“Good morning, our subject today is financial crises and policy responses. I’m going to focus mostly on the crisis of 2008, which seems like it has been going on forever.”
So begins Larry Summers in addressing the students attending the 10th lecture of the course “American Economic Policy” that he is co-teaching with Marty Feldstein and others.
“It was a scary moment and had substantial consequences. The US gross domestic product dropped by 10%, and today is estimated to be 10% lower than would be predicted by the pre-crash trend. That’s $1.7 trillion a year, or $20,000 for the average family of four. Unemployment reached highest level since the depression: 10% in the aftermath of this event, and even today there are several million more people unemployed or out of the labour force as a result.”
What I would like to do today is the most basic economics behind a crisis of this sort, and in the next lecture I give to use it to talk about policy responses to crises.
“The plan for today,” says Martin Feldstein as he begins his 8th lecture to the Harvard students enrolled in a course called American Economic Policy, “is to finish up my three lectures on monetary policy.”
It couldn’t come at a better time, because today [February 10th] Janet Yellen is offering testimony on monetary policy. The news stories seems to say she is “on the one hand and the other hand” in her thinking about the future. The labour market is improving, but she is worried about the future slow down because of economic developments in China. But our trade with China is less than 1% of GDP, so why change US policy?
The Fed has a problem, it is pursuing multiple goals, targeting low inflation but also maintaining full employment, but how do you deal with two goals when you have only one instrument? The Dutch economist Jan Tinbergen taught us that we need two instruments for two targets.
Well, I keep saying there is also fiscal policy, and the Fed should keep reminding Congress that they need help.
But operationally how does the Fed balance these competing goals?
Today we are continuing to talk about monetary policy. We have been discussing the issue of how the Federal Reserve Bank should respond to the extent of slack in the economy: when there is high unemployment, the Fed should be increasing aggregate demand, but at full employment more aggregate demand would lead to inflation. It is a difficult problem to find this balance because of lags in the process and host of measurement issues.
I missed class on February 4th (my bad) when Martin Feldstein of Harvard University gave the 4th lecture of his course “American Economic Policy,” but fortunately my classmate Matthew Tyler took notes and kindly accepted an invitation to post them as a guest on this blog. He also offers some personal reflections on what it feels like to be a left of center observer in a class taught by a self-avowed “conservative economist.” You can reach Matthew on twitter @Matt_B_Tyler .
Feldstein takes to the podium on a relatively mild Cambridge morning for this term’s fourth American Economic Policy lecture. The crowd has thinned slightly since day one, although the rapid tapping of laptop keys throughout suggests those who remain hang on every word. Like sponges, the economists of the future are absorbing the insights of a distinguished five decade career. Today, these eager young minds cover much ground: reflections on the Obama administration’s response to the great recession; the accuracy of real GDP measures; and skepticism regarding the size of the inequality problem in the United States.
It’s December 2008. The National Bureau of Economic Research has just declared the American economy has been in recession for almost 12 months. Both fiscal and monetary policy responses are falling short. $78 billion of tax rebates introduced by President Bush generated only $20 billion of additional consumer spending which was far less than the multiplier predicted by Feldstein, Summers and others. Similarly, traditional monetary policy is not working as the crisis was not caused by rising interest rates.
What caused the Great Recession, and could it happen again? These are the questions that motivate Martin Feldstein in the second lecture of his course “American Economic Policy” given to undergraduates at Harvard.
The good professor suggests that the housing sector is where we should look for an answer, and that we should appreciate that public policy played a role in both causing the recession, and in helping the American economy recover from it. But also important policy changes putting this sector on a more stable footing were reversed for political reasons, and this raises the risk that it could all go terribly wrong again.
“This is a remarkable year for studying economic policy in the United States.”
That is how Martin Feldstein began his course “American Economic Policy” for undergraduates at Harvard University. I’ve gone in cognito and hope all the 20 year olds will not notice me—well not really.
It is just one of several courses I’ll audit this spring semester, and besides it was not too hard to hide in the overflowing room, standing room only at least for this first day of class.
From 1982 through 1984, Martin Feldstein was Chairman of the Council of Economic Advisers and President Reagan’s chief economic adviser. He served as President of the American Economic Association in 2004. In 2006, President Bush appointed him to be a member of the President’s Foreign Intelligence Advisory Board. In 2009, President Obama appointed him to be a member of the President’s Economic Recovery Advisory Board.
Since I am slated to teach a similar course at the University of Ottawa next year after my academic leave is over, it makes sense to see how the Harvard professor handles the big macro-economic issues of our time. So every Monday, Wednesday, and Friday morning it is back to undergraduate economics for me, and I’ll post my edited class notes if you want to follow along, learn some macro-economic theory, and develop an appreciation of the economic challenges facing the United States (and presumably other rich countries).
During the first class Professor Feldstein posed the big questions and issues the course will tackle, as well as laying out some of the administrative ground work.