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Contents: Supply Side Economics vs Keynesian Economic Policy | Keynesian: | Jobs and Inflation | Recession: | Glossary

Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole, rather than individual markets (Microeconomics).

- Jobs and Inflation Analysts and legislators alike are sure to watch with interest as Bernanke's position on inflation targets unfolds. Economists study this relationship between inflation and unemployment with what they call a Phillips Curve. Named after pioneering economist A.W. Phillips, the curve reflects a negative or inverse relationship between the rate of inflation and the rate of unemployment.

Federal Reserve Chair nominee Ben S. Bernanke stated recently that he believes the economy can have both low inflation and employment growth. Current chairman Greenspan agrees that the two issues are compatible. These statements fly in the face of conventional macroeconomic wisdom that we can't have one without sacrificing the other.

- Inflataion - Fed monitary policy It is desirable to hold inflation to 1-2% per year. The Federal Resserve (Ben Bernanke - chairman) traditionally uses monitary policy (raising the federal funds rate to slow inflaation and lowering it to avoid a recession). Internataional Stability


Recession: The common definition of recession is two consecutive quarters of decline in real GDP, but that is not the definition used by the National Bureau of Economic Research who makes the official call. It defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real G.D.P., real income, employment, industrial production and wholesale-retail sales." Really can't be measured until after the fact.
Unemployment lags the recession and peaks at the end.
Recessions:
Dates Length
months
GDP
decline
peak un-
employment
President
at start
1929-1938 43 30% 25% Hoover
Nov 1973 - Mar 1975 16 3.2% 9.0% Nixon
1980
July 1981 - Nov 1982 14 2.7% 10.8% Regan
July 1990 - March 1991 8 1.4% 7.8% Bush
March 2001 - Nov 2001 8 0.3% 6.3% Bush
Dec 2007 - June 2009: 18 4.1% 10.1% Bush
Source: CouncilForEconEd.org
Unemployment data comes from the Bureau of Labor Statistics.
Recession Definition and GDP at investment.suite101.com


See also US-Unemployment-Rate-2-1-2013 | Cato's Domain


It is often believed that when utilization rises above somewhere between 82% and 85%, price inflation will increase. Excess capacity means that insufficient demand exists to warrant expansion of output. See Capacity Utilization: Total Industry - FRED - St. Louis Fed

Supply Side Economics vs Keynesian Economic Policy

Supply-side economics developed during the 1970s in response to Keynesian economic policy, and in particular the failure of government policies to stabilize Western economies during the stagflation of the 1970s.

Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created using incentives for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates. This can be contrasted with the classic Keynesian economics or demand side economics, which argues that growth can be most effectively managed by controlling total demand for goods and services, typically by adjusting the level of Government spending.

Supply-Side:
Supply-side economics is often conflated with trickle-down economics.
Those who benefit will invest in business which will produce more jobs and better wages and lower prices to benefit everyone.
This investment will result in profits and higher wages will in turn make up for reduced tax rates and government tax revenues will not be hurt and may improve. It is characterized by the Laffer Curve developed by Arthur Laffer as a member of Reagan's Economic Policy Advisory Board (1981-89).

Supply-side is criticized as being politically motivated because it frequently involves lowering the maximum marginal tax rates which benefits the wealthy.
Whereas middle class people may spend a tax cut to stimulate the economy, the wealthy may spend a little, but will invest most of it. Companies will use this increased investment to buyback stock increasing value and stock price. They may also increase dividends. Both of these benefit the wealthy.

Tax Cuts:
The idea is that they (1) Encourage people to work harder because they take home more. (2) Save more and invest more. Tax cuts frequently produce a short term upturn in the economy, but usually not enough to generate extra revenue lost and the deficit increases, which in the long-term will reduce national saving and raise interest rates.
See Effects of Income Tax Changes on Economic Growth | Brookings Institution

Keynesian:
First, there is the "Keynesian multiplier", first developed by Richard F. Kahn in 1931. Exogenous increases in spending, such as an increase in government outlays, increases total spending by a multiple of that increase. A government could stimulate a great deal of new production with a modest outlay if: The people who receive this money then spend most on consumption goods and save the rest. This extra spending allows businesses to hire more people and pay them, which in turn allows a further increase in consumer spending.

See:
The Failure of Supply-Side Economics | Center for American Progress
Pro: Supply-side economics worked wonders for Reagan; Obama should give it a shot -- GazetteXtra
Multiplier, Keynesian Cross: Encyclonomic WEB*pedia | AmosWEB.com


Y (GDP) = C + I + G + X - M
         

Total Sales of final goods = C : total amount of consumption expenditure I : total amount of companies' investment expenditure G : total amount of governmental expenditure X : total sales to foreign countries ( exports ) M : The total imports of intermediate goods in a country NI (National Income) = Wages + Profits (Interest + Dividends + Reserve) IS- Balance Theory y - C + S (Savings) + T (Taxes) In a recession, government increases G to prevent the economy from falling into a severe depression. Consumption: C1A Consumption--durable goods, in billions of current dollars, 1929-1996 C1B Consumption--nondurable goods, billions of current dollars, 1929-1996 C2 Consumption--services, billions of current dollars, 1929-1996 Investment: I Investment, billions of current dollars, 1929-1996 I1 Investment--total fixed investment, billions of current dollars, 1929-1996 I1A Investment--fixed, nonresidential, billions of current dollars, 1929-1996 I1AA Investment--fixed, nonresidential, structures, billions of current dollars, 1929-1996 I1AB Investment--fixed, nonresidential, equipment, billions of current dollars, 1929-1996 I1B Investment--fixed, residential, billions of current dollars, 1929-1996 I2 Investment, change in business inventories, billions of current dollars, 1929-1996 Government purchases of goods and services G Government spending on final goods and services, billions of dollars, 1929-1996 G1 Federal government spending on final goods and services, billions of dollars, 1929-1996 G2 State and local government spending on final goods and services, 1929-1996 Price indices GDPDEF GDP deflator, 1992 = 100, 1929-1996 CPI Consumer price index, 1982-84 = 100, 1929-1996 PPI Producer price index, 1982 = 100, 1947-1996 Productivity PROD1 Labor productivity (output per hour), nonfarm, index, 1992 = 100, 1947-1996 PROD2 Total factor productivity, 1987 = 100, 1948-1996 National income and its components NI National income, billions of current dollars, 1929-1996 Wages, salaries and employee benefits NI1 Total compensation of employees, billions of current dollars, 1929-1996 NI1A Wage and salary compensation of employees, billions of current dollars, 1929-1996 NI1B Supplements (benefits) to wages and salaries, billions of current dollars, 1929-1996 Proprietor's income NI2A Proprietor's income--farmers, billions of current dollars, 1929-1996 NI2B Proprietor's income--nonfarm, billions of current dollars, 1929-1996 Rental income NI3 Rental income to persons, billions of current dollars, 1929-1996 Profits NI4A Corporate profits before taxes, billions of current dollars, 1929-1996 NI4 Corporate profits after taxes, billions of current dollars, 1929-1996 Interest income NI5 Net interest payments to persons, billions of current dollar, 1929-1996 PI Personal income, billions of current dollars, 1929-1996 Miscellaneous subcomponents DP1 Disposable personal income, billions of current dollars, 1929-1996 PS Personal savings, billions of current dollars, 1929-1996 PSP Personal savings as a percent of disposable personal income, 1929-1996 or force, unemployment, and wages Aggregate data LF Labor force, in thousands, 1948-1996 U Unemployed persons, in thousands, 1948-1996 UR Unemployment rate, in percents, 1929-1996 AHE Average hourly earnings, current dollars, 1947-1996 AWH Average weekly hours, 1947-1996 WAI Wage index, average hourly, 1982 = 100, 1947-1994 WARI Wage index, average hourly real wges, 1982 = 100, 1947-1994 Money supply, bank reserves, and interest rates M1 M1 money supply, billions, 1947-1994 M2 M2 money supply, billions, 1947-1994 FBR Free bank reserves, billions, 1945-1994 INT90 Interest rate on 90 day Treasury bills, 1945-1994 INTPR Average prime interest rate charged by banks, 1945-1994 Federal finances GDEF Federal government purchases for national defense, billions, 1946-1994 DEBT Federal debt as a percentage of GDP, 1929-1996 FEDREC Federal receipts, millions of dollars, 1929-1996 FEDEXP Federal outlays, millions of dollars, 1929-1996 TAXY Federal income tax receipts, millions of dollars, 1934-1996 TAXCORP Federal corporate tax receipts, millions of dollars, 1934-1996 TAXSS Federal tax receipts for social insurance, millions of dollars, 1934-1996 TAXEXCI Federal excise tax receipts, millions of dollars, 1934-1996 TAXOTHR Federal tax receipts other than variables 81.-84., millions of dollars, 1934-1996 Source: San Diego State University

Some general rules:
  • A inverted yield curve, an unusual occurrence in which short-term interest rates are higher than long-term rates, is often considered a harbinger of trouble for the economy.
  • Full employment (unemployment < 5%?) causes inflation
  • Inflation is bad for business
  • The Fed will raise interest rates when inflation gets too high.


In Sept. 2007 New York Times columnist Floyd Norris, showed that two recently observed conditions also existed prior to the last two recessions. The 6-month change in employment (using Household Survey data) had turned negative and the spread between 2-year Treasury yields and the Fed Funds rates fell to less than -1.3 percentage points. This yield spread fell to similar levels prior to both the 1990 and 2001 recession. The six-month change in employment data turned down in the same month the 1990 recession began, and a few months before the 2001 recession.

In a March 7, 2009 NY Times Article "Job Losses Hint at Vast Remaking of Economy" they quote John E. Silvia, chief economist at Wachovia as saying:
"These jobs aren't coming back. A lot of production either isn't going to happen at all, or it's going to happen somewhere other than the United States. There are going to be fewer stores, fewer factories, fewer financial services operations. Firms are making strategic decisions that they don't want to be in their businesses."

In "Recessions and Stock Prices" at Hussman Funds, William Hester, CFA says: "Though simple in its construction, it's an intuitive combination of data. When the two-year Treasury yield falls steeply below the Fed Funds rate, the market is already anticipating weakness that the Fed tends to be slower to recognize. Weakening job growth data provides early evidence of that economic weakness.
  I substituted the Fed's Discount Rate for the Funds Rate, and used the one-year Treasury yield from available data. In the eight recessions since 1955 these two warnings (rate spread and unemployment) emerged prior to or during seven of them.

1974: 1.4% fall in GDP
1975: 0.6% fall
1980: 2.1% fall
1981: 1.5% fall
1991: 1.4% fall
See also: Recession under Bear Markets.
YouTube video on money.

Stocks tend to drop prior to a recession, however this not a cause-effect relation, but stocks are anticipating a business slowdown.


Glossary:
Adam Smith (1723-90)
Scottish educator is often seen as the founding father of economics.
Inflation
Increasing prices. See above.
CPI
Consumer Price Index
GDP
Gross Domestic Product
Fiscal Policy
Government budget controlled by congress. Taxes and Spending.
Expansionary = Increase spending or reduce taxes.
Contractionary - Decrease spending or increase taxes.
Invisible hand
The invisible hand is an expression that came about from "An Inquiry into the Nature and Causes of the Wealth of Nations", 1776 by Adam Smith. He argued that the 'invisible hand' would organise markets and ensure that they arrived at the optimum outcome. This would all happen by individuals and firms pursuing their self-interest, yet despite this apparent selfishness, the invisible hand of markets still ensured the best outcome for all concerned.
Laissez-faire
The term "laissez-faire" is used to describe an economic system where the government intervene as little as possible and leave the private sector to organise most economic activity through markets.
Laissez-faire
The term "laissez-faire" is used to describe an economic system where the government intervene as little as possible and leave the private sector to organise most economic activity through markets.
Monetary Policy
The regulation of the money supply and interest rates by a central bank, such as the Federal Reserve Board. Then can:
- Setting the Discount Rate - This is the interest rate that banks pay on short-term loans from a Federal Reserve Bank.
- Setting Reserve Requirements - This is the amount of physical funds that depository institutions are required to hold in reserve against deposits in bank accounts.
Influence the Federal funds rate - the rate at which banks borrow reserves from each other, with open-market operations, buying and selling U.S. government securities in the financial markets.
Money Supply
Currency issued by the Federal Reserve System and the U.S. Treasury--and deposits held by the public at commercial banks, credit unions, ...
An increase in the supply of money works both through lowering interest rates, which spurs investment, and through putting more money in the hands of consumers, and thus stimulating spending. Measured by indicators M1 ($1.3 trillion in 2004), M2 ($6.3T) and M3 ($9.3 T).
See EconLib.org
Real GDP
The level of GDP after changes in inflation have been taken into account.
Reagonomics
The most serious attempt to change the course of U.S. economic policy of any administration since the New Deal. "Only by reducing the growth of government," said Ronald Reagan, "can we increase the growth of the economy."
Recession
Decreasing GDP, Job Market, ... See above.
Supply-side policies
Supply-side policies are policies that improve the workings of markets. In this way they improve the capacity of the economy to produce and so shift the aggregate supply curve to the right. This should enable the economy to grow in a non-inflationary way.
Economic Term Glossaries at:
Concise Encyclopedia of Economics| Library of Economics and Liberty
Virtual Economy Glossary at bized.co.uk

Blogs:
Grasping Reality by Brad DeLong


Links:
Gross Domestic Product (GDP)
Macroeconomics - Wikipedia, the free encyclopedia
Macroeconomics - Consumer Spending and Saving
Google search for macroeconomics gdp inflation recession "interest rates" unemployment fiscal monetary policy
Macroeconomics econ2020 at colorado.edu
investment.suite101.com
delong.typepad.com/sdj/economics_macro/index.html
www.inflationdata.com/

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last updated 14 Jan 2009