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ECO 481: Public Choice Theory

ECO 481: Public Choice Theory. Week 11 - 1: Macroeconomic Instability. Dr. Dennis Foster. Economic Instability. Marx & Keynes - an inherent flaw in capitalism. Schumpeter - inherent, but advantageous. Austrians - not inherent nor advantageous. Highly valued; rarely seen. Why?

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ECO 481: Public Choice Theory

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  1. ECO 481:Public Choice Theory Week 11 - 1:Macroeconomic Instability Dr. Dennis Foster

  2. Economic Instability • Marx & Keynes - an inherent flaw in capitalism. • Schumpeter - inherent, but advantageous. • Austrians - not inherent nor advantageous. • Highly valued; rarely seen. Why? • Economic ignorance. • Self-interest of political decision-makers.

  3. Economic Ignorance • Economists are not physicists. • Agreement on variables doesn’t matter. • Data - not current; not complete; uncertain; costly to collect; unreliable. • Has stimulus kept Ur under 8%? • Macro policy - offer with humility. • Can we tell the fool from the demagogue?

  4. Humility Explained, or not …

  5. Instability = f (self-interest) • Wealth, income, power, status come from: • Having more to do. (“Getting the job done.”) • Not getting the job done. • “Fighting” unemployment is esp. rewarding:cut taxes and raise spending! • Appear to fight deficits; do so is political suicide. • “[M]arket fluctuations, in turn, provide rhetorical ammunition for politicians wanting to inject the government still more into economic life.”

  6. Political Business Cycles •  money supply in last 2 years of term. • SR gains - reduced unemployment. • LR costs - inflation; deal with later. • Evidence from U.K. and U.S. • Even Keynesian prescriptions are not followed: raise taxes and cut spending during recovery. • Is Obama a Keynesian? • “And, of course, deficits are at all time highs.”

  7. Deficits

  8. The Problem w/Macro Policy • Ignores micro principles. • People make choices & respond to incentives. • Macro aggregates ignore the individual. • Provide $ to bridge unemployment gap. • Now - incentivizes people to stay unemployed. • Policies discourage saving/investment. • Tax exempt mortgage; crowding out.

  9. A Depression Story

  10. What if we didn’t “fight” recessions? 8/1920 - 11/1922 6/2008 - ??? 5/1979 - 3/1988

  11. Reducing Deficits • Three choices - taxes, spending, MS. • Text on dealing with 1986 budget deficit. • Current dilemma - $4 b. or $60 b. or $100 b.on a $1.5 trillion deficit? • AZ experience - sell & lease; defer payments.

  12. Economic Bill of Rights • We can’t just elect “good” people. • Constitutional reform . . . 5 proposed amendments: Balance budget Slow MS growth Flat tax Line-item veto Term limits

  13. ECO 481:Public Choice Theory Week 11 - 1:Macroeconomic Instability Dr. Dennis Foster

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