Economics 448W Current Macroeconomic Issues Prof. Steven Fazzari Course Syllabus Spring, 2017 Office: Seigle 185; 935-5693 Office Hours: Tuesday 2:45 4:15; also often available right after class on Mondays and Wednesdays E-mail: fazz@wustl.edu Teaching Assistants: Lucia (Helu) Jiang (helujiang@wustl.edu ) available by appointment via e-mail. Readings and other course materials are posted on the Blackboard site for Econ.448W.01 This course has three broad objectives. First, we examine, in detail, the logic and evidence behind several approaches to understanding macroeconomic fluctuations and economic growth. This analysis builds upon the foundation laid in Economics 1021 and 4021. Second, we apply macroeconomic theory to evolving current events and policy debates. The focus is on issues facing the U.S. economy, but we will also consider the macroeconomic topics relevant to other developed countries. Third, this is a writing intensive course; students will improve their ability to communicate ideas in clear and coherent prose. During the spring 2017 semester, we will focus on a variety of issues. Most prominent as we start the course is the beginning of the Donald Trump presidential term, with the Republican party firmly in control of both the US Congress and the presidency. Trump s surprise victory seems linked in large part to macroeconomic issues related to job creation, international trade, and wage stagnation. We will explore the emerging policy proposals of the new government. The backdrop for much of this discussion is the aftermath of the Great Recession that began in late 2007. This was the most significant U.S. macroeconomic event since World War 2. We will discuss in detail how various macroeconomic theories explain the Great Recession. In addition, the unusually slow recovery since 2009 of important macro variables played an important role in the 2016 national election. We will study how and why this recovery differs from others and discuss what both the recession and stagnant recovery teach us about the relevance of different macroeconomic theories. Central to all of our work in this class is how evidence aligns with different theoretical perspectives. We strive to explain how modern developed economics, the US in particular, actually operate in the reality of the early 21 st century. There is no textbook for this course. Reading will consist of academic articles, policy analyses, and newspaper articles. You should purchase the excellent book on writing by Joseph Williams and Joseph Bizup, Style: Lessons in Clarity and Grace.
CLASS ENVIRONMENT AND TEACHING STYLE A central focus of this course is how well evidence aligns with different theoretical perspectives. We want to explain how modern developed economics, the US in particular, operate in the reality of the early 21 st century. The best way to understand realworld macroeconomics is usually not clear cut. There are a variety of different approaches and controversies about which approach is most effective. Policy recommendations and political views often connect with different macroeconomic perspectives, and sometime these connections are implicit. There will be room for spontaneity in how our class discussions evolve. Although there is a clear plan for each class, the specific content discussed can vary based on observations of the instructor and comments or questions from students. For this reason, this class may seem less scripted than other economics courses. This teaching style poses challenges for students. I will discuss many ideas and compare perspectives. I present content rapidly and sometimes with quickly evolving logical threads. Students need to work hard to understand the material presented in class. Recognize that many important ideas will not be fully covered in reading material. Come to class ready to engage. The challenge of explaining a complex and nuanced reality is not an excuse for lack of clarity. I ask a lot of my students, but I also strive to present concepts and evidence in ways that students who are fully engaged with the class can understand thoroughly. Students should feel free to ask questions at any time during class if something is unclear. You may certainly follow up with me or the TA after class, but do not be shy about raising questions in class. Most likely, if something is not clear to you other students will benefit from your effort to better understand what is going on. In my opinion, this challenging teaching style is well suited to an advanced class that strives for deep understanding. Students who choose to take this class should be ready for this kind of approach. WRITTEN ASSIGNMENTS Exercises I will assign a few exercises that receive low weight in the course grade. These assignments may ask you to work with graphs or solve an economic problem. Some exercises will also focus on writing. While these assignments are similar to homework in other economics classes, grades will depend, to a greater extent than usual, on the clarity and coherence of writing. Essay Assignments on Macroeconomic Issues Essay assignments will be posted on the course Blackboard website. The major essay assignments and planned due dates are: 1. Classical model summary first draft, posted Wednesday, January 25 and due Wednesday, February 8. You will describe the basic theoretical results of 2
the classical macroeconomic model in a compact summary, not to exceed a strict limit of 500 words in length. Do not let the short length mislead you; this is a challenging assignment. Expect to devote as much time to it as you would to a longer paper. 2. Classical model summary revision. You will receive detailed feedback on the first draft of your paper and then turn in a revision, likely due on Monday, February 27. During the time between your submission of the first draft and the revision, we will devote two classes to writing techniques based on the Williams-Bizup book that will provide useful tools for you to apply to the revision. 3. Midterm essay #1 posted on Wednesday, February 15 and first draft due on Monday, March 6. This question will ask you to apply classical macroeconomics to a real-world issue in an essay of 1,000 to 1,500 words. You will receive a grade and comments on the first draft soon after spring break. You will then submit a revised version with essays #2 and #3 on Wednesday, March 29. 4. Midterm essays #2 and #3 posted on Wednesday, March 8 and due on Wednesday, March 29. These questions will ask you to compare and contrast the main theoretical paradigms that we explore in the first half of the semester in applications to two macroeconomic issues. Each essay will be approximately 1,000 to 1,500 words. (Note that you can work on this assignment during spring break if you choose to do so, but there is plenty of time for you to complete this assignment after the break.) 5. Final paper. The assignment will be posted in early April. It will ask you analyze recent events in the U.S. economy and link those events to the policy positions advanced in the 2016 presidential election. The final essay will be due on May 8. Careful, thoughtful revision is absolutely necessary for effective writing. For the classical model summary and midterm essay #1, you will receive comments and a grade on your first draft and you will have an opportunity to revise your essay and submit it again for a new grade. For the final paper you will likely submit an outline and possibly some initial paragraphs and receive comments from the course TA. Regardless of the revision system used for grading the essays you submit in this course, however, you should never turn in work that you have not carefully revised yourself. You need to complete a first draft of any essay assignment, no matter how short, somewhat before the deadline. After finishing the first draft, you should do something else for a while and then give the assignment a fresh look. When you read over your work, if you think there is some chance that one of your ideas is not clearly expressed, work on it aggressively until you it seems crystal clear to you. In my experience, if the author thinks that there might be a problem of clarity in an essay, the reader will almost certainly perceive a major problem. 3
CLASS PARTICIPATION Although this course is writing intensive, I view its mission more broadly as improving communication, which includes spoken expression as well as writing. Class attendance is essential and required. I encourage you to demonstrate your engagement during class by asking questions, making comments, and answering questions that I ask. You will receive a grade for class participation. Attending class regularly sets a base to your participation grade of a low B (14 points on the scale presented below). Even small contributions will quickly raise your grade from this level. You do not have to talk extensively to receive a good participation grade. I will not keep track of every word that you utter. Rather, I look for evidence that you regularly ask questions or offer comments. Questions in my office hours, sessions with the TA, or e-mail questions may also contribute toward the participation grade. But there is a positive externality to class participation: your comments benefit others when they are made during class time. GRADING The TAs and I will assign grades for all writen work, no matter how small, on a common 20-point scale. You can interpret grades with the following absolute scale: 20: A+, truly outstanding work that far exceeds expectations 18-19: A, an excellent effort that is as good as I could reasonably hope for 17: A-, almost an A, but with some room for improvement in the details 16: B+, good grasp of the major objectives, but details need improvement 14-15: B, main ideas correct, but some significant things could be improved 13: B-, some major problems with your understanding and/or communication 10-12: C, shows effort and some understanding, but misses much of the main point Below 10: Unacceptable work for an advanced economics student. Each assignment will receive a weight, and the final grade will be a weighted average of everything you produce during the semester. Although I will determine the detailed weights of each assignment at the end of the semester, I plan to conform roughly to the following plan: Shorter exercises 5% Class participation 10% Classical Summary Essay 16% (6% on first draft, 10% for revision) Midterm Essays 24% (split credit for first draft and revision of #1) Final Essay 45% Note that the final essay assignment will receive, by far, the greatest weight in the course grade. This emphasis reflects the fact that the course material is cumulative and your writing should improve throughout the semester. The final essay will give you the chance to demonstrate what you have learned throughout the semester and how well you can 4
communicate your understanding with an original analysis of real-world macroeconomic issues in clear, interesting prose. Grading Guidelines for Writing I modified (in minor ways) the following grading guidelines from the syllabus of a colleague who had experience with writing-intensive instruction in the social sciences. I cannot promise to follow these guidelines strictly, but I believe they provide useful ways of thinking about the characteristics of good, mediocre, and poor writing. A An A paper shows a detailed understanding of your argument; demonstrates coherent organization; provides supporting evidence, used appropriately; and has few or no mechanical mistakes. The paper contains clear, unambiguous sentences, perhaps with a touch of elegance. In the best A papers, you write with a lively and intelligent voice, showing that you have something interesting to say, and that you can say it clearly and gracefully to an appropriate audience, while supporting it fully. B A B paper has a clear thesis, organization, and continuity. It may have some minor mechanical errors, but no major ones. Your style may be slightly awkward at times. The ideas are anchored in theory and evidence, showing that you have thought enough about the topic to make a solid, but probably not striking, argument. You have a definite point to make and make it an organized and competent way, and to a definite audience. C A C paper has a weak, fuzzy thesis and perhaps illogical or confusing arguments to support it. The writing may be sloppy, with many minor mechanical errors and perhaps some major ones (such as incomplete sentences). You give examples for their own sake or to show that you have done some research, not to prove a point. Organization sprawls; words are misused; diction is misused; proofreading is weak. D A D paper has no thesis and/or major mechanical problems; poor organization; serious misunderstanding of the evidence; stretches in which you simply ramble on for no apparent purpose. F Either you've plagiarized, or you paper is an absolute mess. DEADLINES AND EXTENSION POLICIES In the interest of good course organization and fairness to all students, I try to follow clear procedures for deadlines and extension requests. I hope that these procedures will give students some flexibility, while preventing anyone from getting too far behind, in a way that is fair to all students. Please read the following policies carefully and resolve any questions that you have early in the semester. Every assignment has a due date. Students will submit their work via Blackboard no later than 11:59 p.m. on the due date. You may request extensions for assignments by e-mail to me. Any request should explain the reason for the extension and propose a date when the assignment will be submitted. Requests for extensions of up to a week will usually be granted, although requests from students who have already taken extensions during the semester will receive greater 5
scrutiny. Requests for extensions must be made no later than 24 hours before the class when an assignment is due. Grades on late assignments without an extension will be reduced one half point per day of delay (see the grade scale above) following the due date. For example, an assignment that was due on Monday would receive a half point penalty if it was turned in on Tuesday. The penalty would rise to one point on Wednesday, one and a half points on Thursday, etc. The same reduction will occur for assignments with authorized extensions if they are submitted later than the date agreed upon at the time an extension is granted. Important Note for Graduating Seniors: Final grades must be turned in early for spring degree candidates. Extension requests on the final paper for graduating seniors may not be granted, especially if they are made at the last minute. Plan accordingly! ACADEMIC INTEGRITY IN ECON 448W By this stage in your educational career, I expect you understand standards of academic integrity but this course is somewhat different from other economics classes. All written work is done outside of class. I encourage students to talk among themselves about the course material as a particularly effective way to learn from each other. Work that you submit under your name, however, must be your own. It would be inappropriate for you to ask a classmate to edit or otherwise comment directly on your written work. I also guide teaching assistants to turn down requests along the lines of could you take a look at this essay to see if I am on the right track? Whether you are talking with a classmate, a teaching assistant, or the instructor it would be better to ask about a specific concept if it is unclear. TOPIC OUTLINE and READING (Subject to Revision) The planned topics and dates that we will address them in class are listed below. Revisions in the schedule may be necessary depending on how topics and discussion evolve over the semester. Readings are linked to the topics. They will all be available for download from the course site on Blackboard. I strongly encourage students to read the relevant material before the assigned class. Additional readings may be added during the semester. Also, news articles on current issues will be distributed for you to read and us to discuss in class, especially during the second half of the semester. I have developed a web-based resource to explain basic macroeconomic concepts and current policy issues. This site is called Muddy Water Macro. You can read about the site at http://muddywatermacro.wustl.edu. I hope to add more content to the site during the semester. I encourage you to look at the material on the site and, please, to share comments with the TA and me about anything that is unclear or further topics that you would like to see developed. 6
I. Introduction #1 (W Jan. 18): Course Mechanics and Overview of U.S. Macro Data We will cover course organization, teaching style, assignments and other key aspects of the course. This discussion complements the syllabus that all students should read in detail. In the second part of the first class we will survey aspects recent US economic conditions that will be a central focus of the class. Reading: Course syllabus Williams-Bizup, Lesson 1 Understanding Style and Lesson 2 Correctness (you should read this material before completing exercise 1, which will be due the second Wednesday of class). II. Paradigms in Macro Theory This section comprises about 40 percent of the course. This material should help you understand the implications of major schools of macroeconomic thought. We pay particular attention to comparison among the theories. These perspectives create the foundation for our analysis of current issues throughout the remainder of the course. Some of this material should be familiar from Economics 4021 (and even Economics 1021), but we will certainly develop new ideas that you most likely have not seen in other classes, especially when we discuss different approaches to Keynesian macroeconomics. As we discuss different theoretical perspectives, we will apply the ideas to the analysis of some current issues as illustrations of the theories. In particular, we will apply the basic classical macroeconomic model to explain aspects of the Great Recession (2008-09) and the subsequent slow recovery. The most important objective of this part of the course, however, is to enhance students deep understanding of the major theoretical ideas in macroeconomics. A. The Classical Model Classical macroeconomic theory, often associated with supply-side economics, describes an economy that always operates at full employment and produces the potential level of output, at least in the absence of specific labor market frictions. Changes in demand (spending) have no direct effect on real macroeconomic variables, although changes in some traditional demand factors (consumption or government spending, for example) can have indirect effects on output by changing the conditions of labor or capital supply. Classes #2 through #5 will provide the basis for the first major assignment, the classical model summary essay. #2 (Jan. 23): Tastes, Technology, and Resources: the Production Supply Side #3 - #4 (Jan. 25 & Jan. 30): The Classical Demand Side and Say s Law 7
Reading: On the Muddy Water Macro site, look at the Keynesian Basics pages (http://muddywatermacro.wustl.edu/keynesian-basics). Start with Demand, Supply, and Unemployment and then look at the Interest Rates, Aggregate Demand, and the Paradox of Thrift page up to the subsection entitled The Paradox of Thrift: Keynesian Response to Say s Law. Note that these pages describe some Keynesian ideas that we will discuss later in the course, but they summarize key ideas about the classical model that will be useful at this stage. #5 (Feb. 1): Inflation and Growth in the Classical Model, Summary of Classical Model Classes #6 through #8 apply the basic logic of the classical model to understand actual economic events. We will focus on the Great Recession in classes #6 and #7. In class #8 we will analyze the sources and consequences of trade deficits (a central theme in the Trump campaign). The extensions of the basic model are part of what is often called "New Classical" macroeconomics. At the conclusion of this discussion, we will assess some empirical shortcomings of the new classical explanation for the Great Recession, which motivates a transition to Keynesian macroeconomic models. #6 - #7 (Feb. 6 & 8): Classical Analysis of the Great Recession Reading: Ohanian, Lee E., Understanding Economic Crises: The Great Depression and the 2008 Recession, Economic Record, July 2010. Reading: Schierholz, Heidi, Is There Really a Shortage of Skilled Workers? Chapter 17 from Restoring Shared Prosperity. Also see news articles posted on the Blackboard web site #8 (Feb. 13): Sources and Consequences of Trade Deficits in the Classical Model B. Writing About Macroeconomics This topic is not about theoretical paradigms, but we will spend two classes after we finish with the classical model discussion to talk about writing style, particularly sentence structure. These classes will apply the material from lessons 3 and 4 of the Williams- Bizup book to writing samples taken from our class material. The focus of these lessons is basic sentence structure. The remainder of the Williams- Bizup book develops valuable aspects of style. I strongly encourage you to study them in detail. #9 - #10 (Feb. 15 & 20): Actions and Characters in Economic Writing Reading: Williams Bizup, Lessons 3 and 4. 8
C. Conventional Keynesian Macro -- the Neoclassical Synthesis Conventional Keynesian analyzes how sticky wages or prices may create temporary unemployment after negative demand shocks, that is, reductions in spending by households, firms, and governments. This paradigm is mostly equivalent to the neoclassical synthesis, according to which changes in demand have direct effects on output and employment in the short run (before wages or prices fully adjust), but results converge to those predicted by the classical theory in the long run (after nominal variables fully adjust to equilibrium values). #11 - #13 (Feb. 22 & 27, Mar. 1): The Paradox of Thrift and Keynesian Results in the Loanable Funds, Money, and Labor Markets Reading: Muddy Water Macro (http://muddywatermacro.wustl.edu) Demand, Supply, and Unemployment page and Interest Rates, Aggregate Demand, and the Paradox of Thrift, both accessed from Keynesian Basics on the main menu. (You should have looked at most of this material earlier, but read it again and continue on through the paradox of thrift.) Optional reading: Fazzari, Steven M. A Penny Saved May Not Be a Penny Earned: Thinking Hard About Saving and the Creation of Wealth. #14 (Mar. 6): The Neoclassical Synthesis: Keynesian Short Run Classical Long Run Reading: Muddy Water Macro (http://muddywatermacro.wustl.edu) Wage and Price Adjustment and Deflation (first part, up to Destablizing Effects of Deflation ). Reading: Fazzari, S., P. Ferri, and E. Greenberg. Aggregate Demand and Firm Behavior: A New Perspective on Keynesian Microfoundations, Journal of Post Keynesian Economics, volume 20 (1998), 527-559. Students should feel free to skip the material from the bottom of page 537 to the bottom of page 540, as marked on the pdf available on the course web site. The material from page 546 to the end of the article is directly relevant to classes 15 and 16. D. An Alternative Keynesian Model: Ineffective Wage and Price Adjustment and the Persistent Effects of Demand This third paradigm provides an interpretation of Keynesian macroeconomics more in line with what Keynes himself wrote. Keynes argued that falling wages and prices would usually not cure the macroeconomic problems of insufficient demand and unemployment. The evidence from modern economies provide support for this view, especially in the aftermath of the Great Recession, even though it lies somewhat outside of the mainstream of most modern academic approaches. #15 (Mar. 8): Destabilizing Effects of Falling Wages and Prices on Demand Reading: Muddy Water Macro, Wage and Price Adjustment and Deflation and The MWM Perspective on Macroeconomics Reading: Fazzari, Ferri, Greenberg (1998), pages 546-555. 9
#16 (Mar. 20): Intrinsic Keynesian Macro: Effects of Demand Beyond the Short Run Note: Spring Break (Mar. 13 & 15): No class III. Financial Instability and the Great Recession In the fall of 2007, the U.S. economy entered recession. At first, most economic forecasters predicted a mild recession by historical standards, much like the recessions of 1990-91 and 2001 (during a period often called the Great Moderation in U.S. macroeconomic history). But the job losses and the decline in output made this recession the worst macroeconomic event in the U.S. (and much of the rest of the world) since the Great Depression in the 1930s. There was also a widespread view that the recovery from such a deep recession would be robust (as it was, for example, from the deep downturn in 1982). But the recovery has been disappointing, especially in terms of GDP and labor force participation. Some classical model explanations for the Great Recession and its aftermath were covered earlier under topic II.A, this part of the course will focus on the Keynesian explanations for this interesting and challenging period focusing on unstable financial dynamics, particularly in the household sector of the economy. U.S. consumer spending grew quickly between the middle 1980s and 2007. Household debt also rose to unprecedented levels during this period. The bubble in residential real estate and the associated mortgage debt was the final phase of the consumer boom. Almost every explanation for the Great Recession begins from the bursting of this bubble and the implications that had for household consumption, household debt, and aggregate demand. There is more controversy about what caused the economy to under perform for many years following the trough of the recession. We will also explore the stagnant recovery and its impact on the surprising election results in late 2016. An emerging theme in the research of a number of economists (including Professor Fazzari) is that rising income inequality since the early 1980s played an important role in creating the financial instability that triggered the Great Recession and the slow growth of demand in its aftermath. We will also consider this idea. #17 - #18 (Mar. 22 & 27): Minsky s Theory of Financial Instability and the Great Recession Not Reading, but Watching: Professor Fazzari s Hyman P. Minsky lecture from spring, 2011, http://medialibrary.artsci.wustl.edu/node/93 Reading: Cynamon, Barry Z., Steven M. Fazzari, and Mark Setterfield Understanding the Great Recession (book chapter). #19 #20 (Mar. 29 & Apr. 3): Secular Stagnation in the Aftermath of the Great Recession: Partial Explanation for the Trump Victory? Reading: Summers, L.H. "U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound," from Business Economics, 2014. 10
Reading: Cynamon and Fazzari. Rising Inequality and Stagnation in the U.S. Economy, European Journal of Economics and Economic Policies, 2015. IV. Monetary Policy After the Crisis Monetary policy is considered the primary tool to contain economic fluctuations according to mainstream macroeconomic thinking, particularly prior to the Great Recession. We will consider prevailing views on monetary policy prior to the Great Recession, and then discuss how perspectives have changed as the result of recent events. We will also discuss how quantitative easing policies work (or do not work) when the typical adjustment of short-term interest rates pushes up against the lower bound of zero without adequately stimulating demand to restore at least an approximation to full employment. #21 (Apr. 5): The Zero Bound and Quantitative Easing Reading: Review pages 8-10 of Cynamon, Barry Z., Steven M. Fazzari, and Mark Setterfield Understanding the Great Recession (book chapter). Blog posts from Ben Bernanke (March 31, 2015) and Lawrence Summers (April 4, 2015), see Blackboard website. #22 (Apr. 10): Discussion Monetary Policy and Secular Stagnation V. International Trade, Aggregate Demand, and Jobs A major theme in Donald Trump s election victory in 2016 was a criticism of trade deficits. Candidate Trump argued that the rest of the world, especially China, ripped off the US, costing jobs and hurting wage growth for American workers. While this perspective no doubt resonated with some voters, we will explore the economic foundations of this argument. As discussed earlier in the course, the idea that the trade deficit causes a net loss of US jobs is inconsistent with the simplest form of the classical model. The Trump argument is basically Keynesian, as we will analyze in detail. This conclusion leads to a deeper understanding of policy responses to the trade deficit. If the deeper problem with trade deficits is insufficient demand, both domestically and globally, it is far from clear that protectionist trade policy or sanctions for companies that off-shore production is the most effective approach. #23 (Apr. 12): Perspectives on the Macroeconomic of US Trade Deficits Reading: Trump s Economic Analysis: Gets Symptoms Right, But Diagnosis Wrong, Steven Fazzari, Huffington Post blog, November 8, 2016 (linked from Blackboard web site). 11
VI. Fiscal Stimulus, Deficits, and Austerity Fiscal policy has played an important role in discussions about economic policy since the Great Recession. The U.S. federal budget plunged into deficit in the recession, in part due to the controversial stimulus package implemented by Congress and the Obama administration in early 2009. The rancorous argument over extension of the U.S. debt ceiling in the summer of 2011 was to some extent a continuation of the debate. Fiscal policy debates have also been sharp in European countries, which much focus on government debt problems in Greece, Ireland, Spain, and Italy. What are the economic effects of fiscal stimulus and government deficits? Where does the money come from to finance deficits? Does the deficit burden future generations? Are there good reasons for a government to run a deficit? What policies, if any, should the U.S. pursue to close its budget gap? How does the U.S. situation differ from countries in the European Union? #24 - #25 (Apr. 17 & 19): Keynesian and Classical Perspectives on Fiscal Stimulus, Deficits, and Crowding Out Muddy Water Macro: Fiscal Policy (and linked pages) Reading: Cynamon, Barry Z. and Steven M. Fazzari. No Need for Panic: the Keynesian Macroeconomics of U.S. Fiscal Policy (book chapter). VII. Supply-Side vs. Demand-Side Macroeconomics Perhaps more than at any time since the 1980s, the debates between supply-side and demand-side macro are front and center in the economic policy discussions of early 2017. In the final two classes of the semester, we will draw together themes from the whole course to explore the sources of current US macroeconomic problems and appropriate policy responses. To what extent is the stagnant recovery from the Great Recession a supply-side vs. a demand-side problem? What do we know about the effects of the kind of tax cut and infrastructure policies described as initiatives of the new Trump administration? How does the effectiveness of different policy approaches depend on the underlying supplyside vs. demand-side source of current problems? This discussion should be particularly valuable as you write your final papers. #26 (Apr. 24): Supply-Side Economics: The Logic and Evidence for Tax Cuts as Economic Stimulus #27 (Apr. 26): Supply-Side Tax Cuts Take Place in a Demand-Constrained Economy: What Are the Alternatives? 12