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Macroeconomics
for Beginners
J. Bradford DeLong
U.C. Berkeley, WCEG, and NBER
2017-02-22 #TCEH #AEH #MVSH
key
:
html:
pdf:
http://delong.typepad.com/2017-02-22-macroeconomics-for-
beginners-tceh-ieh.pdf
pages:
https://www.icloud.com/pages/
0Jvme_jXeWFjUBPJ00sgSws1Q#2017-02-22_Macroeconomics_for_
Beginners_.TCEH_.IEH
Notebook: Twentieth Century Economic History:
http://www.bradford-
delong.com/twentieth-century-economic-history-1.html
1
Economics Teaching Master:
http://www.bradford-delong.com/-
_housekeeping_-this-page-edit-this-page.html
1859 words
2
I. Polanyian Perplex
Start with the Polanyian Perplex: land, labor, and fi nance
are not “commodities”
.
“Commodities”
are things that are
pushed to their most valuable use by market forces
. And
e
ach use of them must pass a profi tability test
. By and large
this
is a good thing
, for most things that we call
“commodities”, as it promotes economic effi ciency and
makes us all richer.
But
“
l
and”—
that is
what your community is
.
“Labor”—
that
is
what your lifestyle is
. And
“
fi
nance”—
that is
whether
you have a job, or a fi rm to work for
.
People think they
have rights to stable communities, expected incomes,
secure jobs
. However.
in a market society the only rights
that count are property rights
.
You can argue—and people do
argue
—that those who
complain about “land” and “labor” becoming commodities
have no legitimate beef
.
We have a dynamic society: things
change
.
Changing communities driven by (well-
functioning) markets are positive-sum
changes: the winners
outnumber and outweigh the losers.
Changing occupational
rewards driven by (well-functioning) markets are positive-
sum
as well:
the winners outnumber and outweigh the
losers.
The answer is social insurance and social welfare
3
But all this presumes full employment: there is no sense in
which
as
much instability
as we see
in fi rms and jobs is part
of some positive-sum process
.
Nevertheless, people do so argue. There is a lot of garbage
economics out there.
Where and why this garbage comes
from and why it persists is largely a mystery
. We will not
go into it here. Instead we will turn to understanding why
sometimes the economy undergoes and then stays in a
situation in which there is a “general glut”: even though the
economy remains relatively poor, there are an awful lot of
people who want to work and yet cannot fi nd any or any
stable jobs.
II. General Gluts
The key is that a “general glut”—
an excess supply of
produced goods and services and of labor—is an excess
demand for money.
Money is something you hold as a
substitute for trust
.
You can increase your holdings of
money in two ways:
(1)
Sell more other stuff
. (2)
Buy less
other stuff
. In this, money is d
ifferent from other
commodities
: to get more of any other commodity, you
have to buy it—you cannot decrease how much you spend
on commodity X to get more of commodity Y.
That is the key fact here
. Hold on to that.
4
Back in 1803 economist
Jean-Baptiste Say
argued that it
was simply n
ot possible for there to be a “general glut”:
If certain goods remain unsold, it is because other
goods are not produced; and that it is production
alone which opens markets to produce.... Whenever
there is a glut, a superabundance, [an excess supply]
of several sorts of merchandize, it is because other
articles [in excess demand] are not produced in
suffi cient quantities…
Back then
Thomas Robert Malthus
engaged him in debate,
asking that if what they saw was not a “general glut”, t
hen
wha
t was
going on:
We hear of glutted markets, falling prices, and cotton
goods selling at Kamschatka lower than the costs of
production. It may be said, perhaps, that the cotton
trade happens to be glutted; and it is a tenet of the
new doctrine on profi ts and demand, that if one trade
be overstocked with capital, it is a certain sign that
some other trade is understocked. But where, I would
ask, is there any considerable trade that is
confessedly under-stocked, and where high profi ts
have been long pleading in vain for additional
capital? The [Napoleonic] war has now been at an
end above four years; and though the removal of
capital generally occasions some partial loss, yet it is
seldom long in taking place, if it be tempted to
remove by great demand and high profi ts…
By 1830 Say had come around to Malthus’s point of view.
Describing the depression of 1825-6 in England, he wrote:
5
The Bank [of England]... forced the return of its
banknotes, and ceased to put new notes into
circulation…. Commerce found itself deprived at a
stroke of the advances on which it had counted, be it
to create new businesses, or to give a lease of life to
the old. As the bills that businessmen had discounted
came to maturity, they were obliged to meet them….
They sold goods for half what they had cost.
Business assets could not be sold at any price. As
every type of merchandise had sunk below its costs
of production, a multitude of workers were without
work. Many bankruptcies were declared among
merchants and among bankers…
Consider an economy in which only two things are
produced: yoga lessons and lattes
.
(This is what
we
economists do: stripped-down thought experiments that we
hope capture the essence, and then generalize
.
)
In this
economy, e
xcess demand for yoga lessons is defi cient
demand for lattes
—that is the only thing it could be.
Yoga
teachers are
then
overworked
, while l
atte-pullers stand idle
.
What happens next?
Latte-pullers retrain to teach yoga
. The
economic s
ystem rebalances at a higher level of human
satisfaction
. This is n
ot a process we want to interfere with
.
It is a healthy thing.
Suppose, however, we add cash money to the economy.
Then d
efi cient demand for yoga lessons and lattes is excess
demand for cash
.
Yoga teachers stand idle
.
Latte-pullers
stand idle
. Neither can
retrain to produce cash
.
In normal
times bankers can produce
extra
cash
—that’s what a bank
does when it gives you a mortgage loan.
But what if times
6
are not normal?
What if the banks regard themselves as
tapped out in terms of their ability to create cash?
And so you get depressions: long periods of high
unemployment.
The options for what to do in a depression are limited:
•
Wait it out—until something changes, and people are
happy with the cash they have and so resume spending at
a “normal” pace
.
•
Have those who can make “cash” do so—without
cracking trust in them
.
•
Have those who can spend—usually government—ramp
up their own spending
.
•
Cut wages and prices?
Perhaps.
But the shortage of and
demand for cash is often a fear that somebodies are
bankrupt, and at lower wages and prices more
somebodies are bankrupt
II. Basic Macroeconomic Tools
What determines if there is “too little” cash in an economy?
7
There is too little cash when the
economy as a whole is
trying to accumulate cash—and so cutting (planned)
spending back below (projected) income
. In attempting to
fi gure out whether and when this is the case, it is useful to
start with the facto that there are f
our sets of actors
in the
economy
:
h
ouseholds
, b
usiness investment committees
,
f
oreigners
, and t
he government
.
Households
h
ave a view of their
permanent
income
. They
s
pend a fraction c
y
of the gap between their current income
Y and their permanent income
on consumption goods, and
they hoard the rest on cash, or save it by lending it out to
businesses. Thus we can write down an equation for
consumption spending:
C = c
0
+ c
y
x Y
Foreigners sell us our imports
.
They then turn around and
spend some of their dollar earnings on our exports. The
difference between exports and imports is
net
exports
NX
.
They then take the rest of their earnings from selling us
imports and either hoard it in
cash or save
it
by lending
it
to
businesses
.
The government
spends
an amount
G
.
Business investment committees
decide to borrow and
invest
an amount
I
in buildings and machines to build up
8
their businesses’ capabilities to produce more in the future.
This amount I depends
on:
•
Total economy-wide s
pending E—
if there is
less
spending, why invest?
—plus t
heir “animal spirits”
•
The real interest rate r
that businesses
must pay to borrow
—the higher r, the lower investment.
And so we can write an equation for investment spending I
as well:
I = I
0
- I
r
x r (businesses)
Note that the central bank—the Federal Reserve
—
can
influence
but not
control
r.
We can now write down our whole model. Y is economy-
wide income. e is economy-wide spending. And:
E = C + I + NX + G
For our four sets of actors we have:
C = c
0
+ c
y
x Y (households)
NX (foreigners)
G (government)
I = I
0
- I
r
x r (businesses)
Substituting in, we get:
9
E =
(
c
0
+ I
0
+
NX
)
+
c
y
x Y
- I
r
x r
+ G
Now consider: What happens in the economy if there is a
“general glut”—an excess demand for cash—if planned
expenditure E
is less than expected income Y
?
People make
stuff, expecting to sell it
.
It doesn’t sell
.
So income comes
in lower than people and expected
—your income and total
income, realized Y, cannot be greater than actual
expenditure E because one person’s income can only come
from somebody else’s expenditure.
10
