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Posts from the ‘Economics History’ Category

Learning Economics with Movie Tickets and Babysitting

Drew Field test 2-cropTeachers who went through the AIER Teach-the-Teachers Initiative continue to dazzle us with creativity and innovative practices in their classrooms.

On September 9, 2015, we observed two American History II lessons taught by Drew Gibson at Mount Greylock Regional School in Williamstown, Mass. The purpose of the lessons was defined by the teacher as “discovering the story behind economic data and charts.”

Mr. Gibson (shown in the picture) used data on babysitting wages per hour, and movie ticket prices from 1945 through 2000, to make an interesting point about supply, demand, and price. The data was taken from Virtual Economics published by the Council for Economic Education.

The students computed the average annual rate of increase for both values, and graphed the relationship between Read more

CPI’s History Is Not Just About Bureaucrats

Every month, the Bureau of Labor Statistics releases the Consumer Price Index to a wide range of commentary. Policymakers often debate whether the CPI accurately measures inflation. But you might be interested to know that the history of the CPI is not simply about bureaucrats sitting in an office on the Potomac. In fact, the CPI has its roots in important economic and political events of the late 19th and early 20th century.

The precursor to the CPI was an in-depth report on the 1890 McKinley Tariff, which raised import duties to an astronomical 50 percent. The tariff was meant to protect U.S. industries but in the end hurt consumers in the form of higher prices. Early work measuring price inflation ultimately led to the repeal of the McKinley Tariff to the benefit of the consumer.

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The (Un)Changing Role of Debt in Our Economy

Has the role of debt in our economy fundamentally changed? Some have identified a rise in the ratio of consumer credit to GDP as a sign that debt has taken on a more harmful aspect, fueling unbalanced economic growth. The ratio of consumer credit to nominal GDP was about 18 percent at the end of last year, not much changed from 17-1/2 percent 10 years ago but up from roughly 12 percent 10 years before that.

GDP and Consumer CreditBut how significant is that change? A glance at our chart to the left showing the paths of nominal GDP and credit suggests a pretty constant relationship over the last seven decades. In fact, the levels of nominal GDP and consumer credit exhibit a 99 percent correlation since 1947. That seems to suggest that whatever the role of consumer credit in fueling economic growth, it hasn’t changed much in the last 66 years.

Household Liabilities and GDPThings look a little different when you consider measures of credit that include loans secured by real-estate, including mortgages and home equity lines of credit. There we see a clear and unprecedented change of gears starting around 2000, with household liabilities reaching a peak in 2007. However, the correction back down since then has been dramatic, and the evidence suggests it has not yet run its course. Even considering the mortgage-fueled debt bubble of the early 2000s, the correlation between overall household liabilities and GDP over the last seven decades is still 98 percent.

With a longer-term view, we can see two major shifts in the ratio of consumer debt to GDP—one in the 20-year period from the mid-1940s to the mid-1960s, and another in the roughly 25 years from the mid-1990s to today. During both of those periods, the ratio of consumer debt to GDP rose, but not by enough to disrupt the longer-term relationship between the two.

There are a number of factors that may have contributed to these shifts, such as prolonged periods of low interest rates, or changing patterns of household income growth. It’s possible that we will enter a new period of stabilization in the consumer debt-to-GDP ratio, such as occurred from the 1960s to the 1980s. Or perhaps the ratio will continue to rise. It’s too early to judge—households’ balance sheets, and the economy overall, are still recovering from the financial crisis and Great Recession.

RatioAssetsLiabilitiesAnother way to think about household debt is in relation to household assets. As our chart to the left shows, there has been a decline over time in the ratio of households’ assets to their debt liabilities—in other words, households’ assets have not grown as fast as their debts. But again, seen through a longer-term lens, the recent experience hasn’t been that striking. While there was a clear drop in households’ assets relative to their indebtedness leading up to the Great Recession, there has been substantial improvement since then. In fact, the drop over the last 60 years is much less striking than the decline in the 20 years before that.

We should keep in mind that these are aggregate data, for the economy overall. The story may be more nuanced if you examine the results by household income or assets, or even by geographical region. But in thinking about the role that consumer debt plays in our economy overall, the evidence does not support the conclusion that we are now on a fundamentally different track than prior to the buildup of the financial crisis.

Consumer debt and economic activity are closely correlated. Shifts in that relationship are not unprecedented, but they are more equivalent to, say, adjusting the mixture of fuel and oxygen in your car’s gasoline engine rather than getting a whole new engine—or a whole new car.

On the Fed’s 100th Birthday—Many Happy Returns?

Andrew Jackson slays Monster Bank

Amidst all the fuss over the Fed’s decision to slow the pace of its long-term asset purchases—the much-anticipated but largely symbolic “taper”—a more significant milestone passed relatively unnoticed: December 23 marked the 100th anniversary of the Federal Reserve Act, the legislation that paved the way for the creation of the Federal Reserve System and its current policymaking body, the Federal Open Market Committee.

That’s right—the United States lacked a central bank for much of the first 125 years of its existence. The nation’s first two attempts at central banking fell victim to partisan rancor, regional animosity, and fears that the centralization of monetary authority would lead to an unruly “Monster Bank,” all too susceptible to the whims of corrupt politicians and financial elites. While these matters were still hotly contested in the early years of the twentieth century, the Panic of 1907—which was widely seen as the result of a preventable liquidity crunch—fomented consensus over the need for a central bank to mitigate such crises in the future.

Most of the Fed’s century-long history of monetary policymaking has been marked by trial and error rather than scientific precision—but by necessity, not caprice: Congress did not bestow the Fed with a monetary policy playbook. The Federal Reserve Act of 1913 lacked a clear policy mandate for the new central bank, beyond fostering financial stability. In fact, a specific set of monetary policy objectives was not legislated until 1977, when Congress gave the Fed its “dual mandate”—to foster maximum employment and stable prices “commensurate with the economy’s long run potential.”

Just as the financial system has evolved over time, the Fed’s policy scope and authority have shifted and expanded. In fact, its ability to “innovate” in this regard might be considered one of the institution’s merits. But in the context of the Fed’s 100-year history, the monetary policy innovations implemented in the wake of the 2007-08 financial crisis are unprecedented and contentious. After driving its key interest rate down to zero in 2008, the Fed effectively exhausted its conventional, time-tested policy tools. In an effort to mitigate the effects of the still-raging financial crisis, the Fed undertook the extraordinary measure of making large-scale asset purchases, also known as quantitative easing, or QE. Successive waves of QE, aimed at restoring the economy to its long-run potential growth rate, have expanded the Fed’s balance sheet from roughly $800 billion to over $4 trillion. The “tapering” approved by the Fed last month will only slow the rate at which its balance sheet continues to grow, to $75 billion per month instead of $85 billion. This is by no means a policy reversal.

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Econ 101 Isn’t Killing America–But There Is Room for Improvement

The economic blogosphere has been aflame this week over a controversial Salon essay called “Econ 101 is Killing America.” Authors Robert Atkinson and Michael Lind argue that many neoclassical economists offer policymakers and the public a simplified, dumbed-down version of how the economy works–and that their misrepresentations are doing major damage to the lives of ordinary Americans.

AIER research fellow Zinnia Mukherjee says there’s certainly a need for more nuanced conversations about the economy. “It’s true that economists don’t always have the scope or time available to explain the full complexities of economic principles and analysis to the public,” Mukherjee says. “That’s why efforts to increase economic literacy and education are so important.”

Mukherjee also says both economists and journalists need to be more precise when they communicate economic ideas to general audiences: “There’s a big difference between saying that a principle is generally true and that it is always true.”

However, Mukherjee has several objections to the way Atkinson and Lind–neither of whom are economists–characterize the profession.

1. The claim: Economists present their field as a science akin to physics or chemistry. This obscures the real uncertainty involved in studying human behavior.

    The reality: Economists are well aware that economics is a social science, and are more than ready to admit that economic outcomes can be unpredictable.

“An economist can say how an individual with a certain type of preferences is likely to behave under certain conditions,” Mukherjee says, “but people have widely different kinds of preferences. Questions about economic outcomes can have multiple answers because of a number of factors that are beyond the control of individuals at a particular time.” Read more

The Marketplace of Ideas

Here’s what’s going on in the online world of economics.

  • What people in Brazil are really protesting, by anthropologist Erika Robb Larkins: “The bus fare is a metaphor for the system in Brazil as a whole and it is about raising the costs on something that already barely works. People have to pay a lot for something that just barely passes for functional.” [Cherokee Gothic]
  • Richard Posner offers one way to reduce the cost of health care in the U.S.: switch physicians to a professional model of providing services, along the lines of salaried government employees. “In a medical system governed by the professional model, physicians’ incentive to establish “surgical centers” in their offices in which to perform colonoscopies for which they can charge much higher prices, though there is no need for such centers, is weakened, because physicians imbued with the professional model do not think of themselves, or behave, as profit maximizers. [The Becker-Posner Blog]
  • If you think playing by the rules will make you immune to the dangers of government surveillance, Alex Tabarrok has got some bad news: “It is easy to violate the law without intent or knowledge. Most crimes used to be based on the common law and ancient understandings of wrong (murder, assault, theft and so on) but today there are thousands of federal criminal laws that bear no relation to common law or common understanding.”
  • How debased silver coins plunged the Holy Roman Empire into financial crisis back in 1620, by James Narron and David Skeie: “As Vilar notes in A History of Gold and Money, once ‘agriculture laid down the plow’ at the peak of the crisis and farmers turned to coin clipping as a livelihood, devaluation, hyperinflation, early forms of currency wars, and crude capital controls were either firmly in place or not far behind.” [Liberty Street Economics, thanks to Steve for the link!]
  • If you want people to perform their best, Robin Hanson suggests using negative feedback to punish the worst rather than rewarding the top achievers. This advice goes against all my experience with teaching; what do you think? [Overcoming Bias]

John Stuart Mill, An Economist In Love

Harriet Taylor Mill“It’s not you, it’s me. Well, it’s not me either: it’s just common sense, given the nature of my utility function.”

Going by Josh Freedman’s parody of an economist breaking up with his girlfriend, you might assume that practitioners of the dismal science are a cold-hearted bunch. But just because economists are really, really into being rational doesn’t mean they’re immune to Cupid’s arrows.

Take John Stuart Mill (1806-1873), whose thoughts on opportunity cost, individual freedom, and comparative advantage in trade continue to influence our economy today. While Mill was a formidable intellectual, a look at his personal life affirms that reason and passion aren’t mutually exclusive.

Growing up, Mill had the kind of education that would make Amy Chua proud. His father, a utilitarian and follower of Jeremy Bentham, set out to raise a prodigy. That meant giving his son Greek lessons at age 3 and schooling him in Latin at age 8, stuffing his brain with Plato and Aristotle and algebra, and not letting young Johnny play with kids his own age, apart from his siblings.

The elder Mill’s plan sort of worked. His son was a genius; by the time he was 13, he was helping his dad pen a textbook called Elements of Political Economy. But Mill was also desperately lonely. At 20, he suffered a major breakdown. “I sought no comfort by speaking to others of what I felt,” he wrote in his autobiography. “If I had loved anyone sufficiently to make confiding my griefs a necessity, I should not have been in the condition I was.”

With the help of poetry and literature, Mill eventually emerged from his depression. But the experience opened him up to the parts of life that lay beyond reason’s reach.

A few years later, he met a woman named Harriet Taylor, who would become the love of his life. While brilliant and beautiful, Harriet wasn’t the most logical choice for a romantic partner. She was already married to a good-hearted snooze: “a most upright, brave, and honourable man,” Mill wrote, “of liberal opinions and good education, but without the intellectual or artistic tastes which would have made him a companion for her.” Read more

How Pearls Lost Their Status Symbol Sheen

In Baz Luhrmann’s glitzy new film adaptation of The Great Gatsby, pearls play at least as big a role as Dr. T.J. Eckleburg. In one of the movie’s flashbacks, we see the swinish Tom give Daisy a three-strand pearl necklace worth $350,000–over $4.6 million in today’s dollars. Later, Daisy tears the pearls from her neck as she tries to break off the engagement, scattering hundreds of silver-white beads across the floor. The symbolism is clear: pearls represent the immense, old money wealth that both protects and limits Daisy.

These days, pearls remain a popular choice for well-heeled businesswomen and ladies who lunch. But they’re not the status symbol they used to be. A three-strand pearl necklace from Tiffany & Co.’s new Gatsby collection costs just $1,000. Given the company’s reputation, it’s a safe bet that these are high-quality gems. Yet while in the early 20th century, a fine pearl necklace could be swapped for a Manhattan mansion, today a version from one of the world’s most reputable luxury retailers can be had for the price of a month’s rent–in Brooklyn, with roommates.

So how did pearls go from patrician to (somewhat more) populist? Like so many modern-day economic puzzles, the answer comes down to two things: technological innovation and the global marketplace. Read more

The Surprising Truth About Friedrich Hayek

Today is economist Friedrich Hayek’s birthday! Since he’s 114 years old, and also dead, he won’t be celebrating. But let’s not let that put a damper on the occasion.

These days, Hayek is best-known as an economic guru of the conservative movement (and as a surprisingly good rapper). Paul Ryan has claimed him as a major influence, as have Mitt Romney and Fox News host Glenn Beck.

But although Hayek believed in limited government power and free markets, he wasn’t actually a conservative. How do we know? He wrote an essay called “Why I Am Not a Conservative” in 1960.

The essay offers a sharp critique of the conservative movement. Hayek’s main problems with conservatives boil down to the following:

1. They’re afraid of change… 

“Conservatives are inclined to use the powers of government to prevent change or to limit its rate to whatever appeals to the more timid mind. In looking forward, they lack the faith in the spontaneous forces of adjustment which makes the liberal accept changes without apprehension, even though he does not know how the necessary adaptations will be brought about.”

and new ideas.

“I find that the most objectionable feature of the conservative attitude is its propensity to reject well-substantiated new knowledge because it dislikes some of the consequences which seem to follow from it-or, to put it bluntly, its obscurantism.”

2. They’re really into authority.

Hayek objects to “the characteristic complacency of the conservative toward the action of established authority and his prime concern that this authority be not weakened rather than that its power be kept within bounds.”

3. They’re often eager to impose their own beliefs and values onto others.

“To the liberal neither moral nor religious ideals are proper objects of coercion, while both conservatives and socialists recognize no such limits. I sometimes feel that the most conspicuous attribute of liberalism that distinguishes it as much from conservatism as from socialism is the view that moral beliefs concerning matters of conduct which do not directly interfere with the protected sphere of other persons do not justify coercion.”

(In other words, Hayek was the live and let live kind.) Read more

Richard Brewer Talks Economics

733802_421469131282385_190280505_nRichard Brewer is the chairman of AIER’s board of trustees. We sat down for a quick chat about Friedrich Hayek, job creation, and which news outlets get economics right.

You’ve got plenty of leadership experience under your belt. Before you became AIER’s chairman of the board, you served as the director of American Investment Services and as president and CEO of Arbella Insurance. What’s your management philosophy?

I don’t think leaders are necessarily born—they have to learn leadership behaviors. Good leaders have a genuine interest in people, they communicate. They’re respectful of others, gracious, fair, and firm.

Ronald Reagan is a good example. He was a good communicator. He and Tip O’Neill showed their ability to relate to and work with others when they worked together on revisions to Social Security in the 1980s. He also had a good sense of humor. “There you go again,” that line he said to Jimmy Carter–people still remember that.

What’s the most important economic concept for the average person to understand?

People understand how important jobs are—that’s a no-brainer. But they also need to understand what drives job creation and what deters it. When the government does something, how will that impact jobs? For example, will the Affordable Health Care Act hurt jobs because it will be more expensive for employers to hire?

Understanding the drivers of job creation is important for personal planning as well, as people decide which careers they’ll pursue. It’s important to know which ones will allow you to make a viable salary, along with personal satisfaction and other individual factors.

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