Robert Whaples and the Modern Principles

A blog on my teaching with Modern Principles of Economics by Tyler Cowen and Alex Tabarrok

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End of Semester Thoughts

Posted by Robert Whaples on December 3, 2009

This week I discussed money, the Fed, and monetary policy in class — chapters 14 and 15 of Cowen and Tabarrok (Macro).  The chapters are integrated very well into the dynamic aggregate supply/demand framework.  I especially like the emphasis on how difficult it is for the Fed to do its job(s) effectively.  The discussions of liquidity crises, systemic risk and moral hazard are a real plus.  Once again, the authors have done a masterful job of picking photos to put in the margin and adding apt captions.  On page 323 there’s a photo of Ben Bernanke looking weary and pensive, captioned “it seemed so much easier in the textbook.”

Switching from a textbook that you’ve used for a decade or more is bound to be difficult, as is getting used to the new textbook and integrating its way of explaining things and unique features into your course.  And, there are an unavoidable host of little things to get used to — like using π as the symbol for inflation expectations rather than as the symbol for profits or looking at an AD/AS model, seeing a curve labeled SGC, and not saying “short-run.”  But for many professors the costs of the switch to Cowen and Tabarrok will be well worth it.  The text is certainly the most engaging I’ve ever used — it simply grabs the students’ attention with insightful examples and a freshness that I trust will endure as subsequent editions roll off the presses in the years (decades?) to come.

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Posted in Ch 14 The Federal Reserve System and Open Market Operations, Ch 15 Monetary Policy, Why Switch to Modern Principles of Economics by Cowen and Tabarrok? | 1 Comment »

Making Macro Dynamic

Posted by Robert Whaples on November 19, 2009

On Monday I covered Chapter 8 of Cowen and Tabarrok, “Saving, Investment, and the Financial System,” which I used as a springboard for a lengthy discussion of the financial crisis of 2008.  The chapter has an able discussion of the suppy and demand for loanable funds and uses the analogy of financial institutions as a bridge between savers and the firms, entrepreneurs and households who borrow funds.  I’ve used this analogy myself in class for years.  It works fairly well, but it can leave one with the impression that the financial secure is inert, that getting things right in this sector is a matter of engineering — sort of like building a solid bridge for the interstate highway system.  As we all know, however, the financial sector is very dynamic — it seeks out opportunities rather than passively allowing traffic to flow from one side of the river to the other.  I’m especially fond of Figure 8.11, which shows the financial bridge broken by insecure property rights, politicized lending, government banks, interest rate controls, inflation and bank failures/panics.  The Figure might work even better if the green arrow showing the flow of money simply disappeared into the abyss, rather than reemerging into the accounts of firms, entrepreneurs and household on the other side.

Yesterday I began Chapter 12, “Business Fluctuations and the Dynamic Aggregate Demand-Aggregate Supply Model.”  Teaching this chapter has been challenging because up to this point I’ve taught only the more static version of the AD-AS Model.  I’m used to a graph with the price index on the vertical axis, real GDP on the horizontal axis and AD, SRAS, and LRAS curves interacting.  This approach illuminates a lot but it has a major shortcoming.  Acknowledging that the long-run aggregate supply curve keeps shifting out over time and drawing in multiple LRAS curves makes the graph very busy and risks getting students lost.  Instead, the convenient convention is to freeze the LRAS in place and discuss how AD and SRAS dance around it — but occasionally reminding the audience (and yourself) that the LRAS curve is, indeed, chugging outward.  C & T’s alternative approach is to look only at changes in aggregate supply and demand.  The inflation rate goes on the vertical axis and the real GDP growth rate goes on the horizontal axis.  They integrate two earlier chapters seemlessly in explaining that the long-run growth curve is determined by the Solow growth rate (from Chapter 7), while linking changes in aggregate demand to the quantity theory of money (from Chapter 11).   Next they show how both the Real Business Cycle Model and the New Keynesian Model behave within this framework.  Bravo!   I got about halfway through the chapter yesterday and — from the looks on their faces, questions they asked and responses to my questions — my students seem to have a pretty clear grasp.  Friday’s quiz will tell me if this reading is correct.

Posted in Ch 08 Saving, Investment, and the Financial System, Ch 12 Business Fluctuations and the Dynamic Aggregate Demand-Aggregate Supply Model | 1 Comment »

Growth Triumphant: The Chapter That Got Me to Switch

Posted by Robert Whaples on November 12, 2009

Yesterday I began Cowen & Tabarrok’s macro chapter 7, “Growth, Capital Accumulation, and the Economics of Ideas: Catching Up vs. the Cutting Edge.” (The title is a bit of a mouthful, so let’s call “Growth Triumphant” for short.)  This is the chapter that finally convinced me to switch to T & C, when I read it about a year ago.

The heart of the chapter is a student-friendly version of the Solow Growth Model. I’ve used the Solow model in my intro course for years because it shows the sources of growth so clearly and pushes students to think abstractly.  Some other intro textbooks invoke it (usually behind the scenes), but they typically are afraid of it — fortunately T & C aren’t.  They demonstrate the model with a three equation framework:  (1) Y = the square root of K; (2) I = 0.3Y; and 3) Depreciation = 0.02K.  After setting up the model, they use it to demonstrate fundamentally important concepts including catch-up growth, the post WWII miracles of bombed-out Germany and Japan, why capital alone cannot be the key to economic growth (because we reach a steady state), what happens if investment rates differ, conditional convergence, and how “cutting edge” growth (i.e. increases in total factor productivity/technology) drives long-term growth.   The framework is simple enough that one can easily solve for the steady state in class.

The chapter closes with an excellent discussion of the economics of ideas — including an aside about how culture influences entrepreneurship and how John Kay, eighteenth-century inventor of the flying shuttle, had his house destroyed by machine breakers.  The crowning touch is an optimistic conclusion about the future of economic growth.  Tyler and Alex conclude that the supply of new economically useful ideas is a function of population x incentives x ideas per hour.  Standing Malthus and neo-Malthusians on their heads, a rising population is good because there are more human brains around to hatch new ideas.  Likewise, it doesn’t appear that the law of diminishing returns applies well to the creation of new ideas.  This section mirrors my own long-term optimism about the global economy, an optimism shared by the bulk of the profession.  As reported in “Collapse? The ‘Dismal’ Science Doesn’t Think So: Economists’ Views of the Future,” The Independent Review, 11 (2), Fall 2006, the cross-section of economists I surveyed are very optimistic about the long-term growth of the U.S. and global economies.

At the end of the lecture, I began to show how the Solow model can incorporate the Malthusian model — changing the axes from Y and K to Y/L and K/L and demonstrating Malthus’s dismal predictions that population growth will drive mankind inevitably back to the subsistence rate.  On Friday, we’ll explore how we moved from a Malthusian world to a Solovian world to a Romerian world.

Posted in Ch 07 Growth, Capital Accumulation and the Economics of Ideas: Catching Up Vs. The Cutting Edge, Why Switch to Modern Principles of Economics by Cowen and Tabarrok? | 1 Comment »

Inflation in a Nutshell

Posted by Robert Whaples on November 10, 2009

On Friday and Monday, I covered Cowen and Tabarrok’s chapter “Inflation and the Quantity Theory of Money.”  The chapter begins by defining and measuring inflation.  There’s an excellent table enumerating episodes of hyperinflation (although I didn’t see a clear definition or rule of thumb as to what constitutes hyperinflation).  It then immediately cuts to the chase: what causes inflation?  The quantity theory of money is explained unusually clearly and is supported convincingly with international data.  I especially liked the “quantity theory of money in a nutshell” summary in the margin of page 222, exactly the way I frame things in class . Disinflation is distinguished from deflation — nice touch.

The chapter concludes with a lengthy discussion of the costs of inflation, with considerable attention paid to how inflation redistributes wealth, especially how expected and unexpected inflation help determine nominal interest rates and actual rates of return.  When presenting this topic in class I always emphasize that high inflation is associated with variable rates of inflation and this causes uncertainty which cows investors and businesses to sit on their hands.  High inflation causes uncertainty which shrinks total output. Here’s how I put it in class: “In the high inflation 1970s the CPI inflation rates were – rounding to the nearest digit – 6, 3, 3, 9, 12, 7, 5, 7, 9, and 13 percent. When the numbers bounce around a lot like this, it’s hard to know what’s coming next.  In 1979, it would have been pretty hard to predict that the inflation rates in the next three years would be 12, 9 and then 4 percent, for example.  Compare this to the lower inflation rates beginning in 1995.  These inflation rates were much less variable – rounding to the nearest digit, they were 3, 3, 2, 2, 3, 3, 2, 3, 2, and 3.   Given this trend it wouldn’t have been hard to come close in guessing the inflation rates of the next couple of years – which were about 3 and 3.”

If I were to add anything to the chapter, it would be a brief (perhaps one-page) discussion of problems with measuring inflation correctly and the whole CPI bias literature.  I introduced this topic in class and used Dora Costa’s estimates of bias to adjust the official CPI numbers given in Figure 11.3 of the text.  Incorporating the bias (which compounds year after year), the price of the market basket rises from $10 in 1914 to about $85 in 2008, rather than from $10 to $207. Big difference.

Disappointment: On Monday’s quiz I posed this question to students — “The current price of a barrel of oil is about $80.  The (nominal) price in late 1979 was $38.  In 1979 the CPI was 77.  Today the CPI is 216.  Has the real price of oil risen or fallen since 1979?   Explain.” Only about half of them did a good job in answering the question, which suggests that the text might do a little more on page 220 to explain how to answer this question.

Posted in Ch 11 Inflation and the Quantity Theory of Money | 1 Comment »

Today’s Burning Issue: Unemployment

Posted by Robert Whaples on November 5, 2009

Yesterday, I covered chapter 10 of Cowen and Tabarrok’s macroeconomics split — “Unemployment and Labor Force Participation.”  The chapter has a familiar outline — beginning with official definitions and then moving to an examination of frictional, structural, and cyclical unemployment — just like the textbook I used before switching to C&T.

The outline doesn’t seem very innovative — but the content is.  For years, I’ve framed my discussion of unemployment by asking why rates are typically much lower in the U.S. than in Continental Europe — pulling in material from outside the textbook on long-term unemployment spells, differences in labor market rigidity, minimum wages, union power and unemployment insurance.  I’ve always wished that my textbook would take the same approach — and my wishes have now been fulfilled, as this is the exact approach taken by C&T.  Especially useful is Table 10.1, which gives average unemployment rates in France, Germany, Italy, Spain and the U.S. for five-year intervals from 1980 to 2004 — as well as data on the fraction of the unemployed who have been jobless for more than a year.  Figure 10.4, which plots the percent of workers jobless for more than a year against an index of employment rigidity is even better.

Yet these two are surpassed by Figure 10.6 which deals with cyclical unemployment — plotting the annual change in the U.S. unemployment rate vs. the annual real GDP growth rate.  The annual data points fall fairly neatly around the regression line, which demonstrates that real GDP needs to grow at about 3.4% per year to make the unemployment rate fall.  I discussed why this makes intuitive sense in class by explaining that a) yearly growth in the labor force means unemployment rates will rise unless more people are hired to produce things and b) rising productivity levels mean that fewer workers are needed every year to produce a constant amount of output.  In addition, I drew two new data dot on the figure — for 2008 and (based on projections of what the next couple months will bring) 2009.  The new dots mesh very well with the overall pattern of the figure.

There’s also some good material at the end of the chapter on labor force participation rates — especially trends in lfp rates among women and older workers — but I didn’t have time to cover this in class.

Finally, Tyler and Alex’s link at Marginal Revolution to my Sporcle quiz on Famous Economists shows the power of their blog.  By Tuesday only 50 people had taken the quiz, but yesterday it became the most popular user created quiz of the day and now the quiz has been taken over 4500 times!  See

http://www.sporcle.com/games/DeaconEcon/famous_economists

Posted in Ch 10 Unemployment and Labor Force Participation | Leave a Comment »

GDP and the Measurement of Progress

Posted by Robert Whaples on November 3, 2009

On Friday and Monday I covered Cowen and Tabarrok’s first macroeconomic chapter, “GDP and the Measurement of Progress” — which is another excellent effort.  It opens with a table giving GDP and GDP/capita in the 15 largest economies in the world. (Why do other intro textbooks usually give GDP statistics for only the U.S.?)  Then it clearly defines and explains GDP by spending a paragraph or two on each word/phrase in the definition — “GDP is the market value … of all final … goods and services … produced … within a county … in a year.”  (My students nailed the definition word for word on their quizzes taken before I covered the topic in class.)  Next come a clear discussion of nominal vs. real and statistics plus a map showing real GDP growth rates over time and space.  Like other textbooks, C&T trades in the old “back to back quarters of falling GDP” definition of a recession for the NBER’s lengthier definition.  Rather than giving a circular flow diagram, however, C&T discusses “The Many Ways of Splitting GDP” — examining the expenditure side (C + I + G + NX) and the factor income approach.  Here my students didn’t do so well.  Even though I gave them a circular flow diagram handout and replicated it on the board, they bombed the part of yesterday’s quiz that gave them information on C, I, G, X, M, and net taxes and asked them to find GDP, total expenditures and total income, because (despite my explanation in class) they forgot that GDP equals total expenditures and also equals total income.

The chapter closes with a thoughtful discussion of “Problems with GDP as a Measure of Output and Welfare.” I used this material as a springboard for a discussion of the growing literature on the economics of happiness — do higher/rising levels of GDP per capita actually make people happier?  (Short answer: “yes.”  Long answer: “It’s complicated.”) I put together a sheet of correlates of GDP/capita at the national level from the Gallup World Poll (2007).  Respondents were asked “did you experience __________ (during a lot of the day) yesterday?”  What does higher income buy us and/or free us from? The correlates of GDP per capita are given below.

I closed yesterday’s discussion by asking whether rising/higher GDP per capita and/or personal income is correlated with eternal happiness.  Of course I don’t know the answer to this one for sure, but Proverbs 30:8-9, which I quoted in class, says: “Give me neither poverty nor riches; (provide me only with the food I need😉 Lest being full, I deny you, saying, ‘Who is the LORD?’ Or, being in want, I steal, and profane the name of my God.” When we go to meet our maker, will HE say, “Oh well, you earned a hell of a lot down on earth and you were quite productive, so I guess you deserve heaven”? The final handout of Monday’s class was from a Pew Research Center survey comparing the percent of the population in over 40 countries who say that religion is very important to them vs. GDP/capita — the correlation is distinctly and strongly negative, as Proverbs would suggest.

Final note: I’ve created a Sporcle quiz for my students on “Famous Economists.”  Feel free to test yourself at http://www.sporcle.com/games/DeaconEcon/famous_economists.

Correlates of GDP per capita at the National Level

Good Tasting Food 0.60
Enjoyment 0.47
Treated with respect 0.44
Pleased with accomplishments 0.28
Smile/laugh a lot 0.27
Pride because someone complimented you 0.27
Ability to choose how to spend time 0.20
On top of the world/life is wonderful 0.18
Love 0.14
Things are going my way 0.12
Worry 0.09
Learned something interesting 0.00
Pride in something you did 0.00
Excitement/interest in something -0.10
Sadness -0.10
Anger -0.16
Restlessness -0.18
Boredom -0.19
Upset over criticism -0.25
Depression -0.30
Loneliness/remoteness -0.30
Physical pain -0.47

Source: Betsey Stevenson and Justin Wolfers, “Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox,” NBER Working Paper 14282



Posted in Ch 05 GDP and the Measurement of Progress | Leave a Comment »

Drinking Milk and Drilling Oil

Posted by Robert Whaples on October 29, 2009

I returned my second midterm exam yesterday.  The students did pretty well — although I was a little disappointed that many students didn’t get the gist of this question (which I had included on a practice study sheet): “True/False/Ambiguous and Explain Why: During the Texas oil rush in the early 1900s, oil wells crowded the landscape (e.g. the photo on page 349 of our text).  This was an efficient market response.”  This question comes almost directly from the “Challenges” section of Chapter 17 (which focuses on the tragedy of the commons) — and I love the accompanying photo of two cute little kids sharing a glass of cold chocolate milk and part c of the question in the book, which asks “Why did we put these two questions together?”

On Friday we begin macro!

Posted in Economics, MICRO, _MACRO | 1 Comment »

Gains from Trade

Posted by Robert Whaples on September 21, 2009

On Friday I covered Chapter 8 of Cowen and Tabarrok’s Micro split (18 in Macro) — International Trade.  My previous textbook handled trade in Chapter 2, but I now think it goes just as well later because putting it in the eighth chapter means that it can be seamlessly integrated into the supply and demand framework.  Figures 8.1 and 8.2, which show imports and tariffs using supply and demand, work very well and build on the strengths that students are developing in this part of the course.

The other big difference from my old textbook is that C&T don’t draw a production possibilities frontier in working through their comparative advantage example.  I’ve always liked the ppf approach, since it shows so graphically how rearranging who does what allows both parties to jump above their old constraints and get a free lunch from specializing and trading.  Slave of tradition that I am, I brushed off my handout on Peter and Mary trading fish and bread and introduced the ppf anyway — it only takes 10 minutes.

A picture is worth a thousand words — and a graph is worth, perhaps, 10,000.  The highlights of the International Trade chapter are the picture of Mr. Spock and quick dissing of  Star Trek for the blasphemous idea that even Spock’s brain could run a modern economy– could it have run an ancient economy or a medieval one? I doubt it — and Figure 8.4 which shows plain as day how child labor force participation falls with GDP per capita.  I used this graph as a springboard for discussing the meaning of “exploitation” which segued nicely into our discussion of Labor Markets in Chapter 14.  More on this tomorrow.

Posted in Ch 08 International Trade and Globalization, Ch 14 Labor Markets, Ch 18 International Trade and Globalization, _MACRO | Leave a Comment »