Post Lesson 31/Pre Lesson 32

Folks,

Today we specifically discussed the ways that government's raise and spend money. In particular we spent the bulk of the class discussing WHY the government might use fiscal policy. Much like an individual who tries to "smooth out" their standard of living, the government could potentially use fiscal policy in order to "smooth out" national business cycles. The problem is that increased spending during recessions is hardly ever met with the same level of decreased spending during expansions. This is due to the political realities faced by those in charge of spending. If you are still struggling with this please see the primer here: K:\DF\DFEG\Economics\Econ201\Fall 2013\Balser\Block C-National Economy

Second, we talked about taxes. How taxes can change incentives, who pays taxes, and whether companies can merely "pass taxes onto" consumers. How do taxes change your choices or others choice? Some questions you should be able to answer after today:

1. Comment: "To reduce the government's budget deficit, the government should raise taxes on the rich."
2. Comment: "It's better to levy taxes on businesses because they can more easily afford to pay the taxes than consumers."
3. What happens when a city tries to keep bus fares lower for low income workers?

Next time we will focus on the other tool of the government: Monetary Policy. You can read BE 386-408 or the supplement here: K:\DF\DFEG\Economics\Econ201\Fall 2013\Balser\Block C-National Economy but you must read one or the other and tell me:

1. How does our banking system "create money?"
2. How does the FED control the amount of money in currency? (what are the three policy tools)
3. During the Great Depression, both Hoover and FDR tried to keep the prices of goods and labor high. What was the rationale and what are the social and economic ramifications of such decisions?

Post Lesson 30/Pre Lesson 31

Today's lesson focused on the foundational importance of the government and the rule of law. Government, properly ordered, gives rise to a functional economy by providing for property rights so that individuals are incentivized to use resources in the most efficient manner. Doing so means that the costs of one's action or inaction will fall upon them and not be reappropriated. Of course a government that is powerful enough to protect you is also powerful enough to take from you. Creating structures such that governments neither find it in their best interest to protect others at your expense or to protect themselves at your expense is the difficult part. Remember also that trust among individuals and with the government results in a willingness to spend my time at what costs me the least. In order to do so, I must become vulnerable and depend on the fact that others will trade with me.

As an aside, government can play an important role when someone else's actions have an effect on society at large. In cases of externalities having government involvement can produce better outcomes but this depends 1) on the structure that is put forward to solve the issue and 2) whether the government might give undue influence to parties which have a specific interest in the issue at hand (ie tobacco companies' lobbies being involved in tobacco legislation).

Next time we'll further discuss just how the government can change behavior via taxes, how they generate revenue, and how and when fiscal policy could be used by using the analogy of personal finances.

Read BE 433-436, 444-451, 458-465, and 468-470. Respond to this question: When do you personally take a loan? why? Now, use the same idea and tell me, when might it be smart to spend more money than you take in as a government (whether you take a loan, sell bonds, or dip into savings)?

Finally, the paper is located at: K:\DF\DFEG\Economics\Econ201\Fall 2013\Balser

Post Lesson 29/Pre Lesson 30

Folks,

You should be able to define all of the terms from my last post. You should also have a basic understanding of how we calculate GDP and what things might change our evaluation of GDP or of economic growth. For example, what happened to inflation, how many people are in a country, or what new goods and services we now have that we didn't 5, 10, or 15 years ago. Generally, it is harder to compare GDP's the further they are apart (time-wise).

Another major topic is how we track inflation by using the CPI, consumer price index. Like GDP it has flaws and is certainly prone to flaws as we change the goods in the index (having an iphone now vs a razor 5 years ago).

For next time I want to move into the Functions of Government. Please read BE 414-426 and respond to this question in your journal: what do you think of as the most basic function of government and why is it important to economics?

RP IV/Post Lesson 28/Pre Lesson 29

Everyone watch this: http://www.npr.org/blogs/money/2011/10/26/141741360/video-what-is-gdp

And be able to define these terms (many should be familiar): Aggregate Supply,Aggregate Demand,National Output,National Income,GDP,Flow,Stock, National Wealth,Economic Growth, Recession, Inflation,Cost of Living,and Deflation

Reflection Paper IV is due next Thursday. The question was:

Reflection paper IV: It is unfair that people can make money merely because they have money. I mean shouldn’t everyone, rich or poor, have to work for their income?

Finally you need to read BE 369-383. Yes it is a bit dry but you NEED to know this stuff. For your journal, what is the greatest miscalculation or misinformation that you had about GDP and what it means before this reading? Additionally, why is it that an increase in only your wage actually makes you better off but an increase in everyones wage changes nothing (hint: focus on what happens to scarcity in each case)?

I hope to have your final paper/project assignment when you turn in your RP IV on Thursday.

Post Lesson 26/Pre Lesson 27

All,

I hope today was a good way to wrap up this section while having some Friday fun. To prep for the GR I'd really encourage focusing on the objectives but also re-reading my blog re-caps. The major theme encapsulated in one line to me is: prices~wages~interest rates and differences in prices-->trade.

Beyond that some good things to think about:

1. wages tell us something about productivity. if someone is more productive they should rightfully be paid more because they (as a productive worker) are a scarce resource which others would love to have.
• as a sub point...the more expensive a person is to do a given job, the greater returns to automating that process if possible
• since the above point is true, trying to legislate higher wages may eventually lead to fewer jobs via automation which suddenly becomes feasible with higher wages
2. statistics can be deceiving...as unemployment stats sometimes are
3. screwing with wages is like screwing with prices....what are the effects?
4. trade is useful because it allows all of us to lower our costs. this is true whether trade is between individual persons or between entire countries
• limiting trade only forces costs to be higher than they could otherwise be
• there may be instances where trade restrictions are important but what happens with those kinds of arguments (ie claiming it as a national security requirement)?
• just because you can pay someone less does that mean you will employ them? no! it would be "cheaper" for an engineering firm to hire the average worker at mcdonalds but this lower cost would result in a drastically lower benefit as well. sometimes the cost is not all that matters. (see the low-wage myth in sowell)
5. we all have a comparative advantage because our costs are ALWAYS relative.
6. Investments come in all sorts of shapes and sizes so to speak. All of them have a purpose, even speculation, in allocating the use of money today and money tomorrow. Interest rates are the prices that allocate the use of this scarce resource.

There is so much more that could be added but hopefully this gives all of you a start on studying. I hope you can relax a bit this weekend and I hope to see at least some of you around the tailgate on Saturday!

Post Lesson 25/Pre Lesson 26

You better know how to do present and future value calculations....that is all.

For next time in addition to the journal assignment from last time add this question:

What is the purpose of insurance and what problem does it solve? Why does government provided or subsidized insurance often fail to solve the problem?

Post Lesson 24/Pre Lesson 25

Interest rates work like prices in that they allocate the scarce resource called money to it's alternative uses, consumption today versus tomorrow. Not only that but the real "price" of money takes into acount both the number we see and what we expect to happen to the value of money over time (inflation). Thus Real Interest Rate = Nominal Interest Rate - Inflation.

Related to this is the difference in real rates of return (or rates of expected interest) among different types of investments: stocks vs bonds vs CDs vs Mutual funds vs real estate etc. Generally the more volatile (or risky) an investment the higher the average rate of return. Additionally, investments (ie bonds) that are longer term have higher rates of return. Why? to compensate for the increased uncertainty and risk over the longer period. So, for example 30 yr bonds will have higher yields (interest rates) than 5 yr bonds.

Finally, to figure out what money in the future is worth today or what money today will be worth in the future you need to know how to complete Present Value and Future Value calculations. You need to memorize the formula to do so, using annual compounding only. Of course these calculations to know the amount of money, expected rates of growth (to get future value) or discount rates (to get present value), and the number of years.

For next time read BE 341-352 completing the standard journal entry and answering this question:

1. Give an example of moral hazard or adverse selection here at the air force academy.

Last time was a check.