Saturday, April 24, 2010

Natural Level of Output: A less-than-sober argument

Yesterday afternoon a few members of the econ club had our usual unofficial meeting at McMenamins on Monroe, something of a tradition every Friday at 4 (you're all welcome to join, of course). Our guest of honor was Professor Stone, who entertained us with stories about academia, the person he lives with (his wife), and the Broncos. We hope he comes back to us soon.

Fellow economics major Ben Price and I got in an argument about medium-run macroeconomics. I've heard macroeconomics called a moon science by other econ majors around the country, but I still accept that these are the best models we have at describing the macroeconomy. At the very least, they're worthwhile classes that I enjoy occasionally being awake in.

Ben, my esteemed interlocutor, disagrees more intensely about the assumptions of macroeconomics. Today, after a few beers and Cuba Libres, Ben challenged the idea of a natural level of output, which Oliver Blanchard identifies as that level of output economies return to after a change in fiscal or monetary policy. Ben demanded proof of such a natural rate, asking for real world data that I usually find distracting and unimportant to economics.

For me, the intuition behind a natural level of output is solid. Imagine a simplified economy where all people did was pick bananas all day. There is a limit to how many bananas can be picked, and that limit is hard to change. We can only be so efficient at banana picking. A government can come in and try to tinker with our output, telling us there's more hours in a day, or inflating the value of a banana to encourage us to work harder, but these are short run solutions. In the end, our bodies are only so good at picking bananas.

A macroeconomic natural level of output figures in the same way. Economies can only be so productive before artificial means of accelerating an economy such as expansionary monetary or fiscal policies only provide short run gains. In the medium run, when people can adjust price expectations and therefore reevaluate the values of goods, economies return to their natural levels.

Makes sense, right? Of course, I don't feel the need to prove any of this with data. It's a moon science!

Wednesday, April 21, 2010

Facebook Page

I have created an OSU Econ Club Facebook group.  JOIN!

I have also created one for the Economics Deparment, so join that as well.

Fat Kow, Monopolistic Competitition, and College Diet

A couple of econ colleagues and I were talking about the Business College's latest squatter, the Fat Kow. A new food cart has showed up in front of Bexell, offering a vegetarian menu at the pleasantly low price of $3.50. I'm planning my first visit tomorrow, where they'll be serving Red Beans and Brown Rice Salad. Maybe I can co-opt this blog into a college food reviewer.

The econ kids were talking about how come we don't see more of these food carts in Corvallis. Econ undergrads are notoriously price sensitive (this is why we meet in a bar during happy hour), but there is also a genuine economic intuition behind our curiosity.

Restaurants generally fall under the microeconomic umbrella of monopolistic competition. Like perfect competition, there are many firms and few barriers to entry. But like monopolies, restaurants have a degree of market power and product differentiation. Still, in the long-run, monopolistic competitors should find themselves producing zero economic profits, as any profit should be eaten away by new firms entering the market.

The introduction of food carts has the potential to upset the status quo, as they are generally regarded to have a lower average cost than restaurants. No wait staff, no building costs, and low maintenance needs all might drive costs down enough to seriously change the food game. Restaurants will still serve a purpose; you could probably never bring a date to a food cart unless you both are exceptionally open-minded. But for those quick and cheap dashes for food in between classes, food carts might finally break Carl's Jr.'s $1 spicy chicken dominance over the market.

But while my econ buddies were optimistic about the future of food carts on campus, I was personally hesitant. Thanks to my rigorous theoretical education from Professor McGough, I am now convinced that there are no more good ideas left in the world. If campus food carts are such a lucrative venture, why haven't more entrepreneurs taken up the gauntlet? There must be a reason, maybe some rule banning food carts that the University heads and the angry Panda Express lady cooked up in a back room a few years back. I'm just too pessimistic to believe that a few tipsy undergrads can come up with an original business plan someone else hasn't already tried and failed.

Then again, if I thought I could make money, I'd probably be inside Bexell rather than outside eating savory tofu and garbanzo beans.

Tuesday, April 20, 2010

Boom, Bust, Wicka Wicka

As promised:


I'm not a big fan of ironic white hip hop, but this video is too important to ignore. It's only in times like these that macroeconomics gets any love. Still, the video focuses on Keynes and Hayek, but ignores Friedman? I'm guessing they're waiting for a sequel where Milton does a drive-by on these fools. And then maybe Blanchard can do a tender folksy acoustic cover.

Next time I'll have a video of a real hip hop artist giving love for expansionary fiscal policy. Or maybe I'll go back to actually talking about economics. Won't that be a treat!

Saturday, April 17, 2010

Broadway does Economics

I'm a fan of Ira Glass's This American Life, especially this week's episode, which focuses on the recent Global Calamitous Money Disappearing Event (thanks to Max Barry for that phrase). Alex Blumberg of Planet Money investigates Magnetar Capital, a hedge fund with dubious investment practices.

The story has a lot of complicated financial gobbledygook, but the intuition is pretty simple. Magnetar bought a bunch of risky housing assets, knowing they were risky. But instead of expecting big returns for big risk, Magnetar had a different plan. They took out insurance on these assets in the form of Credit Default Swaps, hoping that the assets fail and Magnetar can collect massive profits from their insurance payoffs. Well, it worked. The company made record profits buying garbage assets, and thus laid the groundwork for a financial collapse.

It sounds like insurance fraud to me, but Alex made a more comical connection. Ever seen The Producers? In that musical, two Broadway producers realize they can make oodles of money by overselling shares on a play they plan to make terrible. NPR takes the analogy a step further by parodying one of The Producers' song in this humorous and informative number:

'Bet Against The American Dream' from Planet Money on Vimeo.



Pretty good stuff, right? Almost as good as this macroeconomics gangster rap I'll be sharing next time. Stay tuned!

Wednesday, April 14, 2010

Last on his list, first in his heart.

Today some econ club buddies of mine were talking about our adviser, Patrick Emerson, and his Oregon Economics Blog. Someone mentioned that our own blog was placed last on his list of other econ blogs like that was a deliberate insult or something. Well I'm happy to announce that on Friday, April 16th, Patrick Emerson will be speaking to the econ club at 4pm at McMenamins on Monroe. He'll probably talk about the new changes made to the economics major, the state of department, and beer. Accost him there.

Thursday, April 8, 2010

Another Meeting and Some Things I Think About In Class

Big news first, the Econ club is having a meeting tonight, April 8th, at McMenamins on Monroe at 10pm. Come and enjoy happy hour with the company of fellow disaffected Econ majors and watch diminishing marginal returns at work. 21+ only, because we still live in a fascist state that's keeping the free market down.

Speaking of diminishing marginal returns, that has to be one of my favorite concepts in Economics. Econ professors like to joke during a long afternoon class that they can definitely see evidence of downward sloping marginal benefits when their students start napping, getting off-topic, and daydreaming out the window. Of course, professors from other departments must also be aware of the gradual decline in focus over the course of a long lecture, but I wonder if economists take less offense to it. I sure hope so because sleeping in class gives me wicked awesome dreams.