1. Economic Schools of Thought

2. Common Idea/Theme It’s all about competition But…
Competition is complex
Competition can be good/bad
Competition can be rational/irrational
Competition may be helpful/harmful

3. Current debate Bottom up or top down? Top down: Bottom up:
Help businesses
High government control
Cuts and assistance to the wealthy
Bottom up:
Help consumers, allow markets to work
Low government control
Cuts and assistance to he bottom half

4. Classical School

5. Laissez Faire/Invisible Hand
Say’s Law
Competition works, let it create improvements in the market over time. The government is there to keep the game fair, not to interfere with the market.
Fredrich Hayek: “The Road the Serfdom”
Fiscal Policy Only creates wage inflation
Banking manipulation doesn’t allow markets to work as intended
Market prices allow consumers and business to see and react
Supply creates its own demand. Supply manipulates wealth needed to purchase that supply. Prices will use natural supply and demand in the long run.

6. Governments Role
Keep thing fair and efficient. Avoid monopolies, unions, cheating and other barriers to competition.

7. Periods of stagflation No stable FE Outsourcing?
Modern Examples
Flaws
NAFTA, CAFTA, EU, WTO
Business Cycles
Great Depression
Periods of stagflation
No stable FE
Outsourcing?

8. Keynesian (Fiscal Policy) 1930’s - present
Competition can be good but is always flawed
During Great Depression the government needed to step in an do something.
We could not wait like classical theorist suggested and let it work out in the long run.
Keynes said in the long run we are all dead.

9. Major Philosopher
John Maynard Keynes

10. Major terms Ratchet Effect Leaks
Markets and prices move up quickly, but cannot adjust downward near as fast.
The price of something goes up a lot quicker than it comes down
Leaks
Wealth created by supply (Say’s Law) will not be matched by demand, some money will be held aside for the future (savings).

11. Counter-cyclical Fiscal Policy
The government must step in to push the economy towards balance that “laissez faire” fails to do.
This is accomplished by manipulating taxes and government spending.
Automatic stabilizers (transfer payments): Built in long run programs that soften shocks of recession (social security, welfare, unemployment)

12. Government’s Role Keep the business cycle from getting out of hand
Keep recessions and expansions in check

13. Modern Examples Social Security, Medicare, unemployment…etc
Tax cuts during recession (Bush 2001, bought me a new PS2, then took it away in 2002)
Subsidies, Bail-outs
Flaws…
Socialism?
Will Congress RAISE taxes?
Do stabilizers helps or just prolong the problem?
How long does it take for a countercyclical policy to go in effect?

14. Monetary Policy (Central bank policy) 1970’s - present
Main philosophers: John Maynard Keynes, Paul Volcker, Alan Greenspan, Ben Bernanke, Janet Yellen

15. Key Ideas Competition is good but needs fine tuning
The way to control the economy is through the banking system.
By using the central bank we can keep inflation in check and help boost economy in time of recession.

16. Key Terms
Beige Book: the official banking and economic statistics collected by the FED, used to make Monetary Policy
Reserve Requirement: Amount the banks must keep in reserve in vaults to cover possible withdrawals

17. Key terms cont.
Fed Fund Rate “target”: This is the rate banks give to one another for short term loans to balance books. The FED tried to “target: this rate to affect other interest rates.
Open Market Operations: This is when the OMC buys and sells US bonds and has effects on money supply which can affect investment, consumption, and interest rates

18. Key terms cont.
Money Supply: This is regulated by the FED and FED policy. Monitor amount of liquid money (M1 and M2) in the economy.
Counter-cyclical Policies: Fight inflation with higher interest rates, fight recession with lower rates.
Deposit Insurance: The FDIC is part of the FED and uses public funds to stem bank panics

19. Role of government
Through the FED they must keep business cycles in check.
Stop inflation!!!!
Keep banking system secure.

20. Problems with the theory
“liquidity trap” when the interest rates get so low that monetary policy cannot work and possibly make inflation worse. (Japan)
Still a government policy, so classical economist are against it.
FED sometime overreacts to growth and can slow down an expansion

21. Monetarist Policy (not monetary
Monetarist Policy (not monetary!!!!) 1960’s – Present, by Milton and Rose Friedman

22. Major “Stuff” Theory is based o the equation of MV = PQ
M = Money Supply
V = Velocity of money (how many times it is spent)
P = Price of products
Q = Quantity of products

23. What does the equation mean?
Monetarist believe that “V” is stable. It can change but not rapidly. (fixed in the short run)
Quantities of products a relatively fixed in short run as well. (major production adjustments are long run)
So the only thing that truly affect price (inflation) is the money supply…regulate the money supply and control the economy

24. Flaws Rapid inflation is not always the fault of money supply (shocks)
Stagflation defaults this theory
This is basically what the FED is already doing by controlling the banking system

25. Neo- Classical 1980’s - today
Also known as Reaganomics, Trickle Down, Supply Side, Devolution, free trade.
Revalidation of the classical with some modern twists
Ronald Regan, George Bush Sr., George Bush Jr.

26. What does it mean?
Free Trade: No protection of trade (tariffs, embargoes, quotas)
Devolution: Get rid of government welfare and job programs
Supply Side: help businesses be productive, supply creates demand, tax cuts to suppliers
Trickle Down: assistance (tax cuts, subsidies) to the wealthy. The wealthy they will create business, production, investment, which will lower unemployment and “trickle down” to lower class.

27. Modern examples/flaws
Lower taxes raised revenues in the US in the 1980’s (did this help economy or was it the massive military spending?)
Did the tax cuts of generate growth or was it the 4 trillion dollar deficit spending?
Does less government interference lend itself to cheating.
Creation of EU, NAFTA, WTO and CAFTA

28. Rational Expectations 1990’s
Competition is based on predictions of future needs and the government cannot fool the public with policy. Citizen will logically end the effectiveness of a policy
Robert Lucas, Thomas Sargeant, John Nash

29. Ideas behind the theory
Citizens think of future wants and needs and will react accordingly…government says it will fight inflation, people will buy more now because higher interest rates are on the way (inflation gets worse). Government says it will fight unemployment…public thinks times are getting tough and save more, consume less (economy is slowed even more)

30. Ideas cont.
Game theory: patterns of economic behaviors can be modeled and predicted.
People/business use strategies to maximize profit and minimize loss.
Government could only “trick” the public with “fake” policy one time or maybe not tell the public their data or policies.

31. Problem of the theory
Your premise is that all theories are wrong because people are irrational and unpredictable and then you create your theory and try to put concrete evidence to it?!?
Calculus used to model this theory is VERY complex!
Game theory in the most base example is the prisoners delema
Do we want government policy based on secret decision

32. Behavioral Theory 2000
Competition is based in things other than logic. Humans are complex and unpredictable.
Decisions are often made to create happiness in the short run, not security in the long run.
Keynes argues these as “the animal spirits”

33. Examples of theory
Someone who has lots of debt and barely pays his bills gets a new income of $1,000…
Random dude #1 has been a Ford man all his life, but the Ford F-250 is more than the comparable Dodge Ram…
A worker is very inefficient and costly, but she is so nice and really is a morale booster for the company…