Economics in debate

1. Economics in debate

2. What is Economics? • The study of how we use limited resources to meet unlimited wants • This means that SCARCITY is at the heart of our understanding of modern economics

3. “Invisible Hand” • Ascribed to Adam Smith (who was not necessarily a capitalist) • Claims that markets direct individual self-interest towards socially desirable outcomes • Has become the foundation of free market capitalism

4. “Capitalism” • Economic system based on the private ownership of the means of production • Is driven by the production of goods and services for a profit • Types of capitalism • Mercantilism • Free-market economy • Social market economy • State-ownership • Mixed economy

5. “Socialism” • Economic system based on collective ownership of the means of production • Is driven by the production of goods and services to meet social needs • Covers a variety of sociopolitical systems • Anarchism (libertarian socialism) • Authoritarian communism • Democratic socialism • Syndicalism

6. “Supply & Demand” • Describes how many markets determine prices • If supply increases relative to demand, prices DECLINE… • If supply decreases relative to demand, prices INCREASE • If demand increases relative to supply, prices INCREASE • If demand decreases relative to supply, prices DECREASE

7. “Elasticity” • Describes the degree to which one economic variable affects others • ELASTIC variables exhibit large responses to relatively small changes in another variable • INELASTIC variables exhibit small responses to relatively large changes in another variable

8. “GDP”—Gross Domestic Product • Value of expenditures on final goods and services • U.S. GDP has increased steadily—when you hear about “economic growth”, they are usually referencing GDP • ‘Recession’ means 6 months (2 quarters) of negative growth • GDP as a measure of economic performance can be misleading—non-monetarized labor, shift of non-monetarized labor into the market

9. “Keynesianism” • School of economic thought arising from the ideas of John Maynard Keynes • Claims that markets often produce inefficient outcomes that can/should be corrected by government intervention • Interventionary instruments include • Fiscal policy • Monetary policy • Debate about effectiveness usually centers on interpreting the effectiveness of FDRs response to the Great Depression

10. “Supply Side Economics” • Theory that economic growth should be stimulated by lowering barriers to production • Generally means lowering tax rates on income (individual and corporate) and capital gains • Strongly associated with “Ronald Reagan” and “trickle down economics”

11. “The Markets” • Commodities: exchange, in bulk, of everything from orange juice to petroleum—include both ‘spot’ and ‘futures’ contracts • Currency: exchange of different national currencies • Debt: issuance and trading of bonds (promises to pay in the future) • Equity: issuance and trading of stocks (shares in a company)

12. “Competitiveness” • Describes the ability of a particular group (company, sector, nation) to sell goods in a given market RELATIVE to other groups in the same market • Competitiveness expresses profitability, which is directly tied to income, wealth, etc. • EXP: Saudi vs. tar sand oil production

13. “Productivity” • Describes the efficiency of production • Productivity increases when greater output becomes possible with the same input • Often couched in terms of “worker productivity”, but is also a measure of technological efficiency • Growth rates of 1-2% are good

14. “Exchange Rates” • Rate at which one currency is exchanged for another and/or the value of one nation’s currency in terms of another currency • Appreciation: increase in value of a currency relative to others—benefits consumers and hurts producers, ceteris paribus • Depreciation: decrease in value of a currency relative to others—benefits producers and hurts consumers, ceteris paribus • Currencies typically are pegged, floating, or mixed

15. “Employment Rate” • Is usually expressed in terms of ‘unemployment’ • The official unemployment rate is 8.2%--percentage of the workforce that is seeking employment but is unable to find a position • Including the number of people who are no longer actively seeking employment takes the rate up to 15%+ • ‘Normal’ unemployment levels are between 4 and 6 percent

16. “Inflation” & “Deflation” • Inflation: rise of general level of prices of goods and services over time • Deflation: decline of general level of prices of goods and services over time • PREDICTABILITY is key, although economies tend to do best with relatively low, steady inflation (1-4%) • Deflation, over any extended period, and hyper-inflation can quickly wreck economies

17. “Interest Rates” • Rate at which interest is paid by a borrower to a lender for the use of money • Are important because they directly affect consumer spending, the housing market, etc, and thus impact all financial markets • Key interest rates are: • Federal funds rate (rate for overnight, uncollateralized loans between banks) • Prime rate—general FFR+3% • Are generally linked to inflation on an inverse basis • Stagflation!

18. “Confidence” • Consumer confidence: expression of consumer sentiment about the current and future status of the economy • Often used as a predictor of future consumer behavior • Particularly important because consumer spending makes up over two-thirds of the economy • Business confidence: expression of business sentiment about the current and future status of the economy • Often used as a predictor of future business behavior (hiring, tech investment)

19. “Income (in)Equality” • Expression of the relative distribution of income (and wealth) across the population • Is highly variable, both across time and between countries • Income inequality is growing rapidly in the U.S.

20. National Debt • Governments usually borrow through the use of bonds • U.S. national debt has two parts • Public debt—securities held by non-federal investors ($11T) • Inter-Government debt—IOUs held by federal accounts on other federal entities ($5T) • Influences interest rates, and more broadly, market sentiment

21. Oil Prices • Influence the economy—a little bit

22. Dedev • Premise 1: economic collapse is inevitable • Premise 2: collapse sooner is better than collapse later