The new spec is keen to develop students knowledge of economic thinkers such as Keynes, Smith, Hayek etc. I suggest you spend some time this week looking at what their key ideas are (basically free market Vs intervention approach.
Here is a summary of Keynesian economics....please watch and come to school to discuss (I'm not in on Monday!)
Really useful when looking at questions such as:
An understanding of Keynesian ideas can be helpful in evaluating macroeconomic stability in terms of prices, jobs and incomes.
Keynesians believe that free markets are volatile and not always self-correcting in the event of an external shock
The free-market system is prone to lengthy periods of recession & depression
Economies can remain stuck in an “underemployment” equilibrium
In a world of stagnation or depression, direct state intervention may be essential to restore confidence and lift demand.
Keynes was one of the first economists to criticise the profession for adhering to unrealistic assumptions
“In terms of economic policy Keynesian economics has only one proposition: that governments should make sure that aggregate demand is sufficient to maintain a full-employment level of activity.”
Showing posts with label Keynesian economics. Show all posts
Showing posts with label Keynesian economics. Show all posts
Thursday, 8 June 2017
Thursday, 11 May 2017
Sunday, 2 March 2014
Unit 2 & 4: Multiplier, accelerator & Keynesian economics
Here is a revision presentation for an AS Macro topic - the multiplier
effect, the accelerator effect and Keynesian economics;
Saturday, 23 November 2013
Unit 4: Classical Economists fail their own test!
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| I'll be back! |
Saturday, 14 September 2013
Unit 2 & 4: The Austerity Debate
Hi All
A number of interesting articles have popped up over the past few weeks as a result of the IMF lecturing the UK government and some pretty notable Economists changing their opinions based on some data mistakes. Who said that putting 5 Economists in a room would result in 6 opposing opinions?
Anyway read a few of these articles and make up your own mind. Has Austerity held back UK growth or stabilized the economy in the long term? Can you draw parallels with Thatchers policies and the credit given to her (in some circles) for those same divisive policies?
Oh and if you are an Economics student and you are not interested in this debate then you are not going to do quite so well in your exams as you may hope... And those who are feel free to challenge my own opinion. I come down on the side of Keynes and the argument that austerity in a recession prolongs the pain and you need to intervene to get growth back up in an economy. That said I may have 2 other opinions on the same subject which I will use depending on my mood.
A number of interesting articles have popped up over the past few weeks as a result of the IMF lecturing the UK government and some pretty notable Economists changing their opinions based on some data mistakes. Who said that putting 5 Economists in a room would result in 6 opposing opinions?
Anyway read a few of these articles and make up your own mind. Has Austerity held back UK growth or stabilized the economy in the long term? Can you draw parallels with Thatchers policies and the credit given to her (in some circles) for those same divisive policies?
Oh and if you are an Economics student and you are not interested in this debate then you are not going to do quite so well in your exams as you may hope... And those who are feel free to challenge my own opinion. I come down on the side of Keynes and the argument that austerity in a recession prolongs the pain and you need to intervene to get growth back up in an economy. That said I may have 2 other opinions on the same subject which I will use depending on my mood.
Tuesday, 26 March 2013
Unit 2 & 4: Keynesian stimulus can reduce govt debt
Increasing taxes during an economic crisis makes perfect sense!
Thank you to Mr Drennan for spotting this recent Guardian article focusing on debt-friendly stimulus rather than austerity. It suggests that citizens do not necessarily have to endure further financial hardship. Excellent for students discussing macroeconomic policy in their essays.
Raising taxes means more government expenditure on projects such as road-building, which directly benefits the public. Photograph: Bob Battersby/Eye Ubiquitous/
With much of the global economy apparently trapped in a long and painful austerity-induced slump, it is time to admit that the trap is entirely of our own making. We have constructed it from unfortunate habits of thought about how to handle spiralling public debt.
People developed these habits on the basis of the experiences of their families and friends: when in debt trouble, one must cut spending and pass through a period of austerity until the burden (debt relative to income) is reduced. That means no meals out for a while, no new cars and no new clothes. It seems like common sense – even moral virtue – to respond this way.
But, while that approach to debt works well for a single household in trouble, it does not work well for an entire economy, as the spending cuts only worsen the problem. This is the paradox of thrift: belt-tightening causes people to lose their jobs, because other people are not buying what they produce, so their debt burden rises rather than falls.
There is a way out of this trap, but only if we tilt the discussion about how to lower the debt/GDP ratio away from austerity – higher taxes and lower spending – toward debt-friendly stimulus. This means further increasing taxes and raising government expenditure in the same proportion. That way, the debt/GDP ratio declines because the denominator (economic output) increases, not because the numerator (the total the government has borrowed) declines.
This kind of enlightened stimulus runs into strong prejudices. For starters, people tend to think of taxes as a loathsome infringement on their freedom, as if petty bureaucrats will inevitably squander the increased revenue on useless and ineffective government employees and programs. But the additional work done does not necessarily involve only government employees, and citizens can have a voice in how the expenditure is directed.
People also believe that tax increases cannot realistically be purely temporary expedients in an economic crisis, and that they must be regarded as an opening wedge that should be avoided at all costs. History shows, however, that tax increases, if expressly designated as temporary, are indeed reversed later. That is what happens after major wars, for example.
We need to consider such issues in trying to understand why, for example, Italian voters last month rejected the sober economist Mario Monti, who forced austerity on them, notably by raising property taxes. Italians are in the habit of thinking that tax increases go only to paying off rich investors, rather than to paying for government services such as better roads and schools.
Keynesian stimulus policy is habitually described as deficit spending, not tax-financed spending. Stimulus by tax cuts might almost seem to be built on deception. Its effect on consumption and investment expenditure seems to require individuals to forget that they will be taxed later for public spending today, when the government repays the debt with interest. If individuals were rational and well informed, they might conclude that they should not spend more, despite tax cuts, since the cuts are not real.
We do not need to rely on such tricks to stimulate the economy and reduce the ratio of debt to income. The fundamental economic problem that currently troubles much of the world is insufficient demand. Businesses are not investing enough in new plants and equipment. They are not adding jobs, largely because people are not spending enough – or are not expected to spend enough in the future – to keep the economy going at full tilt.
Debt-friendly stimulus might be regarded as nothing more than a collective decision by all of us to spend more to jump-start the economy. It has nothing to do with taking on debt or tricking people about future taxes. If left to individual decisions, people would not spend more on consumption. However, maybe we can vote for a government that will compel us all to do that collectively, thereby creating enough demand to put the economy on an even keel in short order.
Simply put, Keynesian stimulus does not necessarily entail more government debt, as popular discourse seems to assume. Rather, stimulus is about making collective decisions to get aggregate spending back on track. The spending naturally involves different kinds of consumption than we would make individually – say, better highways, rather than more dinners out. But that should be OK, especially if we all have jobs.
Balanced-budget stimulus was first advocated in the early 1940s by William Salant, an economist in president Franklin Roosevelt's administration, and by Paul Samuelson, then a young economics professor at the Massachusetts Institute of Technology. They argued that, because any government stimulus implies higher taxes sooner or later, the increase may as well come immediately. For the average person, the higher taxes do not mean lower after-tax income, because the stimulus will have the immediate effect of raising incomes. And no one is deceived.
Many believe that balanced-budget stimulus – tax increases at a time of economic distress – is politically impossible. After all, French president François Hollande retreated under immense political pressure from his campaign promises to implement debt-friendly stimulus. But, given the shortage of good alternatives, we must not assume that bad habits of thought can never be broken, and we should keep the possibility of more enlightened policy constantly in mind.
Some form of debt-friendly stimulus might ultimately appeal to voters if they could be convinced that raising taxes does not necessarily mean hardship or increased centralisation of decision-making. When people understand that it means the same average level of take-home pay after taxes, plus more jobs and products of additional government expenditure (such as new roads), they may well wonder why they ever tried stimulus any other way.
Thank you to Mr Drennan for spotting this recent Guardian article focusing on debt-friendly stimulus rather than austerity. It suggests that citizens do not necessarily have to endure further financial hardship. Excellent for students discussing macroeconomic policy in their essays.
(Source: guardian.co.uk, Thursday 21 March 2013)
Raising taxes means more government expenditure on projects such as road-building, which directly benefits the public. Photograph: Bob Battersby/Eye Ubiquitous/
With much of the global economy apparently trapped in a long and painful austerity-induced slump, it is time to admit that the trap is entirely of our own making. We have constructed it from unfortunate habits of thought about how to handle spiralling public debt.
People developed these habits on the basis of the experiences of their families and friends: when in debt trouble, one must cut spending and pass through a period of austerity until the burden (debt relative to income) is reduced. That means no meals out for a while, no new cars and no new clothes. It seems like common sense – even moral virtue – to respond this way.
But, while that approach to debt works well for a single household in trouble, it does not work well for an entire economy, as the spending cuts only worsen the problem. This is the paradox of thrift: belt-tightening causes people to lose their jobs, because other people are not buying what they produce, so their debt burden rises rather than falls.
There is a way out of this trap, but only if we tilt the discussion about how to lower the debt/GDP ratio away from austerity – higher taxes and lower spending – toward debt-friendly stimulus. This means further increasing taxes and raising government expenditure in the same proportion. That way, the debt/GDP ratio declines because the denominator (economic output) increases, not because the numerator (the total the government has borrowed) declines.
This kind of enlightened stimulus runs into strong prejudices. For starters, people tend to think of taxes as a loathsome infringement on their freedom, as if petty bureaucrats will inevitably squander the increased revenue on useless and ineffective government employees and programs. But the additional work done does not necessarily involve only government employees, and citizens can have a voice in how the expenditure is directed.
People also believe that tax increases cannot realistically be purely temporary expedients in an economic crisis, and that they must be regarded as an opening wedge that should be avoided at all costs. History shows, however, that tax increases, if expressly designated as temporary, are indeed reversed later. That is what happens after major wars, for example.
We need to consider such issues in trying to understand why, for example, Italian voters last month rejected the sober economist Mario Monti, who forced austerity on them, notably by raising property taxes. Italians are in the habit of thinking that tax increases go only to paying off rich investors, rather than to paying for government services such as better roads and schools.
Keynesian stimulus policy is habitually described as deficit spending, not tax-financed spending. Stimulus by tax cuts might almost seem to be built on deception. Its effect on consumption and investment expenditure seems to require individuals to forget that they will be taxed later for public spending today, when the government repays the debt with interest. If individuals were rational and well informed, they might conclude that they should not spend more, despite tax cuts, since the cuts are not real.
We do not need to rely on such tricks to stimulate the economy and reduce the ratio of debt to income. The fundamental economic problem that currently troubles much of the world is insufficient demand. Businesses are not investing enough in new plants and equipment. They are not adding jobs, largely because people are not spending enough – or are not expected to spend enough in the future – to keep the economy going at full tilt.
Debt-friendly stimulus might be regarded as nothing more than a collective decision by all of us to spend more to jump-start the economy. It has nothing to do with taking on debt or tricking people about future taxes. If left to individual decisions, people would not spend more on consumption. However, maybe we can vote for a government that will compel us all to do that collectively, thereby creating enough demand to put the economy on an even keel in short order.
Simply put, Keynesian stimulus does not necessarily entail more government debt, as popular discourse seems to assume. Rather, stimulus is about making collective decisions to get aggregate spending back on track. The spending naturally involves different kinds of consumption than we would make individually – say, better highways, rather than more dinners out. But that should be OK, especially if we all have jobs.
Balanced-budget stimulus was first advocated in the early 1940s by William Salant, an economist in president Franklin Roosevelt's administration, and by Paul Samuelson, then a young economics professor at the Massachusetts Institute of Technology. They argued that, because any government stimulus implies higher taxes sooner or later, the increase may as well come immediately. For the average person, the higher taxes do not mean lower after-tax income, because the stimulus will have the immediate effect of raising incomes. And no one is deceived.
Many believe that balanced-budget stimulus – tax increases at a time of economic distress – is politically impossible. After all, French president François Hollande retreated under immense political pressure from his campaign promises to implement debt-friendly stimulus. But, given the shortage of good alternatives, we must not assume that bad habits of thought can never be broken, and we should keep the possibility of more enlightened policy constantly in mind.
Some form of debt-friendly stimulus might ultimately appeal to voters if they could be convinced that raising taxes does not necessarily mean hardship or increased centralisation of decision-making. When people understand that it means the same average level of take-home pay after taxes, plus more jobs and products of additional government expenditure (such as new roads), they may well wonder why they ever tried stimulus any other way.
Monday, 11 March 2013
Unit 4: Macro stimulus - what to do?
Jeffrey Sachs, one of the most respected economic advisors of his generation, has launched an attack on Nobel laureate Paul Krugman's short term stimulus solutions to the US' current economic woes believing that what's required is "a consistent, planned, decade-long boost in public investments in people, technology, and infrastructure".
According to Sachs, Krugman, a disciple of John Maynard Keynes, is guilty of what he calls "crude Keynesianism" which he outlines in the four points below:
(2) The belief that our problems are due overwhelmingly to a deficiency of aggregate demand, rather than to structural problems that need a long-term approach;
(3) The belief that a rapidly rising debt-GDP ratio is largely benign because interest rates are low today and will stay so indefinitely;
(4) The belief that "to a large effect, spending is spending," thereby catering to waste and vested interests while ignoring America's urgent investment needs.
Sachs criticizes the size of Krugman's multiplier calculations (useful to my AS students who have looked at this theory recently and who'll be appreciative of some relevant media coverage. Look here for some more fiscal policy multiplier estimates):
"Krugman believes that fiscal multipliers are predictable and large. Thus, a $1 rise in government spending of any kind, according to Krugman, predictably leads to something like $1.50 in higher GDP. Similarly, a $1 cut in payroll taxes leads to something like a $1.30 rise in GDP. "
He then goes on to suggest three possible policy solutions:
(1) Decade-long public investment programs in renewable energy, upgraded public infrastructure, fast rail, job training and the like;
(2) Adequate fiscal revenues (including tolls on infrastructure) to pay for these investments over the course of a decade, including a downward path of the debt-GDP ratio;
(3) Increased revenues through taxation on high net worth, financial transactions, high incomes, capital gains and carried interest, offshore corporate earnings, and carbon emissions, and a stiff crackdown on tax havens and phony transfer pricing.
Krugman's response via his NY Times blog is characteristically to the point - "I don’t know what’s happened to Jeff Sachs. He’s been critical of “crude Keynesianism” throughout this crisis, without ever explaining what’s crude about viewing a huge slump in aggregate demand through a Keynesian lens. So his position has been a mystery."
To finish, for a straightforward explanation of the austerity-stimulus debate have a look at this Business Insider article. It comes with the below graph which compares UK GDP growth after their austerity approach to the crisis to US growth after their stimulus response. No prizes for guessing what Krugman would advocate more of.
Sunday, 17 February 2013
Wednesday, 13 June 2012
Unit 4: Evaluating Government Spending
Excellent piece, please, please read...it will give you some context and evaluation ideas when attempting questions/essay on fiscal policy.
When Robert Skidelsky gave his talk on Keynes here in Madrid last October, he spoke at length about the importance of effective government spending emphasising that the focus of the spending should be on capital rather than current.
ie, When aggregate demand is lacking, the government should increase spending on capital projects, even if that means deficit spending, in order to kick start the economy with the accompanying multiplier effect on output, jobs and growth.
This New York Times article takes up the Keynesian argument concerning the economic benefits of starting an “accelerated program of infrastructure repairs” throughout the US and and urges both Obama and the Republican hopeful Mitt Romney to listen up.
Apart from the impact such a program would have on jobs, $335 in annual damage per vehicle on the road caused by substandard roads would be saved. According to a report by the American Society of Civil Engineers, there’s more than $2 trillion in long-overdue repairs. These add to business costs, not to mention injuries and deaths caused by the roads, therefore by fixing them up, the government will also be improving the supply side even if that means increasing indebtedness.
“When prudent investment opportunities arise, families, businesses, and governments can and should spend more than they take in. “
An excellent article which can help A2 pupils when looking for some context when answering questions related to this topic. This also reminds me of this Q&A blog post from Geoff a while ago as it includes some great analysis and the following evaluation points of such infrastructure projects (relating to road building in the UK):
Read this!!!!
1. Skills shortages and spare capacity– the effectiveness of the investment might depend on whether the UK road building industry has sufficient skilled workers and spare capacity to successfully bid for and deliver the contracts to build new roads. If there are persistent skills gaps perhaps due to structural unemployment, wages will be bid higher and firms may have to depend on net inward migration.
2. Government spending on capital projects will help raise AD but needs to be supported by other policies to improve the human capital of the workforce and improve their job prospects
3. No one can be sure about the likely size of the fiscal multiplier effect – for example the propensity to consume domestically produced goods and services of the people and businesses employed to build the new roads
4. The medium term effects of increased government borrowing to fund major roads – might interest rates and taxation have to edge higher – putting a squeeze on the economy?
5. There might be more effective policies in the medium term – for example spending the same money to fund student enrolment at college or university so that they build up their skills?\
6. Long time lags on transport investment projects - see the comment below on the impact of planning objections and delays
When Robert Skidelsky gave his talk on Keynes here in Madrid last October, he spoke at length about the importance of effective government spending emphasising that the focus of the spending should be on capital rather than current.
ie, When aggregate demand is lacking, the government should increase spending on capital projects, even if that means deficit spending, in order to kick start the economy with the accompanying multiplier effect on output, jobs and growth.
This New York Times article takes up the Keynesian argument concerning the economic benefits of starting an “accelerated program of infrastructure repairs” throughout the US and and urges both Obama and the Republican hopeful Mitt Romney to listen up.
Apart from the impact such a program would have on jobs, $335 in annual damage per vehicle on the road caused by substandard roads would be saved. According to a report by the American Society of Civil Engineers, there’s more than $2 trillion in long-overdue repairs. These add to business costs, not to mention injuries and deaths caused by the roads, therefore by fixing them up, the government will also be improving the supply side even if that means increasing indebtedness.
“When prudent investment opportunities arise, families, businesses, and governments can and should spend more than they take in. “
An excellent article which can help A2 pupils when looking for some context when answering questions related to this topic. This also reminds me of this Q&A blog post from Geoff a while ago as it includes some great analysis and the following evaluation points of such infrastructure projects (relating to road building in the UK):
Read this!!!!
1. Skills shortages and spare capacity– the effectiveness of the investment might depend on whether the UK road building industry has sufficient skilled workers and spare capacity to successfully bid for and deliver the contracts to build new roads. If there are persistent skills gaps perhaps due to structural unemployment, wages will be bid higher and firms may have to depend on net inward migration.
2. Government spending on capital projects will help raise AD but needs to be supported by other policies to improve the human capital of the workforce and improve their job prospects
3. No one can be sure about the likely size of the fiscal multiplier effect – for example the propensity to consume domestically produced goods and services of the people and businesses employed to build the new roads
4. The medium term effects of increased government borrowing to fund major roads – might interest rates and taxation have to edge higher – putting a squeeze on the economy?
5. There might be more effective policies in the medium term – for example spending the same money to fund student enrolment at college or university so that they build up their skills?\
6. Long time lags on transport investment projects - see the comment below on the impact of planning objections and delays
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