ECONOMIC PERSPECTIVES

As I tell my students, it is a legitimate and defensible position to argue that the government should not try to manage the macroeconomy. For a variety of reasons (such as corruption, incompetence, and the influence of special interests), it is conceivable that policy makers and implementers will make things worse, not better. If one chooses this position, however, then one cannot complain about high unemployment, high inflation, or a lack of economic growth. Prior to the Great Depression, the predominant school of economic thought, classical economics, suggested that macroeconomic problems would correct themselves. If unemployment increased, the response would be a decrease in wages until employers were willing to hire them again. Similarly, inflation (a general increase in the level of prices) would cause people to buy less (as prices rose). Reduced demand for products then would cause prices to fall. The biggest problem with classical economic thought, however, is that it is b...

In the April 12, 2010 article " AP survey: Recovery to remain sluggish into 2011 ," Associated Press economics writer Jeannine Aversa says a survey of economists suggests U.S. economic growth will remain quite modest until at least 2011. "Among the first survey's key findings: • The unemployment rate will stay stubbornly high the next two years. It will inch down to 9.3 percent by the end of this year and to 8.4 percent by the end of 2011. The rate has been 9.7 percent since January. When the recession started in December 2007, unemployment was 5 percent. • Home prices will remain almost flat for the next two years, even after plunging an average 30 percent nationally since their peak in 2006. The economists forecast no rise this year and a 2.3 percent gain next year. • The economy will grow 3 percent this year, which is less than usual during the early phase of a recovery and the reason unemployment will stay high. It takes growth of 5 percent for a year to lower th...

In the March 15, 2010 TIME magazine article " Is There Too Much Worry About the Debt? ," Zachary Karabell argues that the U.S. should not lose sight of the things that increase productivity and lead to real economic growth (which in turn, increase tax revenues): investment in physical capital (infrastructure, factories and machines), human capital (education and skills training), and technology.

Click on the image above to enlarge it. In the January 29, 2010 Reuters article " Economy soars 5.7 percent, fastest in 6 years ," Lucia Mutikani reports that the U.S. economy showed unexpectedly strong growth in the fourth quarter of 2009: WASHINGTON (Reuters) – The economy grew at a faster-than-expected 5.7 percent pace in the fourth quarter, the quickest in more than six years, as businesses made less-aggressive cuts to inventories and stepped up spending. The robust performance closed out a year in which the economy contracted 2.4 percent, the biggest decline since 1946. After falling off a cliff at the start of the year, gross domestic product turned higher in the third quarter, and the quickening fourth-quarter pace reported by the Commerce Department on Friday suggested a sustainable recovery was building. "Wow, great number. It's very solid and gives us a running start into the second half of the year when we can't rely on government stimulus," said ...