ECO 481: Public Choice Theory Week 12: Macroeconomic Instability Dr. Dennis Foster

Economic Instability Marx & Keynes - an inherent flaw in capitalism. Schumpeter - inherent, but advantageous. Austrians - not inherent nor advantageous. Highly valued; rarely seen. Why? Economic ignorance. Economic ignorance. Self-interest of political decision-makers. Self-interest of political decision-makers.

Economic Ignorance Economists are not physicists. Agreement on variables doesn’t matter. Data - not current; not complete; uncertain; costly to collect; unreliable. Has stimulus kept Ur under 8%? Has stimulus kept Ur under 8%? Macro policy - offer with humility. Can we tell the fool from the demagogue? Can we tell the fool from the demagogue?

Humility Explained, or not …

Instability = f (self-interest) Wealth, income, power, status come from: Having more to do. (“Getting the job done.”) Not getting the job done. cut taxes and raise spending! “Fighting” unemployment is esp. rewarding: cut taxes and raise spending! Appear to fight deficits; do so is political suicide. “[M]arket fluctuations, in turn, provide rhetorical ammunition for politicians wanting to inject the government still more into economic life.” “[M]arket fluctuations, in turn, provide rhetorical ammunition for politicians wanting to inject the government still more into economic life.”

Political Business Cycles  money supply in last 2 years of term. SR gains - reduced unemployment. LR costs - inflation; deal with later. Evidence from U.K. and U.S. Even Keynesian prescriptions are not followed: raise taxes and cut spending during recovery. Is Obama a Keynesian?Keynesian “And, of course, deficits are at all time highs.” “And, of course, deficits are at all time highs.”

Deficits

The Problem w/Macro Policy Ignores micro principles. People make choices & respond to incentives. Macro aggregates ignore the individual. Provide $ to bridge unemployment gap. Provide $ to bridge unemployment gap. Now - incentivizes people to stay unemployed. Now - incentivizes people to stay unemployed. Policies discourage saving/investment. Tax exempt mortgage; crowding out. Tax exempt mortgage; crowding out.

A Depression Story

What if we didn’t “fight” recessions? 8/ /1922 6/ ??? 5/ /1988

GDP (2011) = $18.3 tr. vs. $13.3 tr net gain = $34.6 tr.

Reducing Deficits Three choices -  taxes,  spending,  MS. Text on Paul Ryan’s plan!! Text on Paul Ryan’s plan!! Current dilemma - $4 b. or $60 b. or $100 b. on a $1.5 trillion deficit? AZ experience - sell & lease; defer payments. Can we even hope for a 19% solution?

ECO 481: Public Choice Theory Week 12: Macroeconomic Instability Dr. Dennis Foster