Introduction to Macroeconomics
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Introduction to Macroeconomics! "[h]ad the price of gold been raised in the late 1920's, or, alternatively, had the major central banks pursued policies of price stability instead of adhering to the gold standard, there would have been no Great Depression, no Nazi revolution, and no World War II." Introduction to the basic propositions of macroeconomics Macroeconomics is the branch of economic analysis most closely identified with "economic well- being" and the justification for studying macroeconomics is based upon four propositions - (1) economic well-being matters; (2) economic well-being can be "captured" by macroeconomic variables (e.g.. unemployment and inflation rates); (3) there are stable relationships between macro variables; and (4) these economic variables can be managed by policy officials. Macro matters The first of these propositions – macroeconomics matters - is widely accepted. Robert Mundell, recipient of the 1999 Nobel Prize in Economics, wrote: "[h]ad the price of gold been raised in the late 1920's, or, alternatively, had the major central banks pursued policies of price stability instead of adhering to the gold standard, there would have been no Great Depression, no Nazi revolution, and no World War II."i He was simply restating the sentiment of observers of the rise of Fascism in Italy and Germany and Communism in Russia. Paul Scheffer, writing in 1932 about the followers of Hitler, describes them as, this depressing assemblage of people is waiting for. It is waiting for a gospel, a message, a Word that will release it from the pinch of want, something that will compensate for the unbearable limitations of its present mode of existence. It wants to get hold of an ideal that will guide it forth from the quagmire where it finds itself. It wants to hear an assurance that it is entitled to a place in this new world. The man who can lift these people from their depression of spirit even for the space of an hour can win them to himself and to the cause that he tells them represents the substance of "liberation. … [Hitler] “is fighting for the right of the half-educated to their own picture of the world, to a culture which is illumined by love of country. He shouts at the university students that they are not worthy of pursuing their scholarly studies if they cannot find a common ground with the mechanic who is intent on serving his country.ii The hyperinflation and widespread unemployment in Germany in the 1920s was not something we can relate to from our own experiences, but you can see from the passage below how it would wreck an economy and a society and set the stage for the rise of a fanatic promising a better future. 'FOR these ten marks I sold my virtue,' were the words a Berliner noticed written on a banknote in 1923. He was buying a box of matches, all the note was worth by then. That was in the early days. By November 5th, a loaf of bread cost 140 billion marks. Workers were paid twice a day, and given half-hour breaks to rush to the shops with their satchels, suitcases or wheelbarrow, to buy something, anything, before their paper money halved in value yet again.iii By the time the hyperinflation had ended in April of 1924 the US dollar was worth 4.2 trillion marks, up from a price of only 2,000 marks a year earlier - and Germans were looking for someone to lead them out of the mess - and someone on whom to blame the mess. They found the leader in Hitler and the scapegoat in the Jews, and we know the end of the story. And Germany was not alone.iv Mismanagement of the macroeconomy has produced numerous episodes of hyperinflation, including in Greece (1943-1944) where the inflation rate peaked at 8.55 billion %; in Hungary (1945-46) where it reached 4.19 quintillion percent; 1 and in China (1948-1949) where the “Chinese Communist Party never forgets it seized power in 1949 following not just military victory, but also hyperinflation under the Kuomintang government…”v More recently, there was hyperinflation in the former Yugoslavia where Slobodan Milosevic engineered vi the ethnic cleansing in Kosovo in an economy already brutalized with inflation. The magnitude of the vii Yugoslavia hyperinflation of the early 1990s is evident in the numbers that are truly mind-boggling. In October of 1993 they created a new currency unit. One new dinar was worth one million of the old dinars. In effect, the government simply removed six zeroes from the paper money. This of course did not stop the inflation and between October 1, 1993 and January 24, 1995 prices increased by 5 quadrillion percent. This number is a 5 with 15 zeroes after it. Even the catastrophic results in Yugoslavia did not, however, rid the world of hyperinflation. By mid December in 2008 Zimbabwe was in the midst of one of the world's worst bouts of hyperinflation. It began circulating a $500 million note as inflation approached 11,250,000%, a rate high enough for prices to double every 22 days and to bring about a collapse of the economy. The importance of the macro economy can also be seen in the million+ witches killed in Renaissance Europe when the weather was unusually cold,viii rioters in the streets and presidential resignations in Argentina in 2001 that accompanied depression-like unemployment rates of 25 percent,ix the collapse of the government of Thailand months after the economic crisis of 1997, the Arab Spring that began with the overthrow of Tunisia’s former president Zine el-Abidine Ben Ali by millions without access to decent jobs. At a more personal level tough economic times are reflected in poorer health and higher suicide rates. In tough times governments cut back public health programs and individuals cut back on their discretionary medical spending, while “[t]he correlation between unemployment and suicide has been observed since the 19th century. People looking for work are about twice as likely to end their lives as those who have jobs. … Fiscal policy, it turns out, can be a matter of life or death.”x In the US, however, the state of the macroeconomy is less likely to show up in social unrest, although it may show up in higher suicide rates that we experienced in the Great Recessionxi or crime stats. In 2008, in the midst of the economic crisis that rippled around the world, the New York Times ran a story under the byline "As economy dips, arrests for shoplifting soar." And the state of the economy certainly affects election results. This is evident in the following passage.xii At any given moment the state of any nation—and especially the state of any stable industrial democracy, where a measure of political calm and social order can generally be taken for granted—is determined largely by the state of its economy. Wars, relative military strength, terrorist attacks, natural disasters, demographic changes, social trends, election outcomes, even the results of international sporting competitions, can all contribute significantly to a country's perception of its own well-being. At times, certainly, one or more of these factors can outweigh the economy in affecting the collective sense of how the country is faring. But as any presidential candidate will tell you, for the average American citizen the most basic measure of national well- being amounts one way or another to economics. Is my income higher or lower than it was last year? Is my job more or less secure? Across the spectrum of class or income well-being is measured to a considerable degree by the question "Can I afford ... ?" Can I afford to put the kids through college? Buy a house? Put my mother in a nursing home? Pay for day care? Put food on the table? Buy a vacation home? It should not be surprising, therefore, that in many presidential elections the economy has been a deciding factor. At the top of the list would be the election of Franklin Roosevelt in 1932 that promised a way out of the Great Depression. John Kennedy picked up on the economy theme and defeated Richard Nixon in 1960 when the American people rallied around his promise to get the economy moving again, and Jimmy Carter won the 1976 election with rhetoric like the following: 2 This year, as in 1932, our country is divided, our people are out of work, and our national leaders do not lead. Roosevelt's opponent in that year was also an incumbent president, a decent and well- intentioned man who sincerely believed our government could and should not with bold action try to correct the economic ills of our nation. Unfortunately for Carter, the economy headed south and he lost in 1980 when Reagan challenged the American people to reflect on the past four years and ask the question: Can you look at the record of this administration and say, 'Well done'? Can anyone compare the state of the economy when the Carter administration took office with where you are today and say, 'Keep up the good work'? Can you look at our reduced standing in the world and say, 'Let's have four more years of this'? The answer was NO, and Ronald Reagan was elected president. Bill Clinton followed the tradition and put the economy at the center of the 1992 election with his campaign slogan "It's the economy, stupid." And then in 2008 Barack Hussein Obama won an election that no one would have predicted a year earlier – in part because he followed Kennedy’s lead in mastering a new technology – TV for Kennedy and the Internet for Obama – and in part because the US economy was sliding into the Great Recession.