TEXT Chapter 1, 2, RWM on Perusall

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WEEK 2
Macroeconomics is…
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Any questions from last week?
Perusall? Assignments? Quizzes?
Books?
Where did macroeconomics come from?
z 2008 (Great Recession)
September 2008 – Stocks
Crash
Stock prices fell to half their peak values, similar
to initial 1929 decline

2008-2014 – Financial Melt

Down
507 Banks Fail . Only 25 total 2000-2007, avg
3.1/year. Huge Government Bail out, FDIC

US GDP Decline closer to 2%

Only 4% growth total 2009-2014

2010: US Unemployment
peaks at 10.6%
15 million people, out of a labor force of 155
million

Alternative measures (U-6) went as high as 18%

2009 – Deflation, -.4% increase

in prices
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2008 - What did we do?

§ FDIC a part of the solution, insures

deposits and manages bank failures

§ 1935: Social Security in pretty good

shape despite attacks since 1980’s

§ TARP (2008) bailed out the large banks,

and huge monetary expansion

§ Stimulus Act of 2009 – 800 billion by

government over two years

§ Affordable Care Act in place insured (20

million more people with insurance)
 Almost a million deaths worldwide;
millions of cases of COVID-19.
z Stock prices fell 26% in four days. Globally
stocks fell 25-30%. By August 2020,
mid 2020 rebounded…
(Covid U.S. GDP Decline Great
Pandemic) depression levels…
First Quarter 2020 down 5% Second Quarter
down 32.9%, year down 3.5%

2020: official US
Unemployment peaks at
14.7%
April 14.7%, May 13.3%, June 11.1%, July
10.2%, Aug 8.4%, overall 8.1%
23 million people at peak, out of a labor
force of 156 million
U-6 measures (U-6) went as high as 22.4% ;
other estimates say 28% and 40 million
workers
2020 – Deflation, decreases in prices
march, April and May: 12 month 1.4%
 What we do to affect the Macroeconomy…
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Cares Act: Trump Fiscal American Rescue Plan: Biden

Stimulus, 2 trillion COVID Relief Bill, 1.9 trillion March
March 2020: 2021:
• $560 billion to families; • $1400 to most individuals plus $1400 each
dependant plus tax breaks (EITC etc)
• $1200 to most Individuals;
extra $500 for dependents • Extended Unemployment with extra $300/week

• Extended Unemployment • Expansion of child tax credit (direct deposits of

with extra $600/week • $350 billion to state and local governments
• Student loan payments deferred • $130 billion to schools

• 500 billion to large corporations • $32 billion childcare

• $28 billion to restaurants/bars
• 377 billion to small business
(paycheck protection program • More money for PPP
etc)
• $75 billion testing and vaccines, some
• rest to public health, education, expansion of financial incentives in Affordable
states and local government care act
• Rental and homeowners assistance ($40 billion)

Also huge Monetary Expansion, Low Interest Rates 20-21

Where did macroeconomics come from?
1930’s 2008 (Great Recession) mid 2020 (Pandemic)
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(Great Depression) September 2008 – 2020 COVID-19 Corona
Stocks Crash Virus
October 1929 – Stocks
Almost a million deaths worldwide;
Crash Stock prices fell to half their millions of cases.
peak values, similar to
Stocks fell 91% between initial 1929 decline
October 1929 and June Stock prices fell 26% in four days.
1932. Dow fell overall 31% Globally stocks fell 25-30%. By
in 1932 alone. 2008-2014 – August 2020, rebounded…
Financial Melt
1930-1932 – Financial Down U.S. GDP Decline Great
Melt Down depression levels…
9000 Banks Fail 507 Banks Fail . Only 25 total
2000-2007, avg 3.1/year. First Quarter 2020 down 5% Second
No Bail Out, not FDIC Huge Government Bail out, Quarter down 32.9%, year down
FDIC 3.5%
Overall, US GDP falls
by 25% US GDP Decline 2020: official US
closer to 2% Unemployment
1933: 25% U.S. peaks at 14.7%
Only 4% growth total 2009-
Unemployment 2014
April 14.7%, May 13.3%, June
World Depression. This is 11.1%, July 10.2%, Aug 8.4%,
about 12.5 million people 2010: US Unemployment overall 8.1%
out of a labor force of peaks at 10.6%
about 50 million* 23 million people at peak, out of
15 million people, out of a a labor force of 156 million
labor force of 155 million
1930-1933, 1938 –
Deflation rate 10% Alternative measures (U-U-6 measures (U-6) went as high as
6) went as high as 22.4% ; other estimates say 28%
18% and 40 million workers
*estimate of labor force by NBER.
Labor Force and Unemployment
are not perfectly comparable, as 2009 – Deflation, -.4% 2020 – Deflation, decreases in
the BLS didn’t measure until increase in prices prices march, April and May:
1948) 12 month 1.4%
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Was what we did in 2020-21 enough?
Is the economy “Normal’?
Inflation, what is being done? Should
we worry about it?

No Normal

Can with get to normal with

Economics? Need Public Health, Well-
being, etc
The Things we did to help the economy
during the Great Depression…and what
we learned from it…

THAT IS THE BEGINNING OF

MACROECONOMICS
 Since high inflation is what we have today,
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when has it been a problem?
1972-1982 – high inflation (average 8.2%)

Three years (1979-81) over 10% each year.

Stagflation = high inflation & unemployment. Unemployment

averaged 6.9% from 1979-81

For many years high Inflation has not been a problem. For the last 11
years, we have had more concerns about deflation or too little
inflation, more typical and expected in recessions/depressions.

Now, since 2021-22, inflation has been high or at least too high…(as of
yesterday Aug 2024) 2.5% (down from a high of 9.1% In June 22)

Is the “high” inflation of the last 40 months something to worry about?

Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Inflation
Rate 2.8% 3.8% -.4% 1.6% 3.2% 2.1% 1.5% 1.6% .1% 1.3% 2.1% 2.4% 1.8% 1.4% 7% 8% 4.1%
(CPI-U)

These are all annual inflation rates…Jan-Dec

 Inflation (CPI-U) versus Core Inflation
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January February March April May June July August
2024
Inflation% 0.3 0.4 0.4 0.3 0 -0.1 0.2 0.2
(CPI-U)
(annual) (3.2) (3.2) (3.5) (3.4) (3.3) (3.0) (2.9) (2.5)
Core 0.4 0.4 0.4 0.3 0.2 0.1 0.2 0.3
Inflation
(annual) (3.8) (3.8) (3.8) (3.6) (3.4) (3.0) (3.2) (3.2)

Note: Avg is last 12 months, not what I happening now. If you only
look at the change for each month, and look at the last five months
only, the inflation rate would be 1.4%

CPI-U: Consumer Price Index for all Urban Consumers

Core Inflation: All items minus food and energy

There are other measures of inflation:

Super Core Inflation – excludes shelter and cars
Core Services - excluding shelter
There are other price indexes:
Producer Price Index, Employment Cost Index, GDP Deflator…
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Depression versus recession

Recession: ~3 quarters of economic downturn. (National Bureau

of Economic Research - NBER)
Recession was an attempt to “re-brand” the second part of Great
Depression. Did not stick but we use it now.
A recession is when your neighbor loses their job; a depression is
when you do. - U.S. President Harry Truman

2008 was the worst recession since the Great Depression:

§ Paul Volker (Former FED Chairman) – “Great Recession”

The 2020 recession was called a depression – global, steep, but

only two quarters of significant negative growth

The first two Quarters of 2022 were negative: -1.6% and -.6%, it
was considered a temporary downturn not a recession.
So, at first, the goal of Macroeconomics was GDP
growth
z and production. Then Price stability. Then
Employment in the 1940’s. What else?

Measures of Well-being:
Older , More traditional § Annual Hours worked
measures:
§ Income inequality
§ GDP per capita § Absolute Poverty
§ Growth of GDP § Foreign Aid Donors and recipients
§ Net National Savings § Internet Users
§ Government Debt § Educational performance
§ Labor productivity
§ Life Expectancy
§ Unemployment Rate
§ Subjective well-being
§ Inflation
§ Carbon Dioxide Emissions per
§ Taxes as a % of GDP capita
§ Trade balance § Local Air Quality

§ Climate Stability
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Today we expand economics more:
Sustainability and Well-being

§ Considering more than the direct economic goals

has always been a part of Economics, but today
with rising inequality and the threats of climate
change, the goals are broadening.
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Modern Macroeconomic Goals:

Living Standards
Stability and Security
Sustainability
 Components of Living Standards
Diet, housing, communication and
transportation
Add quality of education and
Entertainment
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Living Standard growth: improvements in people’s diet,
housing, medical care, education, Working conditions, and
access to transportation, communication, Entertainment,
other amenities

• Economic Growth (GDP)

• Per person Economic Growth (GDP per capita)
• It matters what, how and for whom
Components of Stability and Security

Stable growth
Stable employment
Stable prices
Economic Stability: enables individuals and families to
z enjoy economic Security and to be able to make
reasonable predictions about their future.

• Business Cycles: recurrent fluctuations in

the level of national production, with
alternating periods of recession and boom
 Components of Sustainability
Are economic Activities Financially Stable?
(more GDP growth means less indebtedness)
Are Economic Activities Socially Sustainable?
(Bigger pie means more for all)
Are Economic Activities Ecologically Sustainable?
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(Growth allows us to explore/invest in solutions)

• Technical progress: the development of

new products and new, more efficient,
methods of production
Instead of the Answer,
is growth the problem?
Conscious Consumption: being aware of
the costs of consumption on others and on
the planet, and making consumption
z decisions responsibly to minimize waste and
achieve a more sustainable lifestyle.

Restorative development: economic

process that restores economic, financial,
social or ecological systems that have been
degraded and are no longer adequately
supportive of human well-being in the
present and the future
 Ecological Economics:
Precautionary principle: the principle that
we should err on the side of caution when
facing a significant possibility of severe
damage to human health or the natural
z environment

Contextual Economics: economic analysis

that takes into account the social and
environmental realities within which the
economic system operates.
§ OK, Back to where
economics
z started:
Classical Economics
Adam Smith +, 1776, Markets,
growth and distribution,

Division of labor

Specialization

Laissez-Faire

Say’s Law: Supply

Creates its’ Own
Demand

Capitalism: Private
Ownership of Capital,
Wage workers,
markets and profits
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The Economy Adam Smith talked
about was Feudalism
 Always Debates: Jean-Baptiste Say
Fought
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with Thomas Malthus 1820
Say’s Law: "Inherent in supply is the wherewithal
for its own consumption” 1803
(In words of Keynes, supply creates its’ own demand)

Say
Malthus
 And Karl Marx, 1859, critiqued both
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of them, and Smith, and mostly
Capitalism

Goal: "lay bare the economic law of motion of

modern society."
 Back to the Great Depression and
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John Maynard Keynes
§ Aggregate Demand (AD): The total
demand for all goods and services
in a national Economy

Say;s Law is wrong: When there is not

enough AD , they key to getting out
of a slump (depression, recession)
is to increase AD by:

1. Encourage people to consume more

2. Government can buy more

3. Business can be encouraged to

spend more (Keeping interest rates
low)..hard to get businesses to do
this. Government should control
national Investment

1 and 2 were basically done when the Keynesian Economics

U.S. Government geared up for and Dominant after WWII
then entered WWII.
and through the 1960’s
 The retreat from Keynesian
z Economics: Rise of Monetarism
1970’s Economic Crisis, Industrialized Countries Experiencing High
Unemployment combined with increased inflation

Government blamed…regulation, social programs, high taxes on

corporations, too much money creation…

Monetarism: a school of Economic thought that

argues that governments shoud aim for
steadiness in the money supply rather than
playing an active role

Milton Friedman, University of Chicago

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Now, debate between different
economic ideologies in
Macroeconomics:

Classical, Keynesian, Monetarist….

Debates on the role of the Government in the
Economy
§ Classical/Monetarist: § Keynesians:

People are rational, markets Unemployment causes human

are efficient, and big suffering which can persist.
government discourages Government needs to have
the private sector and an active role; you cannot
growth. wait for markets to correct.

“In the Long Run, we are all

dead”. -JMK