UNIT 1. Introduction to Macroeconomics1. Economics and the New Economy: The Invisible Hand Meets Creative Destruction, Leonard I. Nakamura, Business Review (Federal Reserve Bank of Philadelphia), July/August 2000
Some believe that a “new economy” has emerged—an economy in which the globalization of world markets and high-tech innovations play a major role. What should the fundamental paradigm of economics be in the twenty-first century: creative destruction or the invisible hand? Leonard Nakamura considers some possible answers to this question. New! 2. On Making Economics Realistic, Challenge, November/December 2002
In 2001, George Akerlof was a recipient of the Nobel Memorial Prize in Economic Science for his work in asymmetric information and behavioral economics. In this interview with Professor Akerlof he offers a broad criticism of conventional economics. New! 3. Beyond a President’s Control, Louis Uchitelle, The New York Times, July 11, 2004
We endow our presidents with mythical power, holding them responsible for the health of the economy. However, as Louis Uchitelle shows, a president’s influence over the twists and turns of the complicated American economy is inevitably less than is advertised. UNIT 2. Measuring Economic Performance4. State of the Union: Black Holes in the Statistics, Robert Eisner, Challenge, January/February 1997
How reliable are official U.S. government statistics? Robert Eisner believes that they are deeply flawed. This applies to measures of GDP, public deficits and debt, domestic and foreign investment and saving, productivity, real wages, and the distribution of income and wealth. 5. Notes From Underground: Money That People Earn and Spend Outside the Realm of Official Economic Calculations Is Nonetheless Real, Elia Kacapyr, American Demographics, January 1998
A large share of economic activity occurs in the underground economy, where goods and services—some legal, some not—are produced but not reported. Elia Kacapyr considers possible implications of this activity for economic policy. New! 6. Technology, Productivity, and Public Policy, John Williams and Mary Daly, FRBSF Economic Letter (Federal Reserve Bank of San Francisco), March 12, 2004
The study of productivity growth cuts across many of the fields and approaches in economics—microeconomics, macroeconomics, and international economics; theoretical and empirical analyses—and it is a subject for students of history as well as current events. 7. An International Tale of Two Consumers, David Ingram, The Dismal Scientist, July 10, 2000
The personal rate of time preference (RTP) captures consumers’ attitudes toward current versus future consumption. Individuals with a high RTP strongly value current consumption over future consumption. David Ingram explains why the RTP is high in the United States but low in Japan. UNIT 3. Fiscal Policy and the Federal Budget8. Taxing Terminology: A Primer, Albert B. Crenshaw, The Washington Post, February 11, 2001
The debate over President Bush’s tax proposal has produced a good deal of ill-informed or outright contentious rhetoric from both sides, which serves as a reminder of how confusing tax laws are to ordinary citizens and even to some government leaders. Albert Crenshaw explains how an understanding of basic tax concepts can de-mystify the debate over tax cuts. 9. Surplus Mania: A Reality Check, L. Randall Wray, Jerome Levy Economics Institute: Policy Notes, Volume 3, 1999
A federal government surplus has finally been achieved, and it has been met with pronouncements that it is a great gift for the future and with arguments about what to do with it. However, L. Randall Wray argues that the surplus will be short-lived, it will depress economic growth, and, in any case, surpluses cannot be “used” for anything. New! 10. The Deficit: America’s Credibility Gap, Shawn Tully, Fortune, March 8, 2004
Between 1998 and 2001, the U.S. generated more than half-trillion dollars in budget surpluses, and it was widely assumed that the era of big deficits was over. But a year later the U.S. budget fell into deficit again, and it’s been spiraling downward ever since. Shawn Tully warns of the corrosive effect that deficits will have on the American economy, unless something is done to reduce them soon. 11. The Tax Man Cometh: Consumer Spending and Tax Payments, Peter S. Yoo, Review (Federal Reserve Bank of St. Louis), January/February 1996
How do consumers respond to changes in income tax rates? Peter Yoo examines several episodes in U.S. history when tax payments changed noticeably. He finds that the response of households was rather modest. 12. Go Figure, Jodie Allen, The New Republic, July 31, 2000
If tax breaks aren’t simple, neither are they very efficient. It has been documented that tax preferences mostly subsidize activities that would have occurred anyway (such as saving money, hiring workers, or having kids), and much of the money does not go toward the intended purpose at all. New! 13. Social Spending and Economic Growth, Challenge, July/August 2004
Prevailing opinion holds that big government and high taxes reduce economic growth. But in this interview economist Peter Lindert argues that states that spend a lot on social problems grow no more slowly than those that spend little. 14. Social Security Reform Need Not Be Drastic, Augustine Faucher, The Dismal Scientist, April 4, 2001
Most Americans understand that Social Security faces a long-term imbalance between the cost of benefits promised under current law and the program’s projected income. Augustine Faucher demonstrates why reforming the system need not be drastic. UNIT 4. Money, Banking, and Monetary Policy15. What Should Central Banks Do?, Frederic S. Mishkin, Review (Federal Reserve Bank of St. Louis), November/December 2000
In the last 20 years, there has been substantial rethinking about how central banks should do their job. Frederic Mishkin discusses seven basic principles that can serve as useful guides for central banks trying to achieve their objectives. New! 16. How Does Monetary Policy Affect the U.S. Economy?, FRBSF Economic Letter (Federal Reserve Bank of San Francisco), January 30, 2004
This article discusses how Federal Reserve policy actions affect real interest rates, which in turn affect aggregate demand and ultimately output, employment, and inflation.New! 17. How Does the Fed Decide the Appropriate Setting for the Policy Instrument?, FRBSF Economic Letter (Federal Reserve Bank of San Francisco), February 6, 2004
The Fed’s job of stabilizing output in the short run and promoting price stability in the long run involves several steps. This article discusses the things which complicate the process of determining how the economy is doing. 18. How Sluggish Is the Fed?, Glenn D. Rudebusch, FRBSF Economic Letter (Federal Reserve Bank of San Francisco), March 2, 2001
How quickly does the Fed adjust monetary policy in response to developments in the economy? A common view among economists is that the Fed changes the short-term policy at a very sluggish pace over several quarters. Glenn Rudebusch takes issue with this position. 19. The Science (and Art) of Monetary Policy, Carl E. Walsh, FRBSF Economic Letter (Federal Reserve Bank of San Francisco), May 4, 2001
While economists have identified broad principles to guide monetary policy-makers, making policy is not a science. Good policy-making requires good policy-makers since it requires combining the science of the economist with the art of the practitioner. 20. The New World of Banking, Jim Campen, Dollars and Sense, May/June 2000
The Gramm-Leach-Bliley Financial Service Modernization Act of 1999 makes possible a new kind of corporation—called a financial holding company—that allows any number of banks, insurance companies, and securities firms to be brought together under the same corporate umbrella. Jim Campen suggests that the result is likely to be another wave of financial megamergers. New! 21. Banking Consolidation, Simon Kwan, FRBSF Economic Letter (Federal Reserve Bank of San Francisco), June 18, 2004
Profound changes in banking laws occurred in the 1990s. As Simon Kwan indicates, the ever-growing scale of bank mergers raises some challenging policy questions which must be addressed. New! 22. Why an Old Prohibition Against Linking Loans and Services Is Obsolete, Mara Der Hovanesian, Business Week, October 27, 2003
Big banks give loans to big companies in return for a promise to do future business deals. The banks make money by selling a bundle of services, while Corporate America gets cheap loans and a bulk discount for one-stop shopping. However, as Mara Der Hovanesian demonstrates in this article, the whole transaction may be illegal. New! 23. The Cycles of Financial Scandal, Kevin Phillips, The New York Times, July 17, 2002
In the last few decades, the U.S. economy has been transformed through what Kevin Phillips calls “financialization.” Securities management, corporate reorganization, derivatives trading, and other forms of financial packaging are steadily replacing the act of making, growing, and transporting things. He asks: will an era of reform follow a decade of excess? UNIT 5. Employment, Prices, and the Business CycleNew! 24. Macro Policy Lessons from the Recent Recession, Christian Weller, Josh Bivens, and Max Sawicky, Challenge, May/June 2004
In this assessment of economic policy-making during the recent recession the authors conclude that more coordinated policy could have resulted in an economy that started to recover quickly, would probably have resulted in more job growth, and would not have left America with high future budget deficits. 25. The New Growth Economics: How to Boost Living Standards Through Technology, Skills, Innovation, and Compensation, Robert D. Atkinson, Blueprint, Winter 2001
Robert Atkinson argues that while the New Economy continues to displace the Industrial Age economy, U.S. economic policies are still rooted in the past. He says that the new administration should jettison the holdover prescriptions of Keynesian and supply-side economics and embrace a new growth economics focused on boosting productivity and wage growth. 26. The Mystery of Economic Recessions, Robert J. Shiller, The New York Times, February 4, 2001
Economists have yet to be able to pinpoint what ultimately causes recessions. Robert Shiller argues that, contrary to what many economists believe, changes in the level of confidence in the economy, not the Federal Reserve, are what basically determine its ups and downs. 27. The Cost of Living and Hidden Inflation, James Devine, Challenge, March/April 2001
Economists generally argue that inflation is overstated by the federal government because it does not sufficiently account for the improved quality of products. James Devine argues that if we account for all pertinent changes in the quality of life, inflation is understated. New! 28. A Fight Against Fear As Well As Inflation, Edmund L. Andrews, The New York Times, June 20, 2004
Inflation expectations depend heavily on confidence in the Federal Reserve as a guardian of price stability. And if that confidence is to remain strong, they may be forced to move at more than a “measured pace.” New! 29. Link Between Taxation, Unemployment Is Absent, Jonathan Weisman, The Washington Post, March 15, 2004
Following federal tax increases in 1993, the U.S. unemployment rate dropped steadily for seven years. When taxes were cut in 2001, the jobless rate rose and in 2003 (when taxes were cut again) unemployment increased again. Jonathan Weisman contends that the relationship between taxes and unemployment is far more complicated than many people (including politicians) understand. New! 30. Does Lower Unemployment Reduce Poverty?, Robert H. Defina, Business Review, 2002
In this article, Robert Defina presents empirical evidence that, given numerous short comings in the estimation of poverty levels, the link between unemployment and poverty is not as strong as many people think it is. 31. Employment May Be Even Weaker Than You Think, Francis X. Markey, The Dismal Scientist, April 18, 2001
Surveys of employment trends conducted by the Bureau of Labor Statistics (BLS) are the most timely and most watched economic indicators available. In this article, Francis Markey warns of flaws in BLS methods that may currently be overstating the overall number of jobs. New! 32. More Jobs, Worse Work, Stephen S. Roach, The New York Times, July 22, 2004
Stephen Roach, chief economist for Morgan Stanley, examines job trends since the trough of the last recession in November 2001. Although available evidence suggests that the U.S. job picture has improved, a troubling aspect is that a large share of the new jobs are at the lower end of the economic spectrum. New! 33. Lighting Labor’s Fire, Barbara Ehrenreich and Thomas Geoghegan, The Nation, December 23, 2002
The collapse of union membership in America, from a peak of 38 percent in the mid-1950s to 9 percent of the private work force today, is a major reason for increased income inequality. The authors propose a number of approaches and initiatives to bring the labor movement back. UNIT 6. International EconomicsNew! 34. Foreign Economic Policy for the Next President, C. Fred Bergsten, Foreign Affairs, March/April 2004
At a time when U.S. foreign policy is dominated by matters of war and terrorism, economic concerns are often pushed to the back burner. While the United States may be in a position to undertake unilateral initiatives for the sake of national security, C. Fred Bergsten explains why, in economic policy, unilateralism is simply not an option. New! 35. Why Do Certain Countries Prosper?, Virgina Postrel, The New York Times, July 15, 2004
The American economy has done better—and Europe and Japan have done worse—than most people predicted in the 1980s. Virginia Postrel draws on information from several recent studies to show it’s not what you put into the economy that matters, but what you get out of it. Consumption is the goal of production. New! 36. Perspectives on Global Outsourcing and the Changing Nature of Work, Christopher B. Clott, Business and Society Review, Summer 2004
While globalization has reduced barriers to the movement of goods and capital across national boundaries, it has also created a series of problems, including job losses, increasing income inequality, and stagnant or deteriorating real wages. Christopher Clott examines the role which multinational corporations have played in globalization. 37. The Fall and Rise of the Global Economy, John G. Fernald and Victoria Greenfield, Chicago Fed Letter (Federal Reserve Bank of Chicago), April 2001
The worldwide integration of national economies—through goods and services trade, capital flows, and operational linkages among firms—has never before been as broad or as deep as it is now. John Fernald and Victoria Greenfield describe developments that have contributed to the globalization process. New! 38. The “Globalization” Challenge: The U.S. Role in Shaping World Trade and Investment, Robert E. Litan, Brookings Review, Spring 2000
Economic engagement with the rest of the world played a key part in the recent U.S. economic boom. However, as Robert Litan warns, American economic policy must steer a middle course between the extremes of either unilateralism or one-worldism. 39. Should We Worry About the Large U.S. Current Account Deficit?, Paul Bergin, FRBSF Economic Letter (Federal Reserve Bank of San Francisco), December 22, 2000
Over the last year the U.S. current account deficit has reached unprecedented levels. This Economic Letter explores some recent theories and some data to help the reader understand how the current account deficit could be either an optimal situation or a threatening one. 40. Global Shell Games: How the Corporations Operate Tax Free, Byron Dorgan, The Washington Monthly, July/August 2000
More than two-thirds of foreign-based multinational companies doing business in the United States—and only a slightly smaller fraction of U.S. based multinational firms—pay no federal income tax at all. Byron Dorgan takes a look at how these corporations manage to operate tax free. New! 41. Free Trade on Trial—Ten Years of NAFTA, The Economist, January 3, 2004
From the start, the North American Free-Trade Agreement (NAFTA) of 1994 was bitterly controversial in all three of the countries taking part—the United States, Canada, and Mexico. Unsurprisingly, a mere ten years experience has settled few of these quarrels. 42. Trade in the Americas: All in the Familia, The Economist, April 21, 2001
The Free Trade Area of the Americas (FTAA) would create the world’s largest trade zone, stretching from Alaska to Argentina. The Bush administration is all for it; South America’s biggest economy, Brazil, is not so sure. 43. Latin America’s Volatile Financial Markets, Jonathan Lemco and Scott B. MacDonald, Current History, February 2001
The major economies of Latin America have made remarkable progress since the early 1990s. Strong growth has been accompanied by sharply curtailed inflation rates and impressive debt management. Yet, as the authors note, the greatest challenge facing these nations is their heavy dependence on international capital markets. 44. Japan Learns the Sun May Not Come Out Tommorow, Howard W. French, The New York Times, April 8, 2001
Little more than a decade ago, Japan still had the gleaming look of one of history’s greatest economic success stories. Now, after 11 years of unrelenting decline, the desire by Japan’s neighbors to follow its model has been replaced by dismay over its decay. New! 45. The Limits to Consumption, Shawn W. Crispin and Philip Segal, Far Eastern Economic Review, January 9, 2003
The authors maintain that, if Asian governments think expanded domestic consumption is a recipe for sustained economic growth, they should think again. Easy credit is already fueling personal bankruptcies and threatening the health of the financial system. 46. East Asia: Recovery and Restructuring, Ramon Moreno, FRBSF Economic Letter (Federal Reserve Bank of San Francisco), December 29, 2000
The rapid recovery of East Asian economies following major crises in 1997 has caught many observers by surprise. Ramon Moreno maintains that the biggest challenge facing East Asian policy-makers today is to decide how many traditional institutional practices to keep and how many to discard in favor of the systems in place in advanced market economies. 47. China’s Economic Power: Enter the Dragon, The Economist, March 10, 2001
Although still poor by traditional standards, the Chinese economy could potentially experience extraordinary growth over the next two decades and become the second-largest economy in the world. In this article, The Economist considers possible implications for both China and the world economy. 48. Changing Today’s Consumption Patterns—for Tomorrow’s Human Development, UN Human Development Report, May 1998
World consumption has expanded at an unprecedented pace over the twentieth century. As this United Nations report shows, competitive spending and conspicuous consumption have turned the affluence of some into the social exclusion of many.
