ECO 2013 – Principles of Macroeconomics
Dr. Dave Denslow, PHD
University of Florida
That’s my street cred for purposes of this blog entry. I took an undergrad course at UF in 1990. One measly semester with a fantastic professor. I never attended any actual classes…this was one of those mega-classes where they recorded the lecture on video and you could either go sit in a big lecture hall and watch the video, or watch it on cable TV at home (it was practically impossible to get a seat at the *actual* lecture, which happened at the ungodly hour of 7:30am!)
Guess which one I picked?
Yep. So I watched Dr. Dave on my 19″ television as I munched on Lucky Charms while my roommate smoked weed. Dr. Dave had a cohort in the economics department…Dr. Mark Rush. Dr. Rush taught the sister class, Microeconomics. The two of them would trade jabs about guns and butter…it was actually one of the more interesting courses I had during my college experience.
Lately I’ve been thinking a lot about Dr. Dave. Because Dr. Dave taught me how to pronounce this guy’s name: John Maynard Keynes.
Sure, it’s easy now for me to remember how to pronounce it…I just think of actor Michael Caine. Then I think of a room full of Michael Caines (just like when John Malcovich went inside his own portal in “Being John Malcovich”). Keynes is pronounced like a room full of Michael Caines. When talking about Keynsian Economics, it’s hard for me not to think about Caine’s role as Austin Powers’ father, where he got all “Michael Cainesian” over the part.
I know it’s silly, but trust me…it works. And you won’t come off sounding like an idiot by pronouncing it Keensian. But I digress…because Dr. Dave taught me more than just how to pronounce Keynes…he actually taught me a little bit of macroeconomic theory too.
Dr. Dave taught that Keynes is known as the “father of modern economics” generally because he was pretty much the first guy to accurately describe some of the causes of recessions and depressions on a country or global scale.
In a normal economy, Keynes said, there is a circular flow of money. My hairdresser, Tony, comes to Howl at the Moon and gives me $20 to play Piano Man, which in turn becomes part of my earnings. I turn around and use that money to pay Tony for haircuts…my spending becomes part of your earnings, and your spending becomes part of my earnings.
Classical economics teaches that if there is a downturn, the economy will eventually sort itself out. If Tony can’t afford to pay $20 to hear Piano Man, then I’m going to drop the price until it comes back down to a level that Tony can afford to pay: basic supply and demand.
But for various reasons this circular flow can falter. People start hoarding money when times become tough; and times become tougher when everyone starts hoarding money. Suddenly Tony either doesn’t want to or can’t afford to hear Piano Man at any price and therefore I can’t afford haircuts. We’re all screwed!
This breakdown in the circular flow is called a recession, or as Keynes called it, “a failure of effective demand.” Basically, people aren’t spending enough money, either because they don’t have any or because they got laid off (or are afraid they’re about to get laid off.)
To get the circular flow of money started again, Keynes suggested that the central bank — in the U.S., the Federal Reserve System — should expand the money supply (print more money). The theory being simply that this would put more money in people’s hands, inspire consumer confidence, and compel them to start spending again.
A depression, Keynes believed, is an especially severe recession in which people hoard money no matter how much the central bank tries to expand the money supply. In that case, he suggested that government should do what the people were not: start spending. He called this “priming the pump” of the economy.
But does it work?
In the depths of the Great Depression, Roosevelt expanded government spending, but he never spent as much money as Keynes said he should have. He also did all sorts of things that Keynes opposed, like raising taxes and trying to balance the budget. Keynes himself said those steps would cancel out any positive effect from spending. Indeed, most economists believe that only massive U.S. defense spending in preparation for World War II cured the Great Depression.
In 1973, the U.S. economy had been growing for three years and unemployment had dropped to well below 5 percent. Then on Oct. 6, Egyptian and Syrian forces launched surprise attacks on Israeli-held territory. Arab members of OPEC cut off shipments of oil to the U.S. and other countries that supported Israel, forcing oil prices to sharply rise. Nearly 2.2 million people lost their jobs and by the end of 1974, the stock market had lost more than 40 percent of its value.
The U.S. had high unemployment, and for some reason the Keynesian solution stopped working. The national government spent and spent, but unemployment only got worse. Then came inflation, something Keynes never accounted for. Thus came a new term: Stagflation.
In the early 1990′s, when Diggz was a college sophomore, Dr. Dave taught Keynesian economics as a theory…a semi-failed one. Our textbooks explained the basic Keynesian system, but then had a few chapters explaining why it didn’t work. Dr. Dave said that Keynesian Economics was like prescribing crack for coke addicts…you’re shifting the problem around but the problem is still there. Supply-side economics was where it was at. Reaganomics. Control the economy through interest rates. Alan Greenspan. Enter the anti-Keynesians.
If the weapons the Keynesians used to steer the economy were taxes and government deficits, the anti-Keynesians weapon was the Federal Reserve. If the economy overheats, raise interest rates. If it starts to sputter, lower them. This seemed to work great until December 16, 2008. That’s the day the Federal Reserve tried to stabilize the economy by lowering the interest rate all the way down to zero percent.
It didn’t work. Economists around the world collectively shouted WTF??!?!?!?!?!?!?!
I also happened to be watching “Blame it on Rio” that day, starring Michael Caine (and a very young and very hot Demi Moore). Which brings us back to Keynes.
Scratching their heads, and with literally nowhere else to turn, the economic gurus ran back to the only man who had come close to dealing with this kind of crisis…Keynes. He even had a formula: Figure out how much the economy SHOULD be producing, subtract how much it’s ACTUALLY producing…plug in something called a “Keynesian Multiplier” and voila: you’ve got your answer on exactly how much the government should spend to jump-start the economy.
That’s precisely we are today, with Obama’s proposed $700-$800 billion stimulus package. It’s a straightforward application of textbook Keynesian Economics.
In simpler terms, that’s about $10,000 per family in the United States. For me, that’s playing Piano Man like 2000 times.
Man, I sure hope Keynes was right.
Obama Gives Keynes His First Real-World Test : NPR.
Sunday, February 15
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