Economic Instability Chapter 14

Goals & Objectives 1. Phases of the business cycle. 2. Identify 5 causes of the business cycle. 3. Unemployment & 5 types. 4. How inflation is measured causes & consequences of inflation. 6. Measuring the distribution of income. 7. Antipoverty programs.

Business Cycles & Fluctuations Phases: Phases: 1. recession: GDP declines for two quarters in a row 1. recession: GDP declines for two quarters in a row 2. peak: point where GDP stops going up. 2. peak: point where GDP stops going up. 3. trough: turnaround point where GDP stops going down. 3. trough: turnaround point where GDP stops going down. 4. expansion: period of recessionary recovery 4. expansion: period of recessionary recovery 5. depression: high unemployment, work shortages, supply shortages 5. depression: high unemployment, work shortages, supply shortages

Business Ups & Downs

Great Depression October 29, 1929: Black Tuesday October 29, 1929: Black Tuesday Why? Causes of the Great Depression Why? Causes of the Great Depression 1. Easy Credit: Federal Reserve 2. Global economy: interdependent banking & foreign loan defaults. 3. Overproduction: Technology & increased labor productivity 4. Speculation: Buying on margin

1913: Federal Reserve Controls Money & Banking=16 years later: Great Depression

Causes of the Business Cycle 1. Capital Expenditures: new ventures, capital goods technology, new markets. 2. Inventory Adjustments: JIC theory (long run) vs. JIT theory (short run). 3. Innovation and limitation: new products, new technology, new process. (social media, e-commerce). 4. Monetary Factors: Credit & loan policies of the Federal Reserve. 5. External Shocks: Oil prices, wars, free trade agreements, international boycotts & strikes.

Unemployment Unemployed: people out of work who made a specific effort to find a job during the past month: Employment Office Limitations of Unemployment Rate: does not count people who are not looking for work or people with part-time jobs.

Unemployment & Education

Unemployment & Underemployment Rates

Kinds of Unemployment 1. Frictional Unemployment: workers between jobs. 1. Frictional Unemployment: workers between jobs. 2. Structural Unemployment: changes in technology. Military Base closures. 2. Structural Unemployment: changes in technology. Military Base closures. 3. Cyclical Unemployment: recessionary periods: automotive market, housing market 3. Cyclical Unemployment: recessionary periods: automotive market, housing market

Kinds of Unemployment 4. Seasonal Unemployment: Life-guarding, snow skiing, summer school teachers. 4. Seasonal Unemployment: Life-guarding, snow skiing, summer school teachers. 5. Technological Unemployment: automation that replaces less skilled workers. 5. Technological Unemployment: automation that replaces less skilled workers.

Concept of Full Employment Does not mean 0 unemployment rate. Does not mean 0 unemployment rate. Opinions vary: Most economists consider 4.5% the margin of full employment. Opinions vary: Most economists consider 4.5% the margin of full employment. 2000: 3.9% 2000: 3.9%

Inflation Measuring Inflation: 1. deflation: decrease in the general price level. Degrees of Inflation: A. creeping inflation: 1-3 % a year B. galloping inflation: % a year C. Hyperinflation: 500% or more per year

Supply-Side Economics 1980

Comparison Inflation Rates

Causes of Inflation 1. Demand-Pull Theory: government deficit/spending causes inflation. 2. Rising Input Costs: labor and wages, Unions, taxes, gov’t regulations/fees/fines. 3. Collusion: OPEC, large corporations 4. Excessive Monetary Growth: Federal Reserve; Quantitative Easing (Q3)

Demand-Pull Inflation

Wage-Price Spiral: Cost-Push Inflation

Consequences of Inflation 1. The dollar buys less. Devaluation: Hard on fixed incomes, minimum wage earners. 2. Can cause people to change their spending habits: Decrease in spending. 3. Increases speculation: Rising home prices in 90’s 4. Alters the distribution of income. Lenders hurt more than borrowers. Gov’t Bailouts:

Poverty and the Distribution of Income Reasons for Income Inequality: Reasons for Income Inequality: –1. Educational levels –2. Wealth: Savings vs. Spending –3. Discrimination: Jim Crow & Affirmative Action –4. Ability: Talents, productivity –5. Monopoly Power: Cooperatives, Subsidies

Government Monopolies & Regulations

Lower Education = Poverty Rate Increase

Poverty 15 % of Americans in poverty; 46 million Americans. Median Income: $50,000 year 15 % of Americans in poverty; 46 million Americans. Median Income: $50,000 year The Growing Income Gap: The Growing Income Gap: 1. Industry to Service jobs 1. Industry to Service jobs 2. Diminishing Educational Standards 2. Diminishing Educational Standards 3. Declining Unionism 3. Declining Unionism 4. Divorce, Single-parent families. 4. Divorce, Single-parent families.

War on Poverty Rates

Poverty by County

Anti-poverty Programs Welfare--- Public & Private assistance based upon financial need.Welfare--- Public & Private assistance based upon financial need. 1. Income Assistance: TANF vs. AFDC, SSI. 2. General Assistance: Food Stamps, Medicaid, Obama-care (Affordable Care Act). 3.Social Service Programs: Foster care, child welfare, day-care, WIC. 4.Tax Credits: EITC or redistributed cash to low income workers; Negative Income Tax Credit.

Entitlement Spending 65%

War on Poverty cost to taxpayers

Anti-Poverty Programs 5. Enterprise Zones: areas where companies can locate to avoid federal, state & local taxes with limited operating restrictions. 6. Workfare Programs: exchange some labor for government benefits. 7. Negative Income Tax Credit: cash payments to “certain” groups below the poverty line. Demand-Pull Inflation.

Growth of Entitlement Spending