Ask an Economist #3

[Whomp]

Part of the dollar rebound is due to the weakening of other economies. The opening of swap lines, investors (international redemptions), companies and banks have a need to get dollars to do business and pay back borrowing as well they see it as a safe haven.

Think of it like the shoot out at OK Corral. No one knows who's good for their debts and they don't want to be shot first.

JH---what do you make of these two charts? Seems like a little velocity would help quite a bit...
AMB (currency in circulation)

and
M2

 

[Integral]

I've lurked here a long time, but I figure it's probably time to stop sitting in the shadows as much.

I ended up sleeping through my economics class way too much back in high school, and right now I'm in between semesters due to a change of location. I'm just curious if anyone had any advice on books to pick up on economics to get some fundamentals down, and maybe then some. I know the bare basics like supply and demand, but over the past year or so my interest has shot up a good bit.

To complement Jericho's suggestions, Mankiw's intro book is supposed to be excellent, and he just published a new edition that addresses the credit crisis.

For intermediate micro that's at a reasonable mathematical level, Varian's Intermediate Microeconomics is probably the best in the field. Intermediate-level macro is a bit of a crapshoot, but two books that stand out are Bernanke's and Blanchard's.

Moving away from textbooks, Steven Landsburg's The Armchair Economist (1995) and Thomas Schelling's Micromotives and Macrobehavior (1978, reprint 2008) are readable and fairly nontechnical introductions to the field. Schelling is at a bit of a higher level than Landsburg. Both include sections about some of the shortcomings of economic methodology.

 

[Stormbringer]

Part of the dollar rebound is due to the weakening of other economies. The opening of swap lines, investors (international redemptions), companies and banks have a need to get dollars to do business and pay back borrowing as well they see it as a safe haven.

Think of it like the shoot out at OK Corral. No one knows who's good for their debts and they don't want to be shot first.

JH---what do you make of these two charts? Seems like a little velocity would help quite a bit...
AMB (currency in circulation)

and
M2

Keep in mind that this is percent change on last year. But yeah... pouring more money into the system doesn't seem to do much since M2 looks hardly responsive at all.

 

[pau17]

What are the functional differences between the National Economic Council that Summers is going to lead, and the Council of Economic Advisers?

 

[I'm Cleo!]

I've been reading Gordon Wood's The Radicalism of the American Revolution, and he discusses how the concept of "labor" shifted from "what people do not to starve" to "production in the economy," and he cites Adam Smith as being part of that conceptual change. As a thoroughly modern fellow, the idea that labor isn't "production" seems awfully strange to me, so I'd like to learn more about early modern economics. This idea Wood talks about seems interesting. Do any of you economists recognize it? Do any historians (who've studied economic thought) recognize it? Any book recommendations?

Cleo

 

[JerichoHill]

What are the functional differences between the National Economic Council that Summers is going to lead, and the Council of Economic Advisers?

THE NEC is for policy wonks and heads of Departments to coordinate economic plans. The CEA actually has economists...

I've been reading Gordon Wood's The Radicalism of the American Revolution, and he discusses how the concept of "labor" shifted from "what people do not to starve" to "production in the economy," and he cites Adam Smith as being part of that conceptual change. As a thoroughly modern fellow, the idea that labor isn't "production" seems awfully strange to me, so I'd like to learn more about early modern economics. This idea Wood talks about seems interesting. Do any of you economists recognize it? Do any historians (who've studied economic thought) recognize it? Any book recommendations?

Cleo

Well, yes, we did use to think about labor very differently, and it was the works of Smith, Locke, Hume, etc, that changed what this meant. Smith is regarded as the founder of economics, so his ideas were radically different. It was a new way of looking at an old problem and one that seemed to fit the world better. I'm not up to snuff on the historical economics work to point to a new biography, but it all starts from Smith

 

[pau17]

THE NEC is for policy wonks and heads of Departments to coordinate economic plans. The CEA actually has economists...

Could you explain a bit more? Which is more important? And isn't Summers an economist (going off your last sentence)? Thanks for the info.

 

[BasketCase]

*Primer : I'm sorry to CFC for starting the "Ask A ..." Phenomenon. However, we're about 2300 posts into this, so here's the third incarnation.

Personally I dislike the format, but an actual legit question popped into my head. Plus, this isn't the "ask a socialist" thread, so my instinct to hammer on Commies is currently dormant. So here goes:

Seeing as how national debt is a big thing these days, and getting bigger, what's an economist's opinion of debt? I've heard some pro economists say that zero debt is frequently a BAD thing. And econ didn't cover this in college. Thoughts?

 

[JerichoHill]

Could you explain a bit more? Which is more important? And isn't Summers an economist (going off your last sentence)? Thanks for the info.

THE NEC looks like its just a policy coordination board, which I guess is good when you want to be the one implementing the goals of the President across the departments. It's normally chaired by an economist.

THE CEA is just a whole slew of economists who put forth papers to advise the president and their staff. I'd rather be there.

 

[JerichoHill]

Personally I dislike the format, but an actual legit question popped into my head. Plus, this isn't the "ask a socialist" thread, so my instinct to hammer on Commies is currently dormant. So here goes:

Seeing as how national debt is a big thing these days, and getting bigger, what's an economist's opinion of debt? I've heard some pro economists say that zero debt is frequently a BAD thing. And econ didn't cover this in college. Thoughts?

It really depends on the debt that you're holding. If I can talk about debt as say, an individual's debt holdings, you'd probably agree that student loan debt is better debt to have than credit card debt. Same thing goes for the federal budget.

ZERO debt can be good or bad, because that's got to be just a moment of time measure. If by ZERO debt you mean a balanced budget every year, then that has more downside than upside, in that the government will lose the ability to provide fiscal stimulus. When the government throws on the breaks the same time that the economy does, that just makes the recession sharper and deeper. This is where neo-Keynesianism fits in.

So, before I answer further, am I right about what you meant by zero debt, or did you mean something else?

 

[BasketCase]

Not exactly, but your answer worked out fine.

Since you can still owe debt if you do balance your budget (if you already owed debt on a previous year), I consider "debt" to be the total amount you owe. I use "deficit" to describe red ink in a single budget.

 

[pau17]

Debt only becomes bad when it is not invested in things that will yield good monetary or social returns, or when it gets so high that it threatens the stability of the currency. Otherwise, debt is a perfectly useful tool to leverage opportunities on the national scale that will yield fruit in the future, or to spread out the burden of certain task (e.g. winning a war) over generations that will all benefit from it.

If you have zero debt, supposedly you are not taking advantages of the opportunities that should be out there to be doing one of these things.

 

[innonimatu]

Debt only becomes bad when it is not invested in things that will yield good monetary or social returns, or when it gets so high that it threatens the stability of the currency. Otherwise, debt is a perfectly useful tool to leverage opportunities on the national scale that will yield fruit in the future, or to spread out the burden of certain task (e.g. winning a war) over generations that will all benefit from it.

It seems that you're talking about government debt. Assume a closed national economy (or a "world government") where all debt is internal. What you're saying is that debt is necessary in order to do good things everyone will benefit from. Well, that's the modern rationale for taxation. As debt cannot create new resources, only change the way existing resources are allocated, when you're saying that debt is good you're actually saying that the economic rules of your society distribute resources in a wrong way to start with, making reallocation by debt necessary. Since debt must be repaid, and it usually includes interest, the end result will be a return to the original wrong allocation of resources as debt is repaid.

Sure, the process is dynamic, so things are not this simple. But it should make people question the standard defense of debt as a good thing. Can it be, also, a sign that something is wrong to start with?

 

[silver 2039]

I used to be considering an economics major but at this point I've largely abondanded it. I'm scared off my the math required since I'm fairly miserable at math. Hate it too. Is there much math in economics at the undergraduate level? And does economics really have any value at the undergrad level? Don't you at least need a masters or PhD to make it worthwhile in terms of career options?

I'm ditching it in favor of political science, I'm not sure that's the best choice either but meh, no math at least.

 

[Mise]

As debt cannot create new resources, only change the way existing resources are allocated

Every time we buy and sell something, we change the way existing resources are allocated. A farmer sells his meat to a supermarket, the supermarket sells the meat to consumers. The resource (meat) is being allocated first to the supermarket, and then to us. It's being allocated via some kind of market (a meat market, if you will) from one place to another place.

Are you saying that allocating resources from the farmer to the dinner table is a bad thing? That the only valuable action is one that "creates new resources"?

when you're saying that debt is good you're actually saying that the economic rules of your society distribute resources in a wrong way to start with, making reallocation by debt necessary.

You appear to be suggesting that any tool (such as debt) that reallocates goods from one place to another implies that other tools (such as taxation) are inadequate. I hope you can see how much of a truism that is!

If I'm signing a legal document, I'll use a pen. A pencil is inadequate, because it can be erased. If I use a pen, it can't be erased. My use of a pen implies that the use of other tools is inadequate -- or more accurately, less adequate -- than use of a pen. Are you saying that this, in some bizarre way, means that there is something inherently wrong with pencils? That pencils are inherently inadequate and should be scrapped?

Since debt must be repaid, and it usually includes interest, the end result will be a return to the original wrong allocation of resources as debt is repaid.

Just as I'm willing to pay a premium to use a pen instead of a pencil when signing legal documents, or to have meat on my dinner table instead of on an abatoire's stock room, so too am I willing to pay a premium to use debt as my tool instead of other tools. Interest is that premium. Are you saying that I'm wrong to choose a pen over a pencil, or that I shouldn't pay more to use a pen over a pencil, even if it means I can't sign an employment contract, or apply for a passport?

 

[plarq]

I used to be considering an economics major but at this point I've largely abondanded it. I'm scared off my the math required since I'm fairly miserable at math. Hate it too. Is there much math in economics at the undergraduate level? And does economics really have any value at the undergrad level? Don't you at least need a masters or PhD to make it worthwhile in terms of career options?

I'm ditching it in favor of political science, I'm not sure that's the best choice either but meh, no math at least.

I seldom see people confessing that their math sucks. But if that's true, play with humanistic studies or social/political studies.

Otherwise, you can try agriculture/biology.

 

[Atticus]

Sorry if this has been asked before and is too simple: Suppose you have loaned amount S of money and the annual interest is p% and it accumulates (is it compund interest?). How is the interest calculated if you pay the loan say after 102 days?

Mathematically the whole sum should of course be S (1+p/100)^(102/365), but I have suspicion that it doesn't work that way in real world. (And also that the practice varies in different countries, but I'd like to know at least one way it is done).

 

[WillJ]

Here’s a quote from Card and Krueger's famous 1994 paper:

An alternative to the conventional competitive model is one in which firms are price-takers in the product market but have some degree of market power in the labor market. If fast-food stores face an upward- sloping labor-supply schedule, a rise in the minimum wage can potentially increase employment at affected firms and in the industry as a whole.

[emphasis mine] Do they actually need to specify the bolded part? Unless I’m mistaken, if firms have monopsony power in the labor market, regardless of the structure of the product market (whether it’s a monopoly, or monopsony, or whatever), less than the economically efficient quantity of labor will be purchased, at a lower wage, and it’ll be possible to have a minimum wage above this wage that will cause a greater level of employment (unless, of course, the minimum wage is set above the marginal productivity of the quantity of labor originally bought).

Am I right or wrong? Does it actually depend on the structure of the product market somehow?

 

[Mise]

Sorry if this has been asked before and is too simple: Suppose you have loaned amount S of money and the annual interest is p% and it accumulates (is it compund interest?). How is the interest calculated if you pay the loan say after 102 days?

Mathematically the whole sum should of course be S (1+p/100)^(102/365), but I have suspicion that it doesn't work that way in real world. (And also that the practice varies in different countries, but I'd like to know at least one way it is done).

The problem is that every time you make a payment, you pay off the interest plus a little bit of the capital, which therefore reduces the interest on the next payment. To make the payments the same amount each month, every month you pay off more and more capital. I don't know how it works in real life, but I got a formula for monthly mortgage payments by looking at the javascript on this site: http://www.bbc.co.uk/homes/property/mortgagecalculator.shtml

I have no idea where that formula came from, though, but if you just want to calculate something then it works I guess. The formula is:

Monthly = S * r/d * 1/(1-(1/(1+r)^T))

Total = S * r * T * 1/(1-(1/(1+r)^T))

where S is your total amount borrowed, r is interest rate, T is total length of repayment, and d is the frequency of payments in the inverse units as T (so if you repaid a loan over 1 year with 12 monthly payments, T would be 1 [units of years] and d would be 12 [units of years^-1, i.e. "per year"]).

EDIT: This site: http://www.mortgagesexposed.com/ (which uses frames ) has more info, but I still can't find the bit where they explain how the above formula arises! Click on "book on-line" at the top, and then "the technical bits" on the left frame. The formula in there is basically the same as the formula above, but with slightly different notation.

 

[dutchfire]

It seems that you're talking about government debt. Assume a closed national economy (or a "world government") where all debt is internal. What you're saying is that debt is necessary in order to do good things everyone will benefit from. Well, that's the modern rationale for taxation. As debt cannot create new resources, only change the way existing resources are allocated, when you're saying that debt is good you're actually saying that the economic rules of your society distribute resources in a wrong way to start with, making reallocation by debt necessary. Since debt must be repaid, and it usually includes interest, the end result will be a return to the original wrong allocation of resources as debt is repaid.

Sure, the process is dynamic, so things are not this simple. But it should make people question the standard defense of debt as a good thing. Can it be, also, a sign that something is wrong to start with?

Well, debt for long term investments is perfectly rational in my opinion.

Standard example: The government wants to build a road that will benefit the people for 50 years, but will cost a lot of money. It would be stupid to let the taxpayers pay for this in one year, and then nothing for the remaining years. What you do is lending the money for the road, and spreading the taxation of that money (+interest) over the 50 years it will be used.