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Chapter 26: Saving, Investment, and the Financial System

Recent Posts
(Note: Page numbers referenced in posts prior to June 1, 2011 refer to 5th edition)

 

May 22

A Defense of High Frequency Traders

High frequency traders have been blamed for a variety of ills, including destabilizing financial markets and rigging the markets against ordinary investors. Members of AQR Management LLC reject the charges and claim high frequency traders supply an important service.

Textbook References:

Pages 556-558 “Financial Markets”

October 7

No Risk if Default

Martin Feldstein points out that even if the federal debt ceiling is not increased, the government collects enough revenue to pay interest on its debt. Thus a failure to increase the debt ceiling need not cause the U.S. to default on its debt.

Textbook References:

Pages 570-572 “The History of U.S. Government Debt”

October 3

Britain should not take its credit status for granted

Kenneth Rogoff argues against those who say that the British government should have borrowed more during the recession. Analogies to Britain's past are misleading, and borrowing excessively can damage a country's credit status.

Textbook References:

Pages 570-572 “The History of U.S. Government Debt”

May 9

Stocks are cheap

Two economists from the New York Fed surveyed predictions from 29 of the most widely used equity risk premium models. The models suggest that the S & P 500 will enjoy unusually high returns in the next five years. But can the models be trusted?

Textbook References:

Pages 557-558 “The Stock Market”

May 6

Larry Summers on Reinhart and Rogoff

Larry Summers reminds us that 1. Economics at the best of times is an inexact science, so policy should not be based on a single study, and 2. Despite the errors in Reinhart and Rogoff's work, debt is still something to be avoided.

Textbook References:

Pages 570-572 “The History of U.S. Government Debt”

May 3

Preventing the Next Catastrophe

David Romer points out that financial crises are common. Consequently, policymakers must fundamentally reform the financial system.

Textbook References:

Page 561 “Financial Crises”

April 30

Stevenson-Wolfers on Reinhart-Rogoff

Despite an error in their calculations, Reinhart and Rogoff's main finding still holds: High levels of public debt relative to GDP harms growth.

Textbook References:

Pages 570-572 “The History of U.S. Government Debt”

April 9

Solow on Bernanke

Robert Solow reviews a book that reproduces four lectures that Ben Bernanke gave in March 2012. The focus of the book is the role of the Fed during the recent financial crisis. Solow concludes by wondering if the financial sector has grown too large, i.e. "that the last x percent of financial activity absorbs more resources (especially intellectual resources) and creates more potential instability than its additional efficiency-benefits can justify."

Textbook References:

Page 561 “Financial Crises”

January 27

Is the financial sector too large?

From 1980 to 2007, the U.S. financial services industry grew from 4.9% to 7.9% of GDP. Two papers discuss whether this has been socially beneficial.

Textbook References:

Pages 556-561 “Financial Institutions in the U.S. Economy”

October 26

The Effects of Government Debt on Growth

Michael Boskin argues that the U.S. must reduce its debt-to-GDP ratio or face a significant reduction in economic growth. If it fails to do so, there will be a "growth disaster."

Textbook References:

Pages 570-572 “The History of U.S. Government Debt”

June 23

Niall Ferguson on the Generational Compact

Niall Ferguson argues that the current generation is running up a huge debt that will burden future generations.

Textbook References:

Pages 570-572 “The History of U.S. Government Debt”

April 20

CBO looks at the president's budget

The CBO forecasts that, compared to current law, the president's proposed budget will increase output from 2013 to 2017, but will reduce it after that. It illustrates the short-run ability of fiscal policy to boost growth and the long-run crowding out of productive investment by government borrowing.

Textbook References:

Pages 568-572 “Policy 3: Government Budget Deficits and Surpluses”
Pages 767-773 “How Fiscal Policy Influences Aggregate Demand”

January 16

The Strategic Bequest Motive

Steady saving leads one to accumulate wealth. The wealth can be used as a potential bequest that might induce children to take care of their parents.

Textbook References:

Pages 566-567 “Policy 1: Saving Incentives”

December 30

The Burden of the Debt

Paul Krugman argues that the Federal debt is not much of a problem. Laurence Ball and Greg Mankiw argue that the debt has distributional effects and that too much debt might trigger a collapse in demand for government bonds.

Textbook References:

Pages 238-240 “The Fiscal Challenge Ahead”
Pages 568-572 “Policy 3: Government Budget Deficits and Surpluses”
Pages 704-706 “Government Budget Deficits”
Pages 823-827 “Should the Government Balance Its Budget?”

October 29

My Lecture at Princeton

An hour-long video shows Mankiw's recent lecture at Princeton. In a wide-ranging presentation, he discusses the current state of macroeconomics. In the process he addresses the policy difficulties created by the current slump and the long-term debt crisis.

Textbook References:

Pages 238-240 “The Fiscal Challenge Ahead”
Page 561 “Financial Crises”
Pages 568-572 “Policy 3: Government Budget Deficits and Surpluses”
Pages 631-632 “Bank Capital, Leverage, and the Financial Crisis of 2008-2009”
Pages 745-748 “The Recession of 2008-2009”
Pages 758-767 “How Monetary Policy Influences Aggregate Demand”
Pages 767-773 “How Fiscal Policy Influences Aggregate Demand”
Pages 773-779 “Using Policy To Stabilize The Economy”
Pages 812-814 “Should Monetary And Fiscal Policymakers Try To Stabilize The Economy?”

October 27

The Budget Deficit

In a 90 minute video, Peter Diamond, Jeff Leibman, Deborah Lucas, Greg Mankiw, and Robert Solow discuss the federal budget deficit. The discussion addresses both short-term and long-term concerns.

Textbook References:

Pages 238-240 “The Fiscal Challenge Ahead”
Pages 568-572 “Policy 3: Government Budget Deficits and Surpluses”
Pages 745-748 “The Recession of 2008-2009”
Pages 767-773 “How Fiscal Policy Influences Aggregate Demand”
Pages 773-779 “Using Policy To Stabilize The Economy”
Pages 823-827 “Should the Government Balance Its Budget?”

October 22

Fates to Avoid

Mankiw warns against the policy blunders made by Zimbabwe, Japan, Greece, and France.

Textbook References:

Pages 7-9 “Principle 4: People Respond to Incentives”
Pages 238-240 “The Fiscal Challenge Ahead”
Pages 568-572 “Policy 3: Government Budget Deficits and Surpluses”
Page 654 “Hyperinflation in Zimbabwe”
Page 662 “Inflation Is Bad, But Deflation May Be Worse”

October 4

Alan Blinder and Glenn Hubbard Agree

Alan Blinder and Glenn Hubbard are from different parts of the political spectrum, but agree on a plan to bring the national debt under control.

Textbook References:

Pages 238-240 “The Fiscal Challenge Ahead”
Pages 568-572 “Policy 3: Government Budget Deficits and Surpluses”

October 2

Optimal Stabilization Policy

Mankiw's new paper suggests that fiscal policy is not necessary to stabilize the economy unless the Fed hits the zero lower bound on nominal interest rates AND cannot commit to future monetary policy actions that would boost present demand. When fiscal policy is required, tax changes that boost investment might be preferred to increases in government purchases.

Textbook References:

Page 568 “Policy 2: Investment Incentives”
Pages 758-767 “How Monetary Policy Influences Aggregate Demand”
Pages 767-773 “How Fiscal Policy Influences Aggregate Demand”
Pages 773-779 “Using Policy To Stabilize The Economy”

September 28

Robert Shiller on Stock Valuations

Robert Shiller points out that the price-to-earnings ratio in the stock market is still above its long-run average.

Textbook References:

Page 559 “Key Numbers for Stock Watchers”
Pages 584-589 “Asset Valuation”

September 24

A Conversation with Robert Lucas

Robert Lucas talks about the effects of high marginal tax rates on growth, about the recent financial crisis, and about rational expectations.

Textbook References:

Pages 7-9 “Principle 4: People Respond to Incentives”
Page 561 “Financial Crises”
Pages 631-632 “Bank Capital, Leverage, and the Financial Crisis of 2008-2009”
Pages 745-748 “The Recession of 2008-2009”
Pages 789-795 “Shifts in the Phillips Curve: The Role of Expectations”

September 22

Kotlikoff on the Corporate Tax

Laurence Kotlikoff argues that the corporate income tax harms workers more than investors. This is in part because capital can easily move to countries with lower tax rates, but workers can not. Kotlikoff proposes an overhaul of the U.S. tax system.

Textbook References:

Pages 250-251 “Pays the Corporate Income Tax?”
Page 568 “Policy 2: Investment Incentives”

September 10

Fixing Our Sick Economy

Two essays, one by Mankiw and the other by Robert Barro, address the causes of the weak recovery, and suggest possible solutions.

Textbook References:

Pages 7-9 “Principle 4: People Respond to Incentives”
Pages 250-251 “Who Pays the Corporate Income Tax?”
Pages 250-251 “The Value-Added Tax”
Page 568 “Policy 2: Investment Incentives”
Pages 745-748 “The Recession of 2008-2009”
Pages 767-773 “How Fiscal Policy Influences Aggregate Demand”

August 21

Split-Rated

Curtis Threadneedle (a.k.a. Merle Hazard) sings a humorous song about the downgrade in the U.S. credit rating.

Textbook References:

Pages 745-748 “The Recession of 2008-2009”
Pages 570-572 “The History of U.S. Government Debt”

August 8

I Talk to Reuters

Mankiw discusses the current U.S. debt crisis and what the Fed can do to boost the weak recovery.

Textbook References:

Pages 238-240 “The Fiscal Challenge Ahead”
Page 561 “Financial Crises”
Pages 568-572 “Policy 3: Government Budget Deficits and Surpluses”
Pages 745-748 “The Recession of 2008-2009”
Pages 758-767 “How Monetary Policy Influences Aggregate Demand”

August 4

Rogoff on the Great Contraction

Kenneth Rogoff argues that it is wrong to compare the recent recession to a typical recession. The real issue is that the world economy is badly overleveraged, and "and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation."

Textbook References:

Page 561 “Financial Crises”
Pages 631-632 “Bank Capital, Leverage, and the Financial Crisis of 2008-2009”
Pages 745-748 “The Recession of 2008-2009”

July 23

Spending in Disguise

Donald Marron explains how a significant amount of government spending is hidden in the tax code.

Textbook References:

Chapter 10 “The Design of the Tax System”
Pages 568-572 “Policy 3: Government Budget Deficits and Surpluses”

July 21

The Subprime Mortgage Crisis

Christopher Foote and Paul Willen examine two different theories of why the subprime mortgage crisis occurred.

Textbook References:

Pages 468-473 “Asymmetric Information”
Pages 480-481 “People Aren't Always Rational”
Page 561 “Financial Crises”
Pages 745-748 “The Recession of 2008-2009”

July 14

Reinhart and Rogoff on the Debt Problem

Carmen Reinhart and Kenneth Rogoff argue that public debt above 90 percent of GDP is associated with slower growth.

Textbook References:

Page 552 “The Importance of Long-Run Growth”
Pages 570-572 “The History of U.S. Government Debt”

July 12

GSE Fact of the Day

By 2008 half of all mortgages were excessively risky, and government sponsored enterprises such as Fannie Mae owned 12 million out of 27 million such loans.

Textbook References:

Pages 11-13 ldquo;Principle 7: Governments Can Sometimes Improve Market Outcomes”
Page 561 “Financial Crises”
Pages 745-748 “The Recession of 2008-2009”

July 10

Choices for Greece

The Greek debt crisis has no easy solutions.

Textbook References:

Pages 568-572 “Policy 3: Government Budget Deficits and Surplusses”
Page 683 “The Euro”

June 30

Economist as Movie Reviewer

Economist Phillip Swagel critiques two movies about the recent financial crisis.

Textbook References:

Page 561 “Financial Crises”
Pages 745-748 “The Recession of 2008-2009”

June 11

How to Grow the Economy

Bruce Bartlett reminds us that saving and investment, education, infrastructure, and technological advancement ultimately drive growth.

Textbook References:

Pages 238-240 “The Fiscal Challenge Ahead”
Pages 540-552 “Economic Growth and Public Policy”
Pages 568-572 “Policy 3: Government Budget Deficits and Surpluses”

June 4

The Demagoguing of Medicare reform

Mankiw wonders why politicians on both the left and the right seem more interested in scoring political points than solving a serious problem.

Textbook References:

Pages 238-240 “The Fiscal Challenge Ahead”
Pages 568-572 “Policy 3: Government Budget Deficits and Surpluses”

May 31

How to Fix the Long-Term Fiscal Problem

Six think tanks offer their solutions to the long-term fiscal crisis faced by the U.S.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 560-572 “Economic Growth and Public Policy”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 842-843 “Dealing with Deficits”

May 17

Google Plays the Yield Curve

Why is Google borrowing money in the bond market when it has $37 billion in cash?

Textbook References:

Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 576-577 “The Bond Market”

April 28

Keynes vs. Hayek Round Two

The views of Keynes and Hayek are dramatized in a music video.

Textbook References:

Pages 8-10 “Principle 6: Markets Are Usually A Good Way To Organize Economic Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-797 “Using Policy To Stabilize The Economy”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize The Economy?”

April 25

Shiller vs Siegel on Stock Market Valuation

Robert Shiller thinks that stocks are a bit overvalued. Jeremy Siegel disagrees.

Textbook References:

Page 579 “Key Numbers for Stock Watcher”
Pages 606-610 “Asset Valuation”

April 16

My Talk From Yesterday

A video shows Mankiw's talk at the University of Cincinnati. He provides a brief history of macroeconomics, discusses current monetary and fiscal policy, and discusses the long-run fiscal situation.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 539-541 “Real and Nominal Interest Rates”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 654-655 “The Financial Crisis of 2008”
Page 750 “The 2008 Fiscal Stimulus”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-797 “Using Policy To Stabilize The Economy”
Pages 842-843 “Dealing with Deficits”

April 13

The Ryan Plan

Paul Ryan offers his plan to reduce the federal debt, and he contrasts it to the Bowles-Simpson plan.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 842-843 “Dealing with Deficits”

April 13

Two Visions for Medicare

Mankiw is pleased that the long-run fiscal health of the nation is now taken seriously by both parties. Yet there are fundamental philosophical differences between the two sides.

Textbook References:

Pages 8-10 “Principle 6: Markets Are Usually A Good Way To Organize Economic Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 842-843 “Dealing with Deficits”

March 29

A Striking Scatterplot

There is a strong negative correlation between the unemployment rate and the ratio of fixed investment to GDP.

Textbook References:

Pages 397-399 “What Causes the Labor-Demand Curve to Shift?”
Pages 555-560 “How Productivity Is Determined”
Pages 581-583 “Some Important Identities”

March 28

Stiglitz on the Deficit

Joseph Stiglitz explains why he does not endorse the report produced by the bipartisan National Commission on Fiscal Responsibility and Reform.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 253-257 “Taxes and Equity”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 842-843 “Dealing with Deficits”

March 26

Our Children's Financial Crisis

Mankiw writes a speech for a future president that discusses the cost of not acting sooner to reduce the Federal debt.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 842-843 “Dealing with Deficits”

March 24

CEA Chairs on the Budget Deficit

Ten former chairs of the Council of Economic Advisers urge Congress to consider seriously the report produced by the bipartisan National Commission on Fiscal Responsibility and Reform.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 842-843 “Dealing with Deficits”

February 25

MIT Symposium

A 2-hour video presents a wide-ranging discussion of macroeconomic issues. Participants are Olivier Blanchard, Pedro Aspe, Robert Gordon, Paul Krugman, Greg Mankiw, and Christina Romer.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 654-655 “The Financial Crisis of 2008”
Chapter 32 “A Macroeconomic Theory of the Open Economy”
Page 750 “The 2008 Fiscal Stimulus”
Pages 778-787 “Monetary Policy Influences Aggregate Demand”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-797 “Using Policy To Stabilize The Economy”
Pages 842-843 “Dealing with Deficits”

January 1

Letter to the President

Mankiw offers advice to President Obama on how to work with Republicans.

Textbook References:

Page 6 “Principle 3: Rational People Think at the Margin”
Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 442-445 “The Political Economy of Income Redistribution”
Pages 563-565 “Education”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 842-843 “Dealing with Deficits”

December 24

Economists on Ebenezer Scrooge

Three economists discuss the virtues of Scrooge, and a fourth claims there is a humbug industry.

Textbook References:

Pages 4-5 “Principle 1: People Face Trade-offs”
Pages 8-10 “Principle 6: Markets Are Usually A Good Way To Organize Economic Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Page 560 “Saving and Investment”
Pages 584-585 “Supply and Demand for Loanable Funds”

December 16

The Economics of Seinfeld

Clips from the TV show "Seinfeld" are used to illustrate a variety of economic concepts.

Textbook References:

Pages 4-5 “Principle 1: People Face Trade-offs”
Pages 5-6 “Principle 2: The Cost of Something is What You Give Up to Get It”
Page 6 “Principle 3: Rational People Think at the Margin”
Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Chapter 3 “Interdependence and the Gains from Trade”
Pages 67-72 “Demand”
Pages 73-76 “Supply”
Pages 144-153 “Controls on Prices”
Chapter 10 “Externalities”
Pages 226-227 “The Different Kinds of Goods”
Pages 227-232 “Public Goods”
Pages 230-232 “The Difficult Job of Cost-Benefit Analysis”
Pages 232-237 “Common Resources”
Pages 274-275 “Fixed and Variable Costs”
Page 281 “Economies and Diseconomies of Scale”
Pages 312-315 “Why Monopolies Arise”
Chapter 16 “Monopolistic Competition”
Pages 370-378 “The Economics of Cooperation”
Pages 399-400 “The Supply of Labor”
Page 414 “Compensating Differentials”
Page 442 “Utility”
Page 465 “Utility: An Alternative Way to Describe Preferences and Optimization”
Pages 484-489 “Asymmetric Information”
Pages 556-558 “Technological Knowledge”
Pages 578-580 “Financial Intermediaries”
Pages 598-600 “Present Value: Measuring the Time Value of Money”
Pages 603-604 “Diversification of Firm-Specific Risk”
Pages 606-609 “The Efficient Market Hypothesis”
Pages 630-631 “The Economics of Unions”
Pages 703-705 “The Prices for International Transactions: Real and Nominal Exchange Rates”
Pages 707-708 “The Basic Logic of Purchasing Power Parity”
Page 833 “Time Inconsistency”

December 9

Hear me Squawk

Mankiw discusses the tax deal reached between President Obama and Congressional Republicans. He argues that it is a good deal that will help stimulate the economy. Mankiw also endorses the Simpson-Bowles plan to reduce the long-run deficit.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”

Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”

Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”

Pages 793-797 “Using Policy To Stabilize The Economy”


December 9

Simon Johnson and Me on NPR

Simon Johnson and Greg Mankiw discuss the tax deal reached between President Obama and Congressional Republicans. Johnson fears that the deal adds too much to the tax deal. Mankiw argues that it is positive for the short run, but that the administration needs to get serious about reducing the deficit in the long run.

Textbook References:

Pages 34-36 “Why Economists Disagree”

Pages 246-248 “The Fiscal Challenge Ahead”

Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”

Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”

Pages 793-797 “Using Policy To Stabilize The Economy”

Pages 842-843 “Dealing with Deficits”


November 16

Hubbard on the Bowles-Simpson Tax Plan

Glenn Hubbard likes the idea of broadening the tax base so as to reduce tax rates.

Textbook References:

Page 6 “Principle 3: Rational People Think at the Margin”
Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 160-164 “The Deadweight Loss of Taxation”
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 842-843 “Dealing with Deficits”

November 14

You Fix the Federal Budget

How would you reduce the federal deficit?

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 842-843 “Dealing with Deficits”

November 10

Good Signs from the Deficit Commission

The Bipartisan Deficit Commission was appointed to find ways to reduce the federal deficit. Mankiw approves of some of the options the Commission is considering.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 842-843 “Dealing with Deficits”

November 6

Laura Tyson and Me on NPR

Laura Tyson and Greg Mankiw discuss current fiscal policy on National Public Radio.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Page 560 “Saving and Investment”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-797 “Using Policy To Stabilize The Economy”
Pages 830-832 “Should Monetary And Fiscal Policymakers Try To Stabilize The Economy?”
Pages 842-843 “Dealing with Deficits”

October 24

Christy's First Column

Christina Romer argues against calls to cut the federal deficit now. She says that while the deficit must eventually be reduced, the economy is too weak to do so now.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-797 “Using Policy To Stabilize The Economy”
Pages 842-843 “Dealing with Deficits”

October 18

Hear Me Squawk

Mankiw discusses a variety of issues including marginal tax rates, long-term deficits, and ways to stimulate the economy.

Textbook References:

Page 6 “Principle 3: Rational People Think at the Margin”
Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 160-164 “The Deadweight Loss of Taxation”
Pages 246-248 “The Fiscal Challenge Ahead”
Page 399 “The Trade-off Between Work and Leisure”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 749-751 “Why the Aggregate-Demand Curve Might Shift”
Page 750 “The 2008 Fiscal Stimulus”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-797 “Using Policy To Stabilize The Economy”
Pages 842-843 “Dealing with Deficits”

September 13

Viard on Marginal Tax Rates

Alan Viard argues in favor of keeping the Bush tax cuts because they will promote growth.

Textbook References:

Pages 7-8 “Principle 4: People Respond to Incentives”
Page 560 “Saving and Investment”
Page 586 “Policy 1: Saving Incentives”
Pages 587-589 “Policy 2: Investment Incentives”

September 11

Miron on the Bush Tax Cuts

Jeffrey Miron argues in favor of making the Bush tax cuts permanent.

Textbook References:

Pages 7-8 “Principle 4: People Respond to Incentives”
Page 560 “Saving and Investment”
Page 586 “Policy 1: Saving Incentives”
Pages 587-589 “Policy 2: Investment Incentives”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”

August 17

What I've Been Reading

Mankiw recommends "More Money Than God," Sebastian Mallaby's book about hedge funds.

Textbook References:

Pages 578-580 “Financial Intermediaries”
Pages 654-655 “The Financial Crisis of 2008”

August 7

How Is Medicare Doing?

Rick Foster, the chief actuary for Medicare, says that planned Medicare cost reductions are not likely to happen.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 838-841 “Should the Government Balance Its Budget?”

August 6

On Congressman Paul Ryan

Paul Krugman argues that Paul Ryan's plan to cut federal spending and taxes actually raises the deficit. This is contrary to Ryan's claim. Ted Gayer suggests that Krugman's reading of the evidence is flawed.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 838-841 “Should the Government Balance Its Budget?”

August 4

Rogoff on the Current Policy Challenge

Kenneth Rogoff worries that an excessive concern with short-run aggregate demand management may cause us to ignore long-run issues such as productivity growth and innovation.

Textbook References:

Pages 554-560 “Productivity: Its Role and Determinants”

Pages 560-572 “Economic Growth and Public Policy”

Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”

Pages 830-832 “Should Monetary And Fiscal Policymakers Try To Stabilize The Economy?”


July 31

Stocks Look Cheap

By one measure, stocks look under-priced.

Textbook References:

Pages 577-578 “The Stock Market”
Page 579 “Numbers for Stock Watchers”
Pages 606-610 “Asset Valuation”

July 31

The Risk of a Fiscal Crisis

The CBO considers the possibility of a fiscal crisis in the U.S. brought on by excessive government debt. If it happens, there could be a sharp rise in interest rates and substantial crowding out.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 842-843 “Dealing with Deficits”

July 23

The Mid-Session Review

The administration's mid-session budget review assumes rapid growth and hopes the fiscal commission will fix the deficit problems.

Textbook References:

Pages 242-249 “A Financial Overview of The U.S. Government”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 842-843 “Dealing with Deficits”

July 21

The Dodd-Frank Anti-Stimulus Bill

The new financial-reform bill has had the unintended consequence of shutting down the bond market because of uncertainty about legal liability.

Textbook References:

Pages 566-567 “Property Rights and Political Stability”
Pages 576-577 “The Bond Market”

July 21

Harvardians in the FT

Kenneth Rogoff argues against more fiscal stimulus. Lawrence Summers supports short-term stimulus combined with medium and long-term deficit reduction. Niall Ferguson argues that Keynesian policies are misguided.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Page 750 “The 2008 Fiscal Stimulus”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 842-843 “Dealing with Deficits”

July 20

Merle Hazard on the Greek Debt

Merle Hazard presents a humorous song about the current Greek debt crisis.

Textbook References:

Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Page 704 “The Euro”

July 20

Government Spending By Another Name

Martin Feldstein points out that a significant portion of government spending is in the form of special tax rules called tax expenditures. Deficit reduction should include reducing such expenditures.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 842-843 “Dealing with Deficits”

July 19

Jeremy Siegel's Forecast

Jeremy Siegel is Bullish on stocks.

Textbook References:

Pages 577-578 “The Stock Market”
Pages 606-610 “Asset Valuation”

July 7

Are Stimulus Skeptics Logically Incoherent?

Paul Krugman wonders why private spending would create jobs but public spending won't. Mankiw replies.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-797 “Using Policy To Stabilize The Economy”
Pages 842-843 “Dealing with Deficits”

July 1

The Influence of Alberto Alesina

Alberto Alesina argues that governments should take large, credible steps to reduce their deficits. That would calm bond markets and increase confidence for investors and consumers.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 560-572 “Economic Growth and Public Policy”
Pages 576-577 “The Bond Market”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 842-843 “Dealing with Deficits”

June 27

Links

There are five links sent in by readers. Four of them are humorous, but one, "Ten Commandments for Fiscal Adjustment," is serious.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 560-572 “Economic Growth and Public Policy”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Page 750 “The 2008 Fiscal Stimulus”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-797 “Using Policy To Stabilize The Economy”
Pages 842-843 “Dealing with Deficits”

June 15

Stock Market Valuation

By two common measures, the stock market is substantially overvalued.

Textbook References:

Pages 577-578 “The Stock Market”
Page 604 “Market Risk”

June 14

Are Bonds Sexy?

The Japanese government is running ads claiming that women like men who own bonds. The purpose is to increase the demand for government bonds.

Textbook References:

Pages 576-577 “The Bond Market”

June 7

CBO on Health Spending

The CBO argues that health-care spending "will put tremendous pressure on the federal budget during the next few decades and beyond."

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 842-843 “Dealing with Deficits”

April 17

The Latest from the CEA Chair

CEA Chair Christina Romer reports on what has been done to fight the current recession and discusses what else can be done.

Textbook References:

Pages 30-33 “The Economist as Policy Advisor”

Pages 246-248 “The Fiscal Challenge Ahead”

Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”

Pages 654-655 “The Financial Crisis of 2008”

Page 750 “The 2008 Fiscal Stimulus”

Chapter 34 “The Influence of Monetary and Fiscal Policy on Aggregate Demand”

Pages 830-832 “Monetary And Fiscal Policymakers Try To Stabilize The Economy”

Pages 842-843 “Dealing with Deficits”


April 10

The Enormity of the Fiscal Gap

The Tax Policy Center argues that income taxes must rise by 40 per cent just to reduce the deficit to 3 per cent of GDP.

Textbook References:

Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 160-164 “The Deadweight Loss of Taxation”
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 838-841 “Should the Government Balance Its Budget?”
Chapter 26: Saving, Investment, and the Financial System
Archived Posts

 

March 24

A Fiscal Train Wreck

In an "exceedingly rare" event, bonds issued by a private company (Warren Buffet's Berkshire Hathaway) paid a lower yield than bonds of a similar maturity issued by the U.S. Treasury. That is evidence that investors are getting nervous about the size of the U.S. deficit.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 576-577 “The Bond Market”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 604-605 “The Trade-off Between Risk and Return”
Pages 842-843 “Dealing with Deficits”

March 23

An Inflation Debate

Michael Kinsley and Paul Krugman disagree about how likely hyperinflation is in the U.S.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 591-593 “A History of U.S. Government Debt”
Chapter 30 “Money Growth and Inflation”

March 9

The Problem with Deficit Neutrality

A deficit neutral health-care plan does nothing to fix the problem of rising deficits.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 842-843 “Dealing with Deficits”

March 6

CBO on the President's Budget

The Congressional Budget Office estimates that under the proposed budget, federal debt held by the public will rise to 90 percent of GDP.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 842-843 “Dealing with Deficits”

March 5

Rogoff on Japan

Japan's economy has performed below its potential for 18 years. Kenneth Rogoff discusses the challenges it still faces.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 842-843 “Dealing with Deficits”

March 1

Life Expectancy at Retirement

People in developed countries are living much longer after retirement. They expect pensions and healthcare, which is putting great strain on public finances.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 842-843 “Dealing with Deficits”

February 23

Financing Healthcare Reform

The most recent healthcare reform proposal does not include a tax on "Cadillac" health insurance and adds a tax on capital. It will not reduce demand for healthcare and will likely slow growth.

Textbook References:

Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 125-127 “How Taxes on Buyers Affect Market Outcomes”
Page 560 “Saving and Investment”
Pages 586-587 “Policy 1: Saving Incentives”
Pages 587-589 “Policy 2: Investment Incentives”

February 14

The Buck Stops Where?

The administration's proposed budget does not include a plan to reduce the federal budget deficit as a share of GDP.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits”

February 6

Austan Goolsbee on the Daily Show

Austan Goolsbee, a member of the President's Council of Economic Advisors, appears on the Daily Show.

Textbook References:

Pages 30-33 “The Economist as Policy Advisor”

Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”

Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”

Pages 793-797 “Using Policy To Stabilize The Economy”


February 1

President Obama's New Budget

Keith Hennessey says that "President Obama proposes spending be 12% higher as a share of the economy than it has averaged over the past three decades."

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 838-841 “Should the Government Balance Its Budget?”

January 31

Slow Growth and Rising Debt

Carmen Reinhart and Kenneth Rogoff warn that rising public debt may lead to default, higher taxes, or financial repression. All harm growth.

Textbook References:

Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 160-164 “The Deadweight Loss of Taxation”
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits”

January 28

Lazear on the Spending Freeze

Edward Lazear argues that the spending freeze is "optical rather than substantive." Higher taxes will be needed to pay for higher government spending, and higher taxes mean slower growth.

Textbook References:

Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 160-164 “The Deadweight Loss of Taxation”
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits”

January 26

The Budget Picture

There is a graph from the CBO showing past and projected spending versus revenue for the federal government.

Textbook References:

Pages 246-249 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”

January 16

Healthcare Reform Debate

There is a link to a video and the Powerpoint slides of a symposium on healthcare reform. The U.S. and Canadian systems are discussed.

Textbook References:

Pages 4-5 “Principle 1: People Face Trade-offs”
Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 114-123 “Controls on Prices”
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 271-273 “Production and Costs”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”

December 27

P/E Ratio

According to the P/E ratio, the stock market is slightly above its historical average valuation.

Textbook References:

Page 579 “Key Numbers for Stock Watchers”

December 22

The Case Against the Millionaire Surtax

Alan Viard argues that taxing the rich to pay for health-care reform will do significant damage to the economy.

Textbook References:

Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 160-164 “The Deadweight Loss of Taxation”
Pages 164-167 “The Determinants of the Deadweight Loss”
Pages 167-171 “Deadweight Loss and Tax Revenue as Taxes Vary”
Pages 583-593 “The Market for Loanable Funds”

December 20

Readings on Financial Regulatory Reform

Mankiw provides a list of articles that discuss financial regulatory reform.

Textbook References:

Pages 576-580 “Financial Institutions in the U.S. Economy”
Chapter 27 “The Basic Tools of Finance”
Pages 654-655 “The Financial Crisis of 2008”

December 16

Nine Observations About Investment

Mankiw makes a case for an investment tax credit.

Textbook References:

Pages 587-589 “Policy 2: Investment Incentives”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”

November 21

Steering into an Iceberg

Former CBO director Douglas Holtz-Eakin warns that the proposed health care "reform" will make the already high Federal deficit larger. Politicians are steering us into a debt crisis.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”

November 17

Flier on Healthcare Reform

The dean of Harvard's medical school argues that the proposed healthcare reforms will increase costs without improving access or quality.

Textbook References:

Page 80 “Figure 10: How an Increase in Demand Affects the Equilibrium”
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”

October 27

From the CEA Chair

Christina Romer discusses the effect of health-care reform on the projected budget deficit.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 797 “Automatic Stabilizers”

October 19

Is the Fiscal Stimulus Really Temporary?

Alex Brill and Amy Roden claim that 37 percent of the spending and tax components of the American Recovery and Reinvestment Act of 2009 are permanent.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-797 “Using Policy to Stabilize the Economy”


August 26

How large is the fiscal hole?

The Concord Coalition projects that the federal debt will grow by $14 trillion over the next decade.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 838-841 “Should the Government Balance Its Budget?”


August 22

Preview of the Midsession Review

Federal debt is expected to increase by $9 trillion over the next decade.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 838-841 “Should the Government Balance Its Budget?”


August 19

Blanchard on the Outlook

Olivier Blanchard notes that in previous banking crises, output does not return to its previous growth path. It remains below it, though the average growth rate returns to what it was.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 550-554 “Economic Growth Around the World”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 740-742 “Three Key Facts About Economic Fluctuations”


August 13

Ken’s Dystopia

Kenneth Rogoff argues that Western governments will have to raise taxes, inflate their economies, default on their debt, or do some of each.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”


July 19

Anna Schwartz on the Bernanke Fed

Anna Schwartz thinks Bernanke has confused a crisis of confidence with a shortage of liquidity.

Textbook References:

Pages 576-580 “Financial Institutions in the U.S. Economy”
Pages 654-655 “The Financial Crisis of 2008”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


July 11

More Fiscal Stimulus?

Paul Krugman makes the case for another stimulus package. Phil Levy makes the case against another package.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”


July 9

Lazear on Fiscal Stimulus

Edward Lazear notes that very little of the stimulus package has actually been spent. He claims that it is primarily an excuse to expand the size of government.

Textbook References:

Pages 8-10 “Principle 6: Markets are Usually a Good Way to Organize Economic Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”


July 02

Old Speeches, New Policies

Blogger Mark Thoma uses a speech Mankiw gave six years ago to defend Obama’s deficit spending. But Mankiw’s speech emphasizes that a deficit caused by spending may have a different long-term effect than a deficit caused by tax cuts.

Textbook References:

Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?” Pages 838-841 “Should the Government Balance Its Budget?”
Pages 842-843 “Dealing with Deficits”


June 08

Randy and Phill

There is a video of former Fed governor Randy Kroszner and former assistant Secretary of the Treasury Phill Swagel as they discuss the policy actions taken during the financial crisis.

Textbook Reference:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 649-653 “Banks and the Money Supply”
Pages 654-655 “The Financial Crisis of 2008”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Pages 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?”
Pages 838-841 “Should the Government Balance Its Budget?”


May 30

Ferguson Takes on Krugman

Historian Niall Ferguson argues that the recent rise in interest rate on long-term Treasury bonds is evidence that Krugman is wrong that expansionary fiscal policy will not drive up interest rates.

Textbook Reference:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Pages 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?”
Pages 838-841 “Should the Government Balance Its Budget?”


May 27

The Yield Curve is Steep

The yield curve that shows the difference between the yields on two year and ten year Treasury bonds has a large positive slope. In the past, this has signaled an end to recessions.

Textbook Reference:

Pages 576-577 “The Bond Market”

John Taylor is Worried

John Taylor is concerned that the U.S. federal debt is growing too large. Among other things, it jeopardizes the country’s credit rating.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”


May 23

Crisis 101

Mankiw comments on how the current crisis will affect the introductory college economics course. He says that the fundamentals are still important, but that more attention will be given to the financial system, leverage, the limits of monetary policy and the difficulty of forecasting.

Textbook References:

Pages 576-580 “Financial Institutions in the U.S. Economy”
Pages 654-655 “The Financial Crisis of 2008”
Page 656 “Problems in Controlling the Money Supply”


May 20

The Fiscal Future, Again

A graph from the CBO shows how demographics and rising health-care costs will cause Social Security, Medicare and Medicaid to absorb a much larger share of GDP in the future.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 842-843 “Dealing with Deficits”


May 18

The Fiscal Future

Robert Samuelson worries about the extraordinary amount of deficit spending.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”
Pages 842-843 “Dealing with Deficits”


May 14

Limited Purpose Banking

Laurence Kotlikoff and John Goodman make the case for limiting banks to their role as financial intermediaries.

Textbook References:

Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 578-580 “Financial Intermediaries”
Pages 649-658 “Banks and the Money Supply”
Page 821 “Bernanke’s Challenges”


May 13

Paul Krugman concedes

In a previous blog, Mankiw doubted that the economy would grow as fast as the administration predicted. Krugman agreed with the administration and called Mankiw evil. Mankiw asked Krugman if he would like to bet some of his Nobel Prize money on it. Krugman hasn’t responded. But Krugman has recently written that we cannot expect the economy to grow very fast at all. Pride goeth before the fall.

Textbook References:

Pages 32-33 “Why Economists’ Advice Is Not Always Followed”
Pages 246-247 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”


May 9

Fear Subsides

An index that measures expected stock market volatility has fallen. This suggests that fear has also declined.

Textbook References:

Pages 576-578 “Financial Markets”
Pages 749-751 “Why the Aggregate Demand Curve Might Shift”


May 5

An Overview of the Credit Crisis

There is an article that summarizes how the current crisis started, how it spread and the actions taken to counteract it. There are also links to a large number of articles and videos on the same topics. This should be an especially valuable resource for instructors.

Textbook References:

Pages 8-10 “Principle 6: Markets are Usually a Good Way to Organize Economics Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Chapter 26 “Saving, Investment, and the Financial System”
Pages 654-655 “The Financial Crisis of 2008”
Chapter 33 “Aggregate Demand and Aggregate Supply”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?”
Pages 838-841 “Should the Government Balance Its Budget?”


May 1

From the CEA Chair

Christina Romer discusses the causes of the current crisis, the policy actions taken to end the crisis, and the prospects for the future.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 649-653 “Banks and the Money Supply”
Pages 654-655 “The Financial Crisis of 2008”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?”
Pages 838-841 “Should the Government Balance Its Budget?”


Apr. 29

Miron on the Financial Crisis

Jeff Miron argues the case for the government to do nothing in response to the financial crisis.

Textbook References:

Pages 8-10 “Principle 6: Markets are Usually a Good Way to Organize Economic Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 740-742 “Three Key Facts About Economic Fluctuations”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”

Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”


Apr. 24

The Ideal Financial System

Laurence Kotlikoff and Edward Lerner propose an overhaul of the financial system. The proposal includes an end to fractional reserve banking.

Textbook References:

Pages 576-580 “Financial Institutions in the U.S. Economy”
Chapter 29 “The Monetary System”


Apr. 21

President Obama’s Fiscal Policy

A graph shows projected federal government revenues and spending.

Textbook References:

Pages 242-249 “A Financial Overview of the U.S. Government“
Pages 589-593 “Policy 3: Government Budget Deficits“
Pages 838-841 “Should the Government Balance Its Budget?“

Solow on Posner

Robert Solow reviews Richard Posner’s book, A Failure of Capitalism: The Crisis of ’08 and the Descent into Depression. Along the way he provides insightful observations, as one would expect from a Nobel laureate.

Textbook References:

Pages 8-10 “Principle 6: Markets are Usually a Good Way to Organize Economic Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 484-489 “Asymmetric Information”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?”
Pages 838-841 “Should the Government Balance Its Budget?”


Apr. 19

A Quick Quiz

Take a quiz made up of questions from past AP tests.

Textbook References:

Pages 4-5 “Principle 1: People Face Trade-offs”
Chapter 12 “The Design of the Tax System”
Pages 589-593 “Policy 3: Government Budget Deficits”
Page 614-619 “How is Unemployment Measured?”
Pages 649-653 “Banks and the Money Supply”
Pages 653-656 “The Fed’s Tools of Monetary Control”
Chapter 30 “Money Growth and Inflation”
Pages 742-744 “The Assumptions of Classical Economics”
Pages 749-751 “Why the Aggregate–Demand Curve Might Shift”
Pages 753-755 “Why the Long–Run Aggregate–Supply Curve Might Shift”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-797 “Using Policy to Stabilize the Economy”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


Apr. 16

Meet the Cassandras

Salon lists the 14 biggest critics of Obama’s economic policy, along with a short synopsis of their criticisms.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 649-653 “Banks and the Money Supply”
Pages 654-655 “The Financial Crisis of 2008”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?”
Pages 838-841 “Should the Government Balance Its Budget?”


Apr. 15

Yale Economists on the Financial Crisis

Robert Shiller, John Geanakoplos and Richard Levin discuss the financial crisis in a one-hour video. The roles of psychology and of leverage are emphasized.

Textbook References:

Pages 494-500 “Behavioral Economics”
Pages 498-499 “This Is Your Brain on Economics”
Pages 576-578 “Financial Markets”
Pages 608-609 “Neurofinance”
Pages 654-655 “The Financial Crisis of 2008”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”


Apr. 9

Siegal on Stock Market Valuation

Jeremy Siegal argues that Standard and Poor’s should use the weights it uses to calculate its S&P 500 valuation index when it calculates its earnings index.

Textbook References:

Pages 576-578 “Financial Markets”
Page 579 “Key Numbers for Stock Watchers”


Apr. 6

The Four Pillars of Sound Policy

Edward Glaeser worries that the “Washington Consensus” (fiscal restraint, the rule of law, free trade and privitazation) may be coming to an end.

Textbook References:

Pages7-8 “Principle 4: People Respond to Incentives”
Pages 8-10 “Principle 6: Markets Are Usually A Good Way To Organize Economic Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Chapter 3 “Interdependence and the Gains from Trade”
Pages 566-567 “Property Rights and Political Stability”
Pages 589-593 “Policy 3: Government Budget Deficits”


Apr. 5

Cowen on Bailouts

Tyler Cowen argues that creditors have not shouldered their share of the burden in this crisis.

Textbook References:

Pages 576-580 “Financial Institutions in the U.S. Economy”
Pages 649-653 “Banks and the Money Supply”
Pages 654-655 “The Financial Crisis of 2008”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”


Apr. 3

Boskin on the Obama Budget

Michael Boskin argues that the Federal budget deficit will be much larger than the administration claims.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”


Mar. 23

And I Did Not Even Get a Citation

The new Treasury plan to fix the financial system has some of the characteristics of what Mankiw suggested on his blog last October. But there are also important differences.

Textbook References:

Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 576-580 “Financial Institutions in the U.S. Economy”
Pages 654-655 “The Financial Crisis of 2008”


Mar. 20

Budget Deficits as a Fraction of GDP

The CBO projects the future of the budget deficit. There’s lots of red ink in our future.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”

The Direction of Policy

Alan Blinder argues that Obama is not a socialist. Gary Becker and Kevin Murphy think that Obama’s plan may kill capitalism.

Textbook References:

Pages 8-10 “Principle 6: Markets are Usually a Good Way to Organize Economic Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 740-742 “Three Key Facts About Economic Fluctuations”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”


Mar. 9

From the CEA Chair

CEA Chair Christina Romer discusses the lessons from the Great Depression that should guide policy today.

Textbook References:

Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


Mar. 6

How is the President Doing?

Michael Boskin thinks Obama is too radical. Paul Krugman thinks Obama is dithering. And the Economist thinks Obama has not explained how he is going to pay for everything.

Textbook References:

Pages 4-5 “Principle 1: People Face Trade-Offs”
Pages 8-10 “Principle 6: Markets are Usually a Good Way to Organize Economic Activity”
Pages 10-12 “Principle 7: Government Can Sometimes Improve Market Outcomes”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”


Mar. 3

CBO on the Stimulus

The Congressional Budget Office estimates that the stimulus plan will have a positive short-run effect but not much long-run effect.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”


Feb. 28

What is a Deficit Hawk to do?

Obama’s budget document is titled “A New Era of Responsibility.” Mankiw argues that the budget does not seem to live up to its name.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”


Feb. 27

A Speech From the CEA Chair

CEA Chair Christina Romer Defends the Stimulus Bill.

Textbook References:

Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”

Rosy Scenario or Audacity of Hope?

Obama’s budget forecast depends on some extremely optimistic assumptions.

Textbook References:

Pages 32-33 “Why Economists’ Advice Is Not Always Followed”
Pages 246-247 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”

Moving the Goal Posts

The Committee for a Responsible Budget believes that Obama’s budget contains absurd assumptions.

Textbook References:

Pages 32-33 “Why Economists’ Advice Is Not Always Followed”
Pages 246-247 “The Fiscal Challenge Ahead”
Pages 589-593 “Policy 3: Government Budget Deficits and Surpluses”


Feb. 25

The Formula that Killed Wall Street

There is a link to an article about David Li, who developed the formula that had a central role in the financial meltdown.

Textbook References:

Pages 576-580 “Financial Institutions in the U.S. Economy”
Chapter 27 “The Basic Tools of Finance”

Leonhardt vs Obama

Obama says that families making less than $250,000 will not see a tax increase. David Leonhardt says that families making less than $250,000 will have to pay higher taxes.

Textbook References:

Pages 4-5 “Principle 1: People Face Trade-Offs”
Chapter 12 “The Design of the Tax System”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 838-841 “Should the Government Balance Its Budget?”


Feb. 24

The Spending Stimulus Debate

Brad DeLong and Michele Boldrin are on opposite sides of the debate over the stimulus.

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”


Feb. 23

Is Macro Policy Overreacting?

Jeffrey Sachs argues that the current macroeconomic policy is courting disaster in the long run.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 654-655 “The Financial Crisis of 2008”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?
Pages 838-841 “Should the Government Balance Its Budget?”


Feb. 22

The Fiscal Gap

Alan Auerbach and Bill Gale argue that the long-term fiscal picture for the U.S. is very bleak.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 581-582 “Some Important Identities”
Pages 589-593 “Policy 3: Government Budget Deficits”
Pages 838-841 “Should the Government Balance Its Budget?”


Feb. 12

The Budget Balance

Mankiw presents a chart showing the federal budget deficit or surplus as a fraction of GDP for the period since 1980. It shows that the projected budget deficit for this year is quite large.

Textbook References:

Pages 589-591 “Policy 3: Government Budget Deficits and Surpluses”
Pages 591-593 “The History of U.S. Government Debt”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-797 “Using Policy to Stabilize the Economy”
Pages 838-841 “Should the Government Balance its Budget?”


Feb. 11

Ray Fair on Stimulus

Ray Fair reports that his macroeconomic model predicts that the stimulus bill will create short-run gains and long-run pain.

Textbook References:

Pages 246-248 “The Fiscal Challenge Ahead”
Pages 589-591 “Policy 3: Government Budget Deficits and Surpluses”
Pages 591-593 “The History of U.S. Government Debt”
Pages 724-728 “Government Budget Deficits”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


Feb. 5

The GOP mortgage plan, Con and Pro

Ed Glaeser and John Cochrane discuss the possibility of the government providing low-interest mortgages.

Textbook References:

Pages 576-580 “Financial Institutions in the U.S. Economy”
Pages 654-655 “The Financial Crisis of 2008”


Jan. 30

Temporary, Timely and Targeted – Not!

David Brooks argues that Larry Summers has advocated a stimulus plan that is temporary, timely and targeted. Yet despite Summers becoming an economic advisor to Obama, the proposed fiscal stimulus contains large permanent, untimely and untargeted provisions.

Textbook References:

Pages 32-33 “Why Economists’ Advice is not Always Followed”
Pages 589-591 “Policy 3: Government Budget Deficits and Surpluses”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


Jan. 22

Barro on Fiscal Stimulus

Robert Barro argues that the proposed stimulus package ignores what have economists have learned since 1936. There is also a link to Paul Krugman’s blog where he chides Barro for misrepresenting Keynes.

Textbook References:

Page 6 “Principle 3: Rational People Think at the Margin”
Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 230-232 “The Difficult Job of Cost-Benefit Analysis”
Pages 589-591 “Policy 3: Government Budget Deficits and Surpluses”
Page 770 “The Origins of Aggregate Demand and Aggregate Supply”
Pages 791-792 “The Crowding-Out Effect”


Jan. 19

Advice for Tim Geithner

There is a link to commentary by Luigi Zingales, who has advice for the new Secretary of the Treasury.

Textbook References:

Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 578-580 “Financial Intermediaries”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Page 821 “Bernanke’s Challenges”

Infrastructure Spending as Stimulus

There is a link to Gary Becker’s blog where he explains why the stimulus package will not work.

Textbook References:

Pages 589- 591 “Policy 3: Government Budget Deficits”
Pages 8-10 “Principle 6: Markets Are Usually A Good Way To Organize Economic Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 589- 591 “Policy 3: Government Budget Deficits”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Pages 838-841 “Should the Government Balance its Budget?”


Jan. 16

More Spending Stimulus Skeptics

There is a link to a short article in the Chicago Tribune that quotes prominent economists who do not think the spending stimulus will work.

Textbook References:

Pages 8-10 “Principle 6: Markets Are Usually A Good Way To Organize Economic Activity”
Pages 10-12 “Principle 7: Governments Can Sometimes Improve Market Outcomes”
Pages 589- 591 “Policy 3: Government Budget Deficits”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”


Jan. 14

There is a link to Fama’s blog that suggests that the fiscal stimulus will only crowd out private investment.

Textbook References:

Pages 589-591 “Policy 3: Government Budget Deficits and Surpluses”
Pages 787-793 “How Fiscal Policy Influences Aggregate Demand”

Mankiw presents a graph of the “Ted Spread,” which is the difference between interest rates on inter-bank loans and the rate on treasury bills. It is a measure of fear in the system.

Textbook Reference:

Chapter 26 “Saving, Investment, and the Financial System”
Pages 778-785 “How Monetary Policy Influences Aggregate Demand”


Jan. 13

There is a link to an editorial by Greg Ip that considers the probability of the U.S. government defaulting on its debt.

Textbook References:

Pages 576-577 “The Bond Market”
Pages 591-593 “The History of U.S. Government Debt”
Pages 673-674 “The Inflation Tax”


Jan. 8

There is a link to a blog by Eugene Fama and Ken French. Fama discusses the problem of how government injections of equity capital into troubled financial institutions can easily become nothing more than subsidies to debt holders.

Textbook References:

Pages 576-578 “Financial Markets”
Pages 601-603 “The Markets for Insurance”
Page 657 “Bank Runs and the Money Supply”
s Pages 778-785 “How Monetary Policy Influences Aggregate Demand”


Dec. 31

Open Market Operations in Equities

Roger Farmer suggests that the Fed should buy some stock to stabilize the equities markets in a manner akin to its open market operations in the bond market.

Textbook References:

Pages 576-578 “Financial Markets”
Pages 653-658 “The Fed’s Tools of Monetary Control”
Pages 778-787 “How Monetary Policy Influences Aggregate Demand”
Pages 793-796 “Using Policy to Stabilize the Economy”
Page 821 “Bernanke’s Challenges”
Pages 830-832 “Should Monetary and Fiscal Policymakers Try To Stabilize the Economy?


Dec. 13

Interview with Marty

There is a video of an interview with Martin Feldstein. Martin addresses the auto bailout, Fannie Mae and Freddy Mac, and real interest rates.

Textbook References:

Pages 7-8 “Principle 4: People Respond to Incentives”
Pages 298-300 “The Firm’s Long-Run Decision to Exit or Enter a Market”
Pages 348-351 “Competition with Differentiated Products”
Chapter 26 “Saving, Investment, and the Financial System”
Page 821 “Bernanke’s Challenges”


Dec. 11

Stiglitz on the Auto Industry

There is a link to an article by Joseph Stiglitz that argues that the U.S. automakers should be allowed to fail and go through chapter 11 bankruptcy

Textbook References:

Pages 298-300 “The Firm’s Long-Run Decision to Exit or Enter a Market”
Pages 348-351 “Competition with Differentiated Products”
Chapter 26 “Saving, Investment, and the Financial System”


Dec. 7

Life in the Left Tail

Mankiw shows a graph of the distribution of stock-market returns from 1825 to the present. 2008 is in the far left tail.

Textbook References:

Pages 577-579 “The Stock Market”
Pages 608-609 “Lessons from the Brain-Damaged Investor”
Pages 609-610 “Market Irrationality”
Page 767 “The Recession of 2001”