June is John Maynard Keynes Month

June 5th is the birthday of both John Maynard Keynes and Adam Smith. What an auspicious day to be an economist!

Keynes, a Depression-era macroeconomist, has come back into popular (popular for an economist) focus after this most recent economic crisis. His solution to depressed markets could be grossly simplified as fiscal expansion. If governments spend more, total output will increase.

In fact, looking at the Keynesian Cross model, even a modest increase in aggregate demand will lead to a much larger boost in output. The story is delightfully simple. Imagine today the government gives you 10 bucks to build a dam. You take that 10 bucks, save maybe 2 dollars, and spend the other 8 on Carls Jr. Carl then takes your 8, saves a dollar from it, and spends the other 7 buying more beef. The rancher saves a bit, spends the rest on fertilizer, and so on and so on. We see that from that initial 10 dollars, the money goes a long way in generating transactions.

Of course we learn this the first week of Intermediate Macroeconomics I. Week two, with its IS-LM and A Sad World models, shows us why this doesn't work and why we should all be good little monetarists. Still, enjoy your time in the sun, Mr. Keynes! June is your month!

Last thing I want to share, hip hop artist Slim Thug giving props to Sir John. Skip to 1:40 for the coolest moment macroeconomics will ever have.

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Slim Thug's Music Video - Still a Boss
www.thedailyshow.com
Daily Show Full Episodes Political Humor Tea Party

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!

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!