge of forecasting the state of the economy in 2020. You believe that potential output in 2022 will be $20 trillion, with a 2% inflation rate, and your baseline forecast given current policies for output in 2020 is $19.4 trillion. You also believe that the marginal propensity to consume is 2/3, and you are working in the income-expenditure model. Suppose, also, that you believe the aggregate supply curve is strongly kinked with inflation anchored at 2%/year: that whenever potential output is above actual real expenditure the inflation rate is 2%/year, but if expenditure rises above the level consistent with output equal to potential output times the price level at 2% inflation, inflation accelerates and the price level rises to keep actual output from rising above potential.

1. Suppose that the federal government undertakes an extra $200 billion fiscal stimulus infrastructure construction program for 2020, and the Federal Reserve remains passive. How does this change your forecast of GDP and inflation in 2020?

2. Suppose that the federal government undertakes an extra $400 billion fiscal stimulus infrastructure construction program for 2020, and the Federal Reserve remains passive. How does this change your forecast of GDP and inflation in 2020?

3. Suppose that the federal government undertakes an extra $400 billion fiscal stimulus infrastructure construction program for 2020, but the Federal Reserve acts to keep inflation from rising above 2%/year. How does this change your forecast of GDP and inflation in 2020? What components of GDP do you think rise and what components of GDP do you think fall in this scenario?

4. How would your answer to (1) have been different if potential output were not $20 trillion but $21 trillion?

5. How would your answer to (2) have been different if potential output were not $20 trillion but $21 trillion?

6. How would your answer to (3) have been different if potential output were not $20 trillion but $21 trillion?

In the first quarter of 2014 the Commerce Department’s Bureau of Economic Analysis estimated that local, state, and the federal government purchased $716.2 billion worth of goods and services, in a context in which total GDP in that quarter was $3,986.6 billion—government purchases were thus 17.9% of the entire economy. Do you believe that this number is lower than is optimal, about optimal, or too high to be optimal? Why? What things have you learned in this course that have changed or confirmed your view of this question?

This is the first time we have taught Econ 2 since 2007, so we are especially anxious for feedback. Write a four-paragraph essay. Pick one element of the course that you thought worked best, and explain why you thought it worked best. Pick one element of the course that you thought worked badly but needs to be improved, and explain how you think it could be improved. Pick one element of the course that you thought worked badly and should be dropped. and explain why it should be dropped. And pick one topic not covered in the course that you think should be added, and explain why it should be added.

Go back and spend the last twenty minutes of the exam filling in holes in your arguments and answers, and checking your work…

Project Syndicate: In The Baffler, Kathleen Geier recently attempted a roundup of conservative criticism of Thomas Piketty’s new book Capital in the Twenty-First Century. The astonishing thing to me is how weak the right’s appraisal of Piketty’s arguments has turned out to be. READ MOAR

...and hit every single branch of the evil tree on the way down. As Jon Gruber said, the propaganda from the Republican Party to scare people away from taking advantage of their benefits under the ACA is "awesome in its evilness".

Robert Calandra: Once opposed to ACA, now a convert: "Dean Angstadt... self-employed, self-sufficient logger... uninsured since 2009...

wanted nothing to do with the Affordable Care Act. "I don't read what the Democrats have to say about it because I think they're full of it," he told his friend Bob Leinhauser, who suggested he sign up. That refrain changed this year when a faulty aortic valve almost felled Angstadt.... "A lot of people I talk to are so misinformed about the ACA," Angstadt said. "I was, before Bob went through all this for me. I would recommend it to anybody and, in fact, have encouraged friends, including the one guy who hauls my logs."... It was taking him 10 minutes to catch his breath after felling a tree. By fall, he was winded after traveling the 50 feet between his house and truck.... "I knew that I was really sick," said the Boyertown resident. "I figured the doctors were going to have to operate, so I tried to work as long as I could to save money for the surgery. But it got to the point where I couldn't work."...

B. Supply and Demand: (20 minutes—if you are not through after 20 minutes, skip to the next question): In the central part of the state of Euphoria there is an enormous suburban sprawl, somewhere in the middle of which is Tall Stick, home of Crony Capitalism University. [Founded by a nineteenth-century Robber Baron who told his British investors that their money was safe in his enterprises because he was not just a financier but also a big wheel in the dominant political party and an ex-governor of the state of Euphoria. Ha, ha! Silly British investors! What they thought would be their profits became instead the core endowment of CCU.] We will look at the daily market for bubble-tea drinks near CCU.

Suppose that the quantity of bubble-tea drinks demanded and the quantity of bubble-tea drinks supplied daily are given by the equations:

• Demand: P = -10 + Q/800
• Supply: P = 20 - Q/1600

where P is the price of a bubble-tea drink in dollars:

1. What is the market equilibrium price?
2. What is the market equilibrium quantity?
3. What is the producer surplus?
4. What is the consumer surplus?
5. Explain, intuitively, why the distribution of producer and consumer surplus is what it is.
6. What would the distribution of consumer and producer surplus be if the supply curve equation were: {IF (10>P) THEN (Q=0)} AND {IF (P≥10) THEN (Q=16000)?

C. Natural Monopoly: (20 minutes—if you are not through after 20 minutes, skip to the next question): All of the 10,000 students at Crony Capitalism University are addicted to The Social Network. The Social Network has no costs: the programming has been done, and the maintenance, bandwidth, and cloud-storage costs are negligibly small. The Social Network sells ads at $1/minute per student—thus if every student watches an ad the advertiser pays The Social Network $10,000; if half the students watch an ad the advertiser pays The Social Network $5,000; and if no students watch an ad the advertiser pays The Social Network $0. The students at CCU who do not install ad-blocking software on their browsers see all ads. The students at CCU who do install ad-blocking software on their browsers see no ads. The fraction F of CCU students who install ad-blocking software is given by the following equation:

• F = 0 + Q/300

where Q is the number of minutes of advertisements TSN sells.

1. What is the revenue curve for advertisements sold by TSN—that is, how much money does TSN earn as a function of how many ads it sells?
2. What is the profit-maximizing number of ads that TSN as a natural monopolist sells?
3. Suppose that it costs each CCU student $300 to install ad-blocking software—they have to hire computer-science majors from Euphoric State as consultants to do the job, you see. Assuming watching each one-minute ad is equally painful in utility terms to each CCU student, what is the willingness--to-pay of CCU students for ad-blocking software?
4. Suppose that CCU decided to charge each of its students a flat fee and use that money to get TSN to supply an ad-free version to CCU students. How large a fee would CCU have to charge to induce TSN to take the deal? Qualitatively, which CCU students would gain from this arrangement relative to the natural-monopoly equilibrium? Which CCU students would lose?

A. Identifications (20 minutes—if you are not through after 20 minutes, skip to the next question): Briefly, in one or two sentences, explain the terms set out and how they have been used in the course:

1. “Utility”
2. “Social Welfare” or “Societal Well-Being”
3. Market Failure
4. Quotas
5. Willingness-to-Pay
6. Non-Rivalry and Non-Excludability
7. “Say’s Law”
8. Output Gap

https://www.icloud.com/iw/#keynote/BAJyIHj2wec7YuneZJmB9uqBj63LabiLvkqF/20140430_Econ_2_Sample_Final_Exam_II_Answers_DRAFT.key

Peter Orszag notes that health-care expenditures grew nearly four times as fast in the first quarter of 2014 than over the previous three years...

If this is a signature of ACA implementation--of people who are newly-eligible for insurance actually getting to the doctor--it is a very good sign indeed...

The Russo-German Front, December 2, 1943-April 30, 1944:

Nick Rowe: Worthwhile Canadian Initiative: Functional Finance vs the Long Run Government Budget Constraint: "Functional Finance says you only use taxes...

...if you want to reduce Aggregate Demand to prevent inflation. The Long Run Government Budget Constraint says you use taxes to pay for past, present or future government spending. They sound very different. They aren't. There's a general principle in economics: first you eat the free lunches; then you  look at the hard trade-offs. Functional Finance says "first eat the free lunches". The Long Run Government Budget Constraint says "then look at the hard trade-offs".

I presume that the Piketty galleys have been lost in internal Berkeley mail hell for some months now...

http://herrenbrueck.weebly.com/uploads/1/3/3/9/13395560/geromichalos-herrenbrueck-salyer_-_a_search-theoretic_model_of_the_term_premium.pdf

Cf. J.W. Mason: http://slackwire.blogspot.com/2014/03/liquidity-preference-and-solidity.html, citing Homer and Sylla...

Joseph Stromberg: This interactive map shows the most popular running and cycling routes in your city: "Strava, a popular app used to log routes and times for cyclists and runners...

...has an an interactive heatmap of 77 million rides and 19 million runs recorded by users over the past few years. It is made up of more than 220 billion total data points, and it is amazing...

Terrifying rather than amazing, I would say...

Mike Konczal: Studying the Rich: "Piketty’s book warns that capital and inequality are likely...

...to make even greater strides in the next few decades; the influence of wealth and inheritance could make our economy look a lot more like the nineteenth century, with its dominance of dynastic fortunes, than the joint prosperity we have come to assume is the natural state of advanced economies.... Piketty’s argument is convincing and well-supported. So what is the debate over?... Generally, critics have come at him from two different directions.... By not locking his own argument tightly to a model he also leaves himself vulnerable to criticism that there are trends towards equality.... Some... have argued... the more capital there is... the rate of return should fall. If it falls rapidly, the capital share of national income will not increase....

Matthew Yglesias: Our Vacant Homes Aren't Where People Need Houses: "I argued... zoning regulations are holding back a potential construction boom....

One key challenge to that view comes from... housing vacanc[ies]... which... remains stubbornly high.... Banks who've foreclosed on homes prefer to keep these houses vacant and preserve their paper value as assets than to sell the houses at current market rates and acknowledge the extent of their financial losses. But... if rents are rising nationwide... why aren't these empty houses increasing in value and being brought back to the market?... Vacancies are in the wrong places. People can't move into vacant homes in Florida, Detroit, and Las Vegas and commute to jobs in Silicon Valley, Manhattan, or Washington DC.... The markets in the San Francisco Bay... have super-low vacancy rates... so do the suburbs of the three major cities of the Northeast Corridor, and... the two highest-wage cities in the interior of the country, Denver and Minneapolis. The places where people could find the most economic opportunities, in other words, don't have the housing supply.... Rents are rising in these areas, but they're also the toughest markets to get permission to build. So we're left with the worst of both worlds--high rents and empty houses...

Annie Lowrey: Recovery Has Created Far More Low-Wage Jobs Than Better-Paid Ones: "The poor economy has replaced good jobs with bad ones....

'Fast food is driving the bulk of the job growth at the low end...' said Michael Evangelist.... Higher-wage industries--like accounting and legal work--shed 3.6 million positions during the recession and have added only 2.6 million positions during the recovery. But lower-wage industries lost two million jobs, then added 3.8 million...

Over at Equitable Growth--The Equitablog

• Morning Must-Read: Ezra Klein: The Republican replacement for Obamacare is Fauxbamacare
• The Daily Piketty: Kathy Geier, Michael Bird, and Tim Noah
• Over at Business Insider: Five Questions and Answers About Thomas Piketty's "Capital in the Twenty-First Century": Monday Focus; April 28, 2014
• Is This the Worst Review of Thomas Piketty's "Capital in the Twenty-First Century"?

Plus:

• Things to Read on the Morning of April 29, 2014

And:

Should-Reads:

1. Eric Monnet: A Monetarist History of the Fed: "The monetarist prism through which [Allan] Meltzer sees the history of monetary policy is also the cause of certain errors and oversights.... The history of ideas and... political relations... supplants administrative history.... His analyses of decision-making and administrative processes are nowhere near as extensive as his history of monetary theory. For instance, he never mentions the number of people employed by the Fed; little detail is offered about the operation of the twelve regional federal banks; and there is no discussion of the relation between these banks and regional economies. The... primacy accorded to the monetary prism... prevent[s] the author from considering Fed decisions in any framework other than one of simple... price stability.... It is hard to deny that in a democracy the representatives of the people are entitled to make the law, which cannot be set aside in the name of economic efficiency defined in a highly theoretical manner. This of course raises the question of the political legitimacy of Fed policy, which Meltzer dismisses with the assertion that the Fed must be credibly committed to price stability.... In the end, it is difficult to overlook a certain gap between the history that Meltzer recounts and the conclusions he draws.... Even if the decisions of the Fed draw on a framework of economic theory, that framework cannot fully determine the outcome because it is never comprehensive enough to yield unambiguous solutions to problems as they arise in real time.... Despite this cognitive complexity, Meltzer simply reiterates his belief in the need for price stability as a long-term goal, along with a credible rule for anchoring expectations, and he regards any deviation from such a rule as a failure of monetary policy.... His interpretation... does not really do justice to the complexity of the phenomena.... He shares... the old monetarist dream of an 'automatic monetary policy'.... Despite Meltzer’s own position on the issue, his absorbing history of more than seventy years of Fed activity will convince many readers that such a rule is absolutely impossible to define..."

2. Duncan Black: Whatever Pisses Off Liberals: "The reverse isn't true. I really don't see liberals supporting or opposing things because they imagine it'll piss off conservatives.... 'Increased MPG standards will sure piss off Limbaugh! Let's vote for that!' It's somewhat unrelated, but I'm reminded of when the Last Honest Man In Washington, Joe Lieberman, briefly floated Medicare buy-in at 55 as a kind of compromise for the public option in the ACA. I pleaded with everyone I knew to STFU about it, because of course liberals would have taken that deal. I knew that the instant the greatest man who ever lived got wind of the fact that liberals would actually love that deal he'd back off supporting it, because liberals. And he did..."

Should Be Aware of:

Adam Beam: FRANKFORT, Ky.: Beshear: 413,000 sign up for health care in Ky: "Beth Moore left her job - and her health insurance...

...to start her own company in January. In March, while visiting Texas, she had an emergency appendectomy followed by a nasty bout with pneumonia that added up to more than $30,000 in medical bills. But Moore was one of 413,410 Kentuckians who signed up for free or subsidized health insurance through kynect, Kentucky's state-run health insurance marketplace made possible by the federal Affordable Care Act. So far, the most she has paid for her treatment is $150. "If I had not had insurance (it) would have been catastrophic for me," Moore said. "I'm very grateful that I am a resident of Kentucky and that this was an option for me."

Moore told her story alongside Democratic Gov. Steve Beshear and other state officials Tuesday who were celebrating the end of the open-enrollment period of Kentucky's health insurance marketplace.... "We're going to keep enrolling people until everybody in Kentucky who needs health coverage has it," Beshear said. About 80 percent of those 413,410 people have their health insurance through Medicaid, meaning the state and federal government pays for their health care. The other 20 percent purchased private plans, but - thanks to a government subsidy - at a discounted rate...

I am wondering: how soon before we begin to see the signal emerging from the noise as states that implement the ACA start pulling ahead, economically, of the others? Enrico Moretti tells me that in the long run each additional state "export" job comes with five other jobs. And from the perspective of a state, a federal government-financed healthcare job is a regional "export". ACA subsidy plus Medicaid expansion do look to approach 1% of GDP in implementing states. And Chodorow Reich et al. definitely find that federal Medicaid dollars matter a lot in the short (Keynesian) run, and that also means they matter even more in the long (resource shift) run...

Plus: would Beshear make a good president?

This Is Brad DeLong's Grasping Reality...: A 2% Inflation Target Is too Low...:

Live at the Economist: Economist Debates: Inflation:

First, the question is not whether the Federal Reserve should raise its target inflation rate above 2% per year. The question is whether the Federal Reserve should raise its target inflation rate to 2% per year. On Wednesday afternoon, Federal Reserve Chair Bernanke stated that he was unwilling to undertake more stimulative policies because "it is not clear we can get substantial improvements in payrolls without some additional inflation risks."

From World War II Today: Heinz Knoke: I Flew for the Fuehrer:

Three Bomber Divisions are launching an offensive from the Great Yarmouth area. Our formations in Holland report strong fighter escorts. My orders are to engage the escorting lighters in combat with my Squadron, draw them off and keep them occupied. Other Squadrons of Focke-Wulfs are thus to be enabled to deal with the bombers eiectively without interference.…

Rob Wile: Brad Delong On Piketty: Below is a Q&A with Brad Delong...

...economics professor at Berkeley. The topic was Thomas Piketty's new book "Capital in the Twenty-First Century." This Q&A went out to subscribers of our "10 Things You Need To Know Before The Opening Bell" newsletter on Monday morning. Sign up here to get the newsletter and more of these interviews in your inbox every day.

I have expanded my answers a bit:

BUSINESS INSIDER: What one comment or idea has stuck with you most from Berkeley's "Piketty Day?" ​

BRAD DELONG: That Piketty has a very uphill climb to get modern American economists to believe his story. Their--our--default models were built for an age in which there was very little movement in inequality and in the capital share of income, and thus the models assume that virtually nothing has a big effect on income and wealth inequality or the capital share of income. Thus our knee-jerk reaction is to reject Piketty's story because it does not fit our standard models. But, then, no story that accounted for the rise would fit our standard models.

Ezra Klein: The Republican replacement for Obamacare is Fauxbamacare: "Scott Brown... called Obamacare a 'disaster'...

...Then he was asked what he's for  — and he went on to describe Obamacare.

I've always felt that people should either get some type of health care options, or pay for it with a nice competitive fee. That's all great. I believe it in my heart. In terms of preexisting conditions, catastrophic coverages, covering kids, whatever we want to do... [it could] include the Medicaid expansion [for] folks who need that care and coverage...

Oh, he also promises his plan won't raise taxes, cut spending on Medicare, or make people drive very far to go to the hospital. So his plan will have more generous insurance options and no way to pay for them. In other words, his plan will be like Obamacare, but even better! Call it Fauxbamacare.... The polls around Obamacare... [suggest] a huge opening for an unprincipled opponent — someone who opposes 'Obamacare', but supports virtually all of the policies in Obamacare. Someone who supports Fauxbamacare....

Republicans could have seen Obamacare as a victory. Instead, the party underwent a we-have-always-been-at-war-with-Eastasia process and turned against ideas they'd once seen as uncontroversial (Sen. Chuck Grassley, June 2009: "I believe that there is a bipartisan consensus to have individual mandates."). The problem with turning against all those ideas is that it's actually really difficult to come up with workable health-reform plans that aren't also terrible politics.... The American people don't want Obamacare. However, they like what's in Obamacare. And they don't like it when Republicans try to get rid of Obamacare. Brown's position shows Republicans a way out.... Fauxbamacare.

As time passes, I find I want more and more to pretend not to be an illiterate barbarian. I want to be able to say "安史之亂" rather than "that mid-eighth century Civil War that separates Great Tang from Later Tang" and "唐玄宗" and "安祿山" rather than "that silly besotted emperor" and "the rebel Sogdian general".

The problem is that I literally cannot hear the tones and the breathing. So I have no idea how to say "安史之亂", "唐玄宗", or "安祿山" correctly.

Can anything be done?

Kathy Geier rounds up conservative critics:

Kathy Geier: What Piketty’s Conservative Critics Get WrongThe Baffler: "A conservative backlash to Piketty was inevitable...

...the only surprise is that it’s taken so long to develop.... Send in the clowns! Reihan Salam... doesn’t appear to have read a word of the book, but took it upon himself to write about it anyway...cribbing from one of the few less-than-glowing reviews of Piketty on the left, by economist Dean Baker, Salam decides he didn’t like the book because of its 'pessimism.' But he disagrees with Baker’s ideas about policies to fix inequality.... Earlier this week, the economist Branko Milanovic tweeted, “And the award for the stupidest review of Piketty’s book so far goes to... (no surprise there) @WSJ”... Daniel Shuchman.... I didn’t think it was possible to find a more hack-stastic review of Piketty in a major publication than the one by Shuchman. Like Milanovic, I was ready to award the dunce cap to the Journal and call it a day. But then along came Megan McArdle... one of the most extraordinary openings of a book review I have ever read:

I apologize in advance, because I am going to talk about a book that I have not yet read. To be clear, I intend to read Thomas Piketty’s “Capital in the Twenty-First Century”...

Okay then! She proceeds to argue vigorously against Piketty’s policy proposal on taxes—although, to repeat, she did not read his arguments in favor of them....

There have been more serious reviews as well.... Kevin Hassett... claims that consumption inequality is not on the rise. Nice try, but no.... Scott Winship claims that... the bottom 90 percent still experienced significant gains.... I’m skeptical.... [And] let’s be real: are we to deduce from Winship-type arguments that conservatives believe that the way to deal with inequality is to increase welfare spending, and make the tax system more fair for low-income earners?...

And Michael Bird surveys worthwhile reviews:

Michael Bird: A revue of reviews - everything you could ever want to read about Piketty's Capital: "You may not have read French Economist Thomas Piketty's...

...near-700 page long Capital in the Twenty-First Century, but there's no need to worry - neither have some of the people who've reviewed it. Below are some of the biggest reviews.... If I've missed one or several that you think should be included, please leave a comment..."

And Timothy Noah adds a good, substantive review:

Tim Noah: The Dead Are Wealthier Than the Living: Capital in the 21st Century: "Patrimonial capitalism—and the landed or urban gentry living off of inherited wealth...

...was dealt a mortal blow by the Great Depression and World Wars. But it’s making a comeback, and the only way to stop it might be a worldwide tax on capital.... To belong to the landed or urban gentry of the 18th and 19th centuries—that is, to possess “books or musical instruments or jewelry or ball gowns”—you needed at least 20 to 30 times the income of the average person, and the most lucrative professions paid only half that. You needed capital, typically in the form of land. And you needed a lot of it.... Consequently, “society” (i.e., the rich) consisted almost entirely of rentiers living off inherited wealth.... Like most public-policy books, Capital is more satisfying in its diagnoses than in its prescriptions.... It’s always dangerous to project current trends into the future, but here’s one extrapolation I’ll subscribe to: predictions about the future will usually prove wrong.... We lack sufficient data to determine how, or whether, capital accumulation goes haywire in the coming years...

That is all...

https://www.icloud.com/iw/#keynote/BAJdMDptcbR0SKnFu4iBPh2sCFIy2iSaZVmF/20140428_Econ_2_Sample_Final_Exam_I.key

• A. Identifications
• B. Supply and Demand
• C. Elasticity
• D. Externalities
• E. "Envy"
• F. Macroeconomic Policy
• G. Economic Growth
• H: Next Time

.pdf | .pages

Briefly, in one or two sentences, explain the terms set out and how they have been used in the course:

1. Supply and Demand Curves
2. Consumer and Producer Surplus
3. Pigovian Taxes
4. Price Ceilings and Price Floors
5. Willingness-to-Pay
6. Opportunity Cost
7. Planned Expenditure
8. Inflation

Suggested Answers:

April 28, 2014 at 09:46 in #berkeley, #economics, Econ 2 Spring 2014 | Permalink | Comments (0)

In the central part of the state of Euphoria there is a small city, Avicenna, which is the home of Euphoric State University. [“Avicenna” is a corruption of the Arabic Ibn Sina, the byname of the great eleventh-century Iranian Abu Ali al-Husayn ibn Abd Allah ibn Sina: academic administrator, Quran reciter, astronomer, chemist, geologist, psychologist, theologian, mathematician, physicist, physician, poet, and paleontologist.] We will look at the daily market for espresso-based drinks in Avicenna.

Suppose that the quantity of espresso drinks demanded and the quantity of espresso drinks supplied daily are given by the equations:

• Demand: Q = 20,000 - 2000P
• Supply: Q = max(-16000 + 8000P, 0)

where P is the price of an espresso-based drink in dollars:

1. What is the market equilibrium price?
2. What is the market equilibrium quantity?
3. What is the producer surplus?
4. What is the consumer surplus?
5. Explain, intuitively, why the distribution of producer and consumer surplus is what it is.
6. What would the distribution of consumer and producer surplus be if the supply equation were: P = 3.6?

Still in Avicenna—same setup as B—but this time we have different supply and demand curves

• Demand: P = 148.413 x Q^(-0.5)

• Supply: P = 1/54.598 x Q

  1. What is the elasticity of demand at Q = 1?
  2. What is the elasticity of supply at Q = 1?
  3. What is the market equilibrium price
  4. What is the market equilibrium quantity?
  5. What is the producer surplus?
  6. What is the consumer surplus?
  7. At what quantity is total revenue maximized?

Externalities can be subtle… Let us move across the bay and 60 miles south from Avicenna to the town of Tall Stick, home of Crony Capitalism University…

The 10,000 students at CCU do two things with their disposable incomes of $5,000/year each:

• Buy gourmet pizzas at $20/pizza
• Rent BMWs at $5000/year

Utility of each student:

• U = (number of pizzas) + 500(if renting BMW) - (1/20)(number of other students renting BMWs)

This utility function thus has both envy and spite…

1. If nobody rents a BMW, what is the utility of a typical student?
2. If nobody else rents a BMW, what is the utility of a student who rents one?
3. If everybody else rents a BMW, how does a typical student spend his or her money?
4. If everybody else rents a BMW, what is the utility of a typical student given his or her choices?
5. Since it made sense for each student to rent a BMW, how come moving from a situation in which nobody rented one to one in which everybody rented one reduced average utility from 250 (which is the answer you should have gotten for D.1) to 1/20 (which is the answer you should have gotten for (D.4)?
6. What is the optimal externality-compensating Pigovian tax on BMW rentals at CCU?

Back in January 2012 Republican presidential candidate Mitt Romney said:

You know, I think it's about envy. I think it's about class warfare. When you have a President encouraging the idea of dividing America based on the 99 per cent versus one percent—and those people who have been most successful will be in the one per cent—you have opened up a whole new wave of approach in this country which is entirely inconsistent with the concept of one nation under God. The American people, I believe in the final analysis, will reject it…

This is an argument that when we do benefit-cost calculations with a utility function like the one in D:

• U = (number of pizzas) + 500(if renting BMW) - (1/20)(number of other students renting BMWs)

We should count the first two terms and add them up as parts of our social welfare function and throw away the third term.

Write a short essay of three paragraphs: the first paragraph should set out what are, in your estimation, the strongest reasons for rejecting Mitt Romney’s argument; the second paragraph should set out what are, in your estimation, the strongest reasons for Mitt Romney’s argument; and the third paragraph should choose a side and explain why you chose the side you did.

Suppose that it is December 2016 and you are called to Washington to audition for a cabinet-level post in the next administration and to advise him or her on the proper size of the economic stimulus program.

Your forecast is that, were 2018 to be a normal business-cycle time, that the level of real GDP in 2018 would be $17.0 trillion/year. You are conducting your analysis in the income-expenditure framework where: Y = C + I + G + X , C = c_o + c_y(Y - T). You believe that c_y = 0.5.

You project that there will be little change from trend in consumer confidence c_o, which you project at $2.5 trillion/year in 2018. you project that business demand for investment spending will be $3.5 trillion/year in 2018. You project that exports will be $2 trillion/year in 2018. And you project that the Federal Reserve will not take additional steps to stimulate the economy.

1. What level of government purchases spending G do you recommend for 2018? Explain why?
2. Suppose that the President-Elect’s political advisors say that it is very important, politically, to cut government spending. What do you say in response?
3. Suppose that the collapse of the euro suddenly drives up interest rate spreads, and leads you to forecast that I in 2018 will be not $3.5 trillion but $2.5 trillion. How do you change your recommendation for G?

In 8300 BC there were roughly 5 million people in the world—with an average standard of living of about $500/year. In 1700 there were roughly 640 million people in the world—with an average standard of living of about $500/year. In 1900 there were roughly 1.6 billion people—with an average standard of living of about $1000/year. Today there are roughy 7.4 billion people— with an average material standard of living of $8000 dollars per year.

1. Use the Rule of 72 to calculate the average population growth rate and the average global real GDP growth rate between 8300 BC and 1700 AD.
2. Use the Rule of 72 to calculate the average global real GDP growth rate between 1700 and 1900 AD.
3. Use the Rule of 72 to calculate the average global real GDP growth rate between 1900 and 2014
4. How much faster has global real GDP growth been over 1900-2014 than it was over 8300 BC-1700 AD?
5. How much faster has global real GDP growth been over 1900-2014 than it was over 1700-1900?
6. What would global real GDP be in 2100 if it were to grow as rapidly between now and 2100 as it grew from 1900-2012?
7. If there are 10 billion people in the world in 2100 and if global real GDP be in 2100 if it were to grow as rapidly between now and 2100 as it grew from 1900-2014, what would average living standards be in 2100?

• This is the first time we have taught Econ 2 since 2007, so we are especially anxious for feedback.
• Write a four-paragraph essay:
  • Pick one element of the course that you thought worked best, and explain why you thought it worked best.
  • Pick one element of the course that you thought worked badly but needs to be improved, and explain how you think it could be improved.
  • Pick one element of the course that you thought worked badly and should be dropped. and explain why it should be dropped.
  • And pick one topic not covered in the course that you think should be added, and explain why it should be added.

With facts confusing me again he is:

Robert Waldmann: "Ah, yes a bold Volcker-like regime change...

...would move expectations. Thus we recall that Volcker's obvious extreme determination to fight inflation caused an anomaly in inflation expectations controlling for lagged inflation.

Based on the Livingston expectations survey we know that supposed experts had significantly different inflation forecasts when Volcker was chairman than when Burns was chairman (coefficients on dummies in regressions of the median Livingston inflation forecast which include lagged personal consumption expenditure deflator minus food and energy inflation). Yes, conditional on Volcker being chairman they forecast significantly higher inflation. This is an elementary statistic published (on the web). Can you reconcile your recollection with this datum?

http://angrybearblog.com/2014/03/inflation-expectations-credibility-and-paul-volcker.html | http://angrybearblog.com/2014/04/inflation-expectations-in-the-usa.html

I think it is totally wrong to claim that there was a Volcker change of regime which affected outcomes through expectations beyond the effect through pushing the fed funds rate up about 10% and causing high unemployment. Volcker could overcome the most stubborn inflation phobia because there isn't an upper bound on the federal funds rate. The evidence from the Volcker years strongly undermines that your view that some sort of more vigorous forward guidance would work.

You can still argue that FDR didn't do much of anything so whoever was Fed chair was key to the recovery. Or you could look at the effect of Kuroda (have you ever noticed that the case for monetary policy working is based on Abenomics and Abe is leader of the majority which controls fiscal policy and not a central banker)

Haruhiko Kuroda or Hjalman Horace Greeley Schacht are your examples. Not FDR (who was you know president not chairman) abd certainly certainly not Paul Volcker...."

Exercise Tiger: Wikipedia:

Early on the morning of 28 April... a convoy of follow-up troops was attacked by nine German E-boats in Lyme Bay. Of the two ships assigned to protect the convoy, only one was present. HMS Azalea, a corvette was leading the nine LSTs in a straight line, a formation which later drew criticism since it presented an easy target to the E-boats. The second ship which was supposed to be present, HMS Scimitar, a World War I destroyer, had been in collision with an LST, suffered structural damage and left the convoy to be repaired at Plymouth. Because the LSTs and British naval headquarters were operating on different frequencies, the American forces did not know this.

Brian Buetler: The Right's New Scam: Feigning Anger on Behalf of People They Encouraged to Skip Obamacare: "Beginning last summer, and continuing unabated until a few weeks ago...

...conservatives undertook... to discourage people... from enrolling in ACA-compliant health plans... to deny state-based insurance markets critical mass... and send them into actuarial death spirals... appealing to strangers to undertake considerable personal risk in service of dubious ideological principles... [and] almost certainly succeeded at convincing some people to skip Obamacare.... [C]onservatives now want you to be outraged about the fact that the Affordable Care Act creates limited open-enrollment periods each year to prohibit precisely that kind of free riding....

MY DAY by Eleanor Roosevelt: WASHINGTON, Wednesday—I did not mention yesterday that the Prime Minister of Australia, Mrs. Curtin, President-elect and Senora de Picado and I had lunch with the President at my husband's vacation residence in the South. I was extremely glad to have the opportunity to meet the man who will be at the head of the Costa Rican government in the near future, and I am sorry that his stay in this country will be so short.

Suresh Naidu: The Slack Wire: Substitutes or Complements: Marx and Brad and Me: "Since Brad Delong has attributed some thoughts on Marx to me...

...and I have gotten some emails inquiring whether or not I did say them, I thought it would be useful to publicly air what I understand to be the context. Brad has been a mentor and advisor for 10 years now, and is one of the very few economists broad and open enough to know anything about what Marx wrote. I have met very few other people in mainstream economics departments who cared enough to read Marx, let alone enough to assign the Communist Manifesto and Wage Labor and Capital in a mandatory first-year economics Ph.D. course (even I don’t do that).

There are many candidates for the worst review of Thomas Piketty's Capital in the Twenty-First Century**. Consider Allan Meltzer. He opens:

Allan Meltzer: The United States of Envy: "In advance of the 2014 election...

...the Obama administration has drawn the political discussion away from its unpopular and flawed healthcare plan, usually called Obamacare, to bring public attention and support for increased income redistribution.... We can all expect this theme to be trumpeted loudly by the mainstream press as the mid-term election approaches: Some of us can have more, the argument goes, if we force others to have less. Support for the alleged social benefits of setting much higher marginal tax rates on the highest incomes has now been endorsed by the International Monetary Fund, based heavily on research by two French economists named Thomas Piketty and Emanuel Saez. The two worked together on the faculty at MIT, where the current research director of the IMF, Olivier Blanchard, was a professor. Like Piketty and Saez, he is also French. France has, for many years, implemented destructive policies of income redistribution....

I agree that in the past there was a notable positive association between economic growth and the spread between the shares of income going to the top 1, 5, or 10 percent of the earners and the share going to the remainder. The mistake is to conclude that narrowing the distribution contributes to growth. The far more plausible explanation is that economic growth in capitalist countries over the past two centuries contributed to a steep decline in the share of the top earners...

What can we say? That Meltzer has not read the book, because if he had read the book he would know that one of Piketty's big points--r > g, remember--is that patrimonial capitalism weakens when economic growth is fast? That he is too disconnected from the world to remember that Emmanuel Saez was never on the MIT faculty? That he is too lazy to check his (faulty) memory against Emmanuel Saez's cv? That there are many people in France who are as opposed to progressive taxation as Allan Meltzer? That France's income-redistribution policies have not kept it from having as high median after-tax incomes with a lot more vacation time and better health care outcomes than the United States? Or that the lead with its invocation of the joint conspiracy of the mainstream media and the Obama Administration to distract attention from ObamaCare is unhinged wingnut regurgitation of mendacious talking points at its worst?

Vladimir Lenin: The Second Congress of the Communist International: Report on the International Situation and the Fundamental Tasks of the Communist International: July 19, 1920:

(An ovation breaks out. All present rise to their feet and applaud. The speaker tries to begin, but the applause and cries in all languages continue. The ovation does not abate.) Comrades, the theses on the questions of the fundamental tasks of the Communist International have been published in all languages and contain nothing that is materially new (particularly to the Russian comrades). That is because, in a considerable measure, they extend several of the main features of our revolutionary experience and the lessons of our revolutionary movement to a number of Western countries, to Western Europe. My report will therefore deal at greater length, if in brief outline, with the first part of my subject, namely, the international situation.