Transcript Conference PowerPoint

New Macroeconomics Teaching
for a New Era:
Instability, Inequality, and Environment
Jonathan M. Harris
http://ase.tufts.edu/gdae
Copyright © 2014 Jonathan M. Harris
Teaching Macroeconomics: Missing Perspectives
Current mainstream texts (e.g. Mankiw, Principles of Economics)
lack treatment of:
• Instability (assume classical long-run full-employment)
• Inequality (no empirical assessment of increasing inequality,
no treatment of macro effects)
• Environment/Resource limits (only brief mention)
• Infrastructure and Social Investment (very limited treatment)
Limitations and biased policy implications arise from
assumptions of Aggregate Supply/Aggregate Demand model
The assumption of a fixed Long-Run Aggregate Supply curve means that
government policy is ineffective, affecting only the price level in the long run.
Source: Mankiw, Principles of Economics, 5th ed., Chapter 33
Is AS/AD salvageable?
• Inherent inconsistency in AS/AD as presented in
standard texts (with price level equilibrium).
• Continued dominance because it appears to work
(at least for short-term results) but intellectual
incoherence (as per Colander critique) and New
Classical bias.
• Dynamic approach (using inflation) is more
intellectually consistent, and reflects more
Keynesian perspective.
A New Approach to Teaching Macroeconomics
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Dynamic approach to AS/AD
Recognition of inherent instability
Active government policy responses
Importance of distribution and inequality
Consideration of resource and environmental
limits
The Aggregate Supply Curve
As the economy approaches its maximum capacity, inflation levels tend to rise as excessive demand for
workers, goods and services, and production inputs pushes up wages and prices.
Unemployment
WagePrice
Spiral
Inflation rate (π )
Aggregate Supply (AS)
Maximum
Capacity
Output (Y )
Y*
Source: Goodwin et al., Macroeconomics in Context, 2nd ed., Chapter 13
Expansionary Fiscal Policy in Response to a Recession
An expansion of government spending, as well as a program of tax cuts, shifts the AD curve to the right.
Inflation rate (π )
Unemployment
AS
E1
AD1
E0
AD0
Y*
Output (Y )
Source: Goodwin et al., Macroeconomics in Context, 2nd ed., Chapter 13
Factors affecting AD, AS
• Slope of AD based on real wealth, real money supply
and trade effects, plus Fed response rule.
• Position of AD: instability of investment, variability of
consumption based on income distribution and debt,
fiscal and monetary policy, trade in open economy
• Position of AS: technology, natural resource and
environmental constraints, institutions,
infrastructure investment
Implications of dynamic AS/AD
• All of the factors affecting positions of AS and AD
are the proper domain of economic analysis and
policy; cannot simply rely on “efficient markets”.
• There is no “equlibrium price level” for the macro
economy, and factors such as money illusion and
rational expectations are not needed to explain
shifts in macro equilibrium.
• Different equilibria, disequilibria, and varied
growth paths exist. Inherent instability may affect
investment, macro equilibrium (as per Keynes).
GDP AND CO2 EMISSIONS
Brunei
CO2 Emissions per Capita (Metric Tons)
25.00
United Arab Emirates
Bahrain
20.00
United States
Saudi Arabia
Kazakhstan
15.00
10.00
Norway
China
5.00
Sweden
India
-
5,000
10,000
15,000
Gabon
20,000
25,000
30,000
35,000
Switzerland
40,000
45,000
GDP per Capita (2005 $, PPP)
CO2 emissions are correlated with GDP, but different
growth paths exist, including low-carbon paths.
50,000
INCOME SHARES OF TOP 10% AND TOP 1%
60
Top 10 Percent
50
Percent
40
30
Top 1 Percent
20
10
0
1917 1922 1927 1932 1937 1942 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
Inequality in the U.S. has risen to levels not seen since the 1920s, with
macroeconomic consequences including increased debt and more
unstable aggregate demand.
GDP and GPI Per Capita (2000 US $)
GDP AND THE GENUINE PROGRESS INDICATOR
Gross Domestic Product
Genuine Progress Indicator
Increasing GDP does not necessarily mean increasing
well-being; other indicators may be needed.
PROJECTIONS FOR STABILIZED GDP/LIMITS TO GROWTH
Index (2005=100)
300
250
200
GDP/Capita
150
100
GHG
Unemployment
Poverty
Debt to GDP
50
0
2005
2010
2015
2020
2025
2030
2035
Year
Indefinite growth is not essential for macro stability. A macroeconomic
model for Canada shows that GDP/capita can be stabilized while improving
social indicators and lowering environmental impacts.
Source: Peter Victor, Managing Without Growth, 2008.
Greening Macroeconomics
• Revised National Income Accounts
• “Green Keynesian” policies of Social
Investment for Full Employment
• Carbon Tax, Resource Taxes
• Limits to Growth
Examples of “Green” Macro Policy: U.S.
• $787 billion dollar stimulus package included about $71 billion for
specifically “green” investments, plus $20 billion in “green” tax incentives.
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Energy efficiency in Federal buildings and DoD facilities -- $8.7 billion
Smart-grid infrastructure investment -- $11 billion
Energy and conservation grants to state and local governments -- $6.3 billion
Weatherization assistance -- $5 billion
Energy efficiency and renewable energy research -- 2.5 billion
Advanced battery manufacturing -- $2 billion
Loan guarantees for wind and solar projects -- $6 billion
Public transit and high-speed rail -- 17.7 billion
Environmental cleanup -- $14.6 billion
Environmental research -- $6.6 billion
Aggressive Federal policy action including “green” investments “probably averted what
could have been called Great Depression 2.0 . . . without the government’s response,
GDP in 2010 would be about 11.5% lower, payroll employment would be less by some 8
½ million jobs, and the nation would now be experiencing deflation.” (Blinder and
Zandi, “How the Great Recession was Brought to an End”, 2010).
Examples of “Green” Macro Policy: Portugal
• Portugal government-led transition from fossil fuels towards
renewable power, with the percentage of renewable supply in
Portugal’s grid up from 17 percent in 2005 to 45 percent in 2010.
• $22 billion investment in modernizing electrical grid and developing
wind and hydropower facilities.
• Portugal will recoup some of its investment through European
Union carbon credits, and will save about $2.3 billion a year on
avoided natural gas imports.
“Portugal Gives Itself a Clean-Energy Makeover,” New York Times August 10, 2010.
Policies for Full Employment
• Increased hiring in public sector: teachers, police,
construction, transit and park workers, etc.
• Major energy efficiency and renewables investment,
partly public and partly incentivized private investment
• Large-scale building retrofit publicly financed but carried
out by private contractors
• Increased public R&D expenditures with accompanying
higher education investment (“Sputnik” precedent)
• Investment in public transit and infrastructure, public
health, education, environmental conservation and
regeneration
Policies For Climate Stabilization
• Carbon tax or equivalent (cap & trade with auction)
• Recycle revenues of ≥ $150 billion for energy efficiency,
renewables, progressive rebates
• R&D investment ($3-12 billion) focuses on efficiency and
renewables
• Infrastructure investment – hi-speed rail, public transit, green
buildings, solar and wind power
• Efficiency standards for plants, vehicles, machinery, buildings
• Preferential credit or subsidy for energy efficiency
investments
What about Deficits and Debt?
• Krugman: “Suppose that government uses borrowed money to buy useful
things like infrastructure. The true social cost will be very low, because the
spending will put resources that would otherwise be unemployed to work
[and allow private debtors to pay down their debt] … the argument that
debt can’t cure debt is just wrong.”
• Europe’s problems now arise from unwillingness to use European Central
Bank to finance debt, allowing indebted players to recover. Instead,
“austerity” policies make debt harder to manage and threaten major
defaults and financial catastrophe.
• U.S. focus on debt reduction prevents further stimulus spending,
threatens to derail weak recovery (like 1937).
• All based on what Keynes called “the Treasury view” or Herbert Hoover
economics: balance the budget during recession.
Sources: Krugman, “Mr. Keynes and the Moderns”, 2011.
Conclusion
• Breaking with standard macro models and
returning to a more “Keynesian” dynamic
model allows instructors to address modern
problems of instability, inequality, and
environment.
• This approach does not necessarily prescribe
what’s right in terms of policy, but opens up
the possibility of constructive activist macro
policy to address crucial issues.
Other relevant publications from Tufts University
Global Development and Environment Institute