Business cycles and the unemployment rate

The COVID19 crisis has unleashed an economic crisis that is unprecedented in its speed and in its depth, making these very interesting times to study macro-economics.

Lecture 9 of Economics for Everyone describes the anatomy of the business cycle, and relates these swings in macroeconomic activity to a statistic that, as much as any other, speaks directly to the lives of citizens, the unemployment rate.

So in this lecture we describe the anatomy of the business cycle, how macro-economists link changes in GDP from its potential to changes in the unemployment rate, and finally just exactly what is this statistic called the “unemployment rate” and how is it measured by statistical agencies.

Download the presentation as a pdf.

The meaning, the measurement, and the use of GDP

In this eighth lecture of Economics for Everyone, we begin our discussion of macroeconomics, the study of the overall level of economic activity.

The lecture offers some background and motivation by examining the sharp increase and sluggish fall of the unemployment rate during the 1930s, the Great Depression. This led to a crisis in economic thinking, and to the publication of John Maynard Keynes’s “General Theory”. Thus macro-economics was born.

Our first challenge involves a host of measurement issues, and in this lecture we examine the meaning, the measurement and the use of Gross Domestic Product. This statistic is nicely presented, reviewed, and evaluated in Diane Coyle’s book, GDP: A Brief but Affectionate History, and it is the major reading on your list for this lecture.

 

Download the presentation for Lecture 8, “The Meaning and Measurement of Macroeconomic Activity” as a pdf, and if you like listen to narrated version.

 

Public policy in competitive markets, for the bad and for the good

In this seventh lecture of Economics for Everyone, we address the nature of government intervention in perfectly competitive markets.

Perfectly competitive markets lead to efficient outcomes, in the sense that no one can be made better off without making someone worse off. But that doesn’t mean we like the outcomes, that they are fair or justice, and as a result governments are often pressured, or even captured, to intervene, sometimes not for the broader social good, but for the benefit of a few to the cost of many.

At the same time competitive markets don’t always lead to efficient outcomes because prices don’t may not reflect all social costs and benefits. So we may have too much, or too little ,of some goods if we let the market work. Governments are often pressure to intervene for the benefit of many, but also at the costs  of some.

Source: https://clcouncil.org/economists-statement/

In this lecture, we work through a number of practical examples to illustrate rent-seeking behaviour in which a group can capture government policy to their benefit, and we also discuss market failures, and the consensus view of economists that these should be corrected with appropriate taxation. Agricultural support programs are one example, and putting a price on carbon is another.

Download the presentation for Lecture 7, “Understanding public policy in competitive markets” as a pdf, and if you like listen to narrated version.

Big government, just in time

Big government road into town just in time, but alas when he jumped off his bronco and reached for his six-gun it became clear he wasn’t just-in-time government.

What is clear from the COVID-19 crisis is that we should always choose our leaders with one thing in mind: character.

Character determines how they will stand up to the unexpected. That’s what matters, and whether it is Legault or Ford, Kenney or Horgan, whether Nenshi or Tory, and yes of course whether it is Trudeau, Canadians feel they are all passing the test.

Opinion polling shows that strong majorities see their leaders as doing a good job responding to COVID-19. And it’s impressive, their sensibility to consult, their conviction to act. Now, when we need them, they’ve all shown up, just in time.

Source: Angus Reid, March 26, 2020, http://angusreid.org/covid-19-healthcare-confidence/

“Think Big” has become the guidepost for these abnormal times, but we can’t be governed by character alone. Good governance needs an infrastructure that can deliver, and thank goodness Canadians can also count on a professional public service. But at the same time we fear its muscles can’t flex in real time.

The biggest stumble of the past week was the Trudeau/Morneau over-reach in the first draft of Bill C-13, an attempt to skirt parliamentary oversight and seize control over taxing and spending for two years. Not immediately tasteful, not in character, and certainly not contributing to the we-are-in-it-together spirit that is crucial for good governance and success.

This over-reach was probably driven more by insecurity than by partisanship, springing from having to look through the veil of uncertainty that has fallen over Ottawa. Staring into the mirror and seeing no reassuring reflection, the Minister of Finance wished for a pot of gold, just in case, you never know, down the road, we may need it.

Insecurity about a fluid situation, and insecurity about how quickly programs can be delivered, flows out of clogged government plumbing, a hard constraint on Big Think: for years we’ve neglected, cut, denigrated, and now the public service has a tough time doing just-in-time.

Employment Insurance, that grand social insurance scheme born from the disaster of the Great Depression, intended to offer income support to all in need, to insure against the great social risks we collectively face, risks that would bankrupt private insurers in no time, how is it performing during a collective crisis of the very kind it was intended to address?

It is straining, with computer code written in the 1980s running its servers, processing power and devoted personnel stretched to the limit, overcrowded service centers that are now shut down. The public service is doing the best it can with old plumbing.

Ottawa mandarins often muse about an “all of government approach,” a busting across the silos of different ministries to address all aspects of a policy challenge. But the biggest silos of all have never been breached, those between policy development and service delivery. And now the delivery plumbing is conditioning the choices that Big Thinkers can make.

What is also clear from the COVID-19 crisis is that we should always be investing and innovating in public service delivery, something easy to ignore in normal times.

There is no doubt that the income support programs the federal government moved quickly out of the drawing room and into legislation last week were designed with an eye, not simply to whether they were big enough, but how they would be delivered. The cheques won’t be in the mail for weeks. In times of Corona, that’s a lifetime.

Our governments have to think big, but they can only implement incrementally, a couple of quick steps forward, another back. Events are moving too fast, capacity is too limited, for Canadians to expect otherwise, even if what they really need is both big and just-in-time government.

Source:https://twitter.com/CanRevAgency/status/1244278188651528194?s=20

When Trudeau’s team first came to power they were enamoured with the idea of governing with data. Measure outcomes, set targets, recalibrate in the face of results, and move forward with a “there’s more to do” attitude. But lags in information and delivery make all that fall short.

There is always a big gap between intention and result, never mind in times of crisis, and that gap has to be filled with the trust that character instils in partners and citizens.

Trust gives us the assurance that the cheque is indeed in the mail, and character, now more than ever, needs to deliver. It can’t stumble too many times, before trust rides away.

[ A version of this post was published in The Globe and Mail on March 30,2020 under the title “Ottawa is struggling to be a just-in-time government.” ]

“When we talk about economics, there’s something known as a demand curve with elasticity”

“We might as reasonably dispute,” Alfred Marshall wrote in his famous economics textbook first published in 1890, “whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or cost of production.”

Prices are determined in the marketplace, through the communication between buyers and sellers, jointly through a negotiation reflecting their willingness to pay, and their costs of offering. Marshall offered us these tools, the demand curve and the supply curve, to understand price determination in perfectly competitive markets. And he also characterized them, and used them to illustrate price determination in a wide variety of examples.

As a part of this he introduced the notion of “elasticity,” a concept that Congresswoman Alexandria Ocasio-Cortez learned well in her economics courses, and used to drive home what she felt were some important lessons in understanding health care. Listen to her.

And so this week’s class in our course, Economics for Everyone, is about elasticity. If she can understand it, so can you. If she can use it, so can you. And that is what we do in the lecture: define the concept, and show how it is used to understand market outcomes for some policy relevant examples.

Download the presentation for Lecture 6, “Understanding and Using Demand and Supply Curves” as a pdf, and if you like listen to narrated version.

“Perfect markets and the ‘World of Truth'”

In his widely read guide to economics—The Undercover Economist—Tim Harford writes:

In a free market, people don’t buy things that are worth less to them than the asking price. And people don’t sell things that are worth more to them the asking price. … The reason is simple: nobody is forcing them to, which means that most transactions that happen in a free market improve efficiency, because they make both parties better off—or at least not worse off–and don’t harm anyone else.

The chapter of his book called “Perfect Markets and the ‘World of Truth'” is the starting point and the end point of the next block of lectures in our course Economics for Everyone. Harford is describing both the power of markets, and the potential for their failures, big and small. He is describing what economics call the two fundamental theorems of welfare economics, and in order to do so he has to explore the determination of relative prices, the neoclassical theory of value.

In perfectly competitive markets we can describe the determination of prices in terms of demand and supply curves. And so we have to develop a facility in using these tools to understand how markets work, how they are sometimes manipulated for better or for worse, and how they may fail in a way that can rationalize a role for public policy.

Download the presentation for the next couple of lectures, and keep reading!