21-(UE) Unemployment

  1. 1st goal of Macro is growth, the second is to reduce unemployment
  2. Who’s unemployed?
    1. 1/3 out of labor force( unemployable)
    2. Bureau of labor statistics formula(No work+looking for work=unemployed)
      1. Housewife is employed but she is not looking
      2. Someone working part-time but is looking for fulltime work is employed
      3. Discouraged worker is one who has stopped looking because it’s become a waste of time(under this model he is not counted as UE)
    3. Economics see UE as a market
      1. Qualified+ Ready to work+ no employment= UE
      2. Low?- Wages are above equilibrium
    4. Why wages are above equilibrium
      1. Min. wage laws
      2. Strong unions playing hardball( unions would rather lose members, than decrease wages)
      3. Implicit contract
        1. Scheduled pay increases
        2. Benefits
        3. All are not guaranteed, but implicitly so
      4. Fear of loss of morale
        1. If implicit contract, it’s tough to go to employees and renege on a promise
        2. Union strikes and grievances
  3. The cost of unemployment
    1. Social pathology
      1. Increased crime
      2. Dysfunction in home
      3. Increased anxiety
    2. Reduces size of economy
      1. Lost output
      2. Consumption of welfare resources
  4. Types of unemployment
    1. Natural rate
      1. Natural rate variables
        1. Laws and regulations( the more regulations, the less hiring and more firing is being done)
        2. Entering workforce/retiring
        3. There will never be 0% unemployment
      2. Reduce natural rate
        1. Adjust unemployment benefits so they are higher at the beginning and taper from there
        2. Expand Gov’t programs concerning: worker training, college scholarships, etc
        3. Dreg
    2. Cyclical
      1. Bears and bulls
      2. Less product demand = less labor demand( and vice versa)
      3. Solutions
        1. Fiscal- tax cuts
        2. Monetary- decrease interest rates
  5. U.S. vs. EUR.
    1. U.S.
      1. Fluctuates below 10%, usually around 5-7%
      2. Cares more about unemployment than inflation
    2. EUR
      1. Hovers around 10%
      2. More Gov’t interaction
        1. Higher min wage
        2. Longer vacation time
        3. Regulation of when places of biz can conduct work
        4. Better benefits for employees
      3. U.K. has reformed by deregulating
        1. Lower UE( around U.S. numbers)
        2. Still has a higher number of benefits and wage controls
  6. Wages increase with GDP growth
    1. Get more productive
      1. Education
      2. Technology
    2. Stimulate demand
    3. Redistribution does nothing



20-Economic Growth

  1. What would you rather have $50,000 today or in 1925
    1. Increased inflation
      1. Relatively rich in 1925
      2. Middle class today
    2. Increased technologies
      1. Travel, electronics, medicine among many
      2. If not 1925, where would the class v. technology ratio pay off
  2. Economic growth compounds overtime
    1. FV=PV(1+GRt)[GR=Growth Rate]
    2. Example: Take the present value of GDP(GR)
      1. 3% normal GR 5% good 8%great(think Japan late 70’s, U.S. Post depression, China mid 2000’s
      2. GDP works like compound interest
        1. GDP ratios between Rich countries and poor ones
          1. 1870- 6:1
          2. 1960- 38:1
        2. Smaller countries mimic motions of past generations, thus no growth
        3. Catch-up growth occurs when a newly industrializing country benefits from known techs
          1. If a country falls behind it can take decades to get back up
          2. No economy is prospering to the peril of another.
        4. The sooner the better with newly industrializing countries(compound interest)
        5. Sources of growth (per/person output) productivity growth
          1. Physical capital .25
          2. Human capital .25
          3. Technology .5
        6. A higher GDP solves most problems(to lower costs, increase sales)


19-Macroeconomics and GDP

  1. Economics is split between micro and macro
    1. Macroeconomics represents a top down aggregate view of the economy
    2. Macro is not just a larger picture
      1. Deals with different issues such as inflation, unemployment and deficits
      2. Individual behavior can lead to unexpected results(e.g. one person at a ball game stands up to get a better view and then everyone else is standing up; no one has a better view but everyone acted rationally)
  2. GDP is the standard measure of the size of an economy
    1. GDP is total value of goods and services
    2. Can be measured as what’s produced or what’s demanded
      1. If its measured by what’s produced it includes: durable goods, non-durable goods, services and structures
      2. Consumption(nearly 70%)+Government(about 19%, social security however is labeled under consumption so always be wary of that)+Investments(which are a much smaller percentage but leads to the highest fluctuations due to investor sentiment)+Exports-Imports, or C+G+I+X-M=GDP
      3. The bureau of economic analysis measures the GDP and every few years they reviews their work and sometimes make very drastic changes
  3. Per capita GDP
    1. GDP ÷ Population= Per capita GDP
    2. This is useful to measure many different economies
  4. Real GDP means adjusted for inflation
    1. Involves establishing a base year at a base number: let’s say 1990 at $200million
    2. In 1995 nominal GDP raises to $300million but since there was an increase in prices due to inflation the real GDP is $250million
  5. GDP has imperfections
    1. Home production is not included(e.g. women went into the work place in the 70’s and things that weren’t bought and sold now were like meals and daycare)
    2. Leisure is not valued by the market. If everyone took an extra week of vacation but output remained the same there would be no shift in GDP
    3. Natural disasters are included in GDP by way of cleanup that ensues
    4. Transfers of ownership are not included
    5. GDP only counts the final product so, for example, rubber steel and iron would not be included individually, they would be blanketed under let’s say tires, and tires may not be included individually but filed under cars sold
  6. GDP shows upward trend overtime with occasional dips and spikes
    1. Recessions, on the whole, have gotten shorter excepting this current one
    2. Recessions are defined by the bureau of economic research and they define it as “a significant decline in [the] economic activity spread across the country, lasting more than a few months, normally visible in real GDP growth, real personal income, employment(non-farm payrolls), industrial production, and wholesale-retail sales.
  7. Macro policy is summarized with four goals and two sets of tools for accomplishment
    1. Goals: economic growth, low unemployment, low inflation and a sustainable balance of trade
    2. Tools: fiscal and monetary policy
    3. Model for describing relationship between goals and tools is the aggregate supply-demand model

18-Corporate and Political Governance

  1. Principal-agent problem[In politics-Citizens are principals and politicians are agents][In corporate world- share holders are principals and top executives are the agents]
    1. Principals want someone(agent) to do something on their behalf and typically it involves the principals having imperfect information as they don’t usually know if the agent is working hard or efficiently
    2. In the corporate or political realm this usually involves many principals and few agents
      1. Principals will generally not want to bother with monitoring the agents and try to leave it to others, but;
      2. Most times the agents wont be monitored or insufficiently monitored
  2. Large firms have separation of ownership and control, meaning they are owned by shareholders but controlled by top managers
    1. 1932 book “the modern corporation and private property” identified an immense gap between ownership and control
    2. Watchmen
      1. Elect board of directors: problem is the top executives usually pick the candidates. Also the job is part-time
      2. Auditors: great idea but they may not be too aggressive as the are employed by the company
      3. Large outside investors(funds)- may not act quickly or at all as they can become complacent
      4. Analysts- will they get access to companies if they become aggressive?
    3. Takeovers and mergers could reform, but sometimes the offending company can buy a smaller company with good management and build an empire
    4. Stock options for top executives are touted as a way of aligning the incentives of top executives with their shareholders
    5. Sarbanes-Oxley act: set new rules for appointing and governing the board of directors, however the separation of accountability still exists
  3. Should Gov’t act, is not so straight forward as these are temporary holders of office who’s primary purpose is to get re-elected which, of course, is not always in the best interest of the public
    1. Also many people don’t vote, as a strictly rational person may feel his vote doesn’t really count
    2. Lobbyists are numerically small but well organized and tend to have direct access to an official. The lobbyist can make an offer that would benefit the politician personally but maybe not be so good for the public at large
    3. Pork barrel spending projects benefit a certain area but is paid with federal dollars(log-rolling occurs when two or more politicians agree to support each others project)
    4. Multiple choices? Majority vote can have a hard time choosing the best outcome(ex. 1992 general election where Bush and Perot split republican vote and Clinton cruises to victory)
    5. In the private sector, if a business cant sell product they go out of business but in the political world this is not true
  4. Markets are imperfect and so is Gov’t
    1. Markets are extraordinarily useful
    2. But, they can also produce unwanted results
    3. Gov’t can reduce problems of markets but can also make matters worse


  1. About
    1. Gap between rich and poor
    2. Not the same as poverty


  2. Poverty and inequality are not equal
    1. Poverty is a level that one is either over or under
    2. Inequality represents the gap between high income earners and low income earners
    3. For example, if the rich get richer and the poor get slightly richer then poverty decreases but inequality increases
    4. There are different concerns for these two ideas
      1. Poverty-people are not getting their basic necessities
      2. While inequality deals more in fairness
  3. Measuring inequality involves capturing the entire distribution of income
    1. Split into parts(e.g. fifths, tenths) and determine income variances from there.


    1. Share of top1/5 has gone up while the bottom 1/5 has gone down.
      1. This could be due to the fact that people who want money are going to pursue it more aggressively causing their income to go up exponentially faster while someone who doesn’t care as much would tend to stagnate.
      2. Baby boomers are getting older throwing off the percentage
  4. Why the increase in inequality?
    1. Technology has increased high income workers productivity-many good paying jobs have become obsolete. One such example is a middle manager who had staff just to complete reports and data, then file it. Now one tech savvy employee can do all the aforementioned.
    2. Unions now are weaker and the minimum wage is lower(adjusted for inflation)
    3. More single parent homes, in 1968 10%sph in 2000 the number jumped to 23%
    4. High income workers are tending to marry each other
    5. Stagnation of the poor
  5. How to decrease inequality
    1. Higher taxes on the rich, but as the chart show below they already pay a high share




    2. Direct payments to the poor could aid in closing the gap
      1. Expanded EIC
      2. Expanded services for libraries, schools, parks and mass transit(question: why are Baltimore cities library hours so inconsistent while the Baltimore county libraries have set hours which stay consistent as far as weekdays, weekends and Sundays?
        1. For any of these there could be increased hours or;
        2. Increased services(worker training, vocational)
    3. Stronger unions which could lead to higher wages and increased benefits
    4. Part of the American dream is that if you work hard and do the best with the hand you are dealt you could live a nice middle class life

15-Poverty and Welfare

  1. Defining poverty (in 1963 it was anyone making under $3000/year
    1. Mollie Orshansky was assigned the task of defining poverty
      1. What’s the cost of a basic food diet
      2. Food=1/3 of budget, so poverty line=food budget *3
    2. Criticisms
      1. Amount spent on food has declined in terms of percentage of budget
      2. Cost of living fluctuations from region to region
      3. What else should be able to be bought?(cable/cars/etc)
      4. What about complementary benefits(e.g. food stamps, Medicaid, wic)
      5. National Academy of Sciences states, food/shelter/clothing should be taken into account and take a percentage
    3. Projected back to the 1950’s the poverty rate has been measured since
      1. The poverty rate fell dramatically from the 1950’s to the early 60’s and has basically leveled off since
      2. The composition of the poor has shifted from the elderly to primarily single mothers and children
  2. Incentive problems
    1. Teach to fish vs. give a fish
      1. May never learn if always given fish
      2. If he’s not given a fish, he may starve while learning
    2. Negative income tax reduces welfare benefits as the recipient earns additional income, but creates a trap as there is no real incentive to earn income
      1. A negative income tax of 100% or even more does not incentivize work
      2. But one that is less than 100% could and would
      3. EIC is a refundable tax credit aimed at helping low income workers, especially ones with children
      4. Another good way to provide incentive is including a work requirement to any form of aid
      5. There are about 80 federal programs to help those with low incomes

13-Positive Externalities and Technology

  1. Free markets can lead to less innovation
    1. If a company invests in R/D
      1. Project fails, company loses out
      2. If the project succeeds, competitors could steal the idea
      3. Heads you lose, tails I win
    2. Appropriability is the ability of the producer to reap the benefits of investment or invention
    3. Conceptually, technology is just the opposite of pollution
  2. Property rights
    1. A patent is an exclusive legal right to use, sell and make inventions for a limited time.(20 years typically in the U.S.)
    2. A copyright is a right of authorship(literary, music or art)
    3. A trademark is a word, symbol or device that indicates the source of a good and helps seller establish reputation
    4. A trade secret is a formula, process or device which makes practice more easy and is relatively unknown
    5. Even with these in place an innovating company only receives 30%-40% of the new value created
  3. Gov’t has policies which helps subsidize innovation
    1. Direct funding(i.e. research grants)
      1. In 2003 the federal government accounted for 30% of R&D spending
      2. The Gov’t, however, can dictate which programs to study
    2. Tax credits are written in the tax code that for every $1 over a certain amount attributed to R&D gets a 20₵ credit. Originally put in in 1981, it accounts for about $5B in tax cuts and is frequently voted in and out of budget(possibly so companies can re-lobby)
    3. Can also subsidize the spread of information(e.g. the internet)
      1. New legislation over the past years have let multiple companies co-operate in R/D projects to share costs and gains instead of a winner take all system
      2. Before it would have been prevented under anti-trust laws
  4. There has been much controversy over too much protection
    1. 200,000 patents a year are granted(on average 18 hours are spent considering each patent). Most patents, though, have no economic impact
    2. By nature patents block competition
      1. Amazon has a patent on 1-click check-out
      2. Xerox “abused” the patent process, having over 17,000 patents. Gov’t realized they were abusing the system, so Xerox agreed to let others use their patents and even some future ones
    3. The goal of all this is a better standard of living, not to be nice to innovators.