Economics

At this time, you are supposed to have read Chapter 7, "Financial Markets." You should post a response of at least one good paragraph to one or more of these questions. (You can also react to other posts.) To receive full credit, your response should be posted before class time on Wednesday

1. Wheelan explains that there are four functions for all "financial instruments": raising capital; storing, protecting, and making profitable use of excess capital; insuring against risk, and speculation. Project yourself two decades into the future, and assume that you are in a good, but not great, financial situation, maybe with a family. Prioritize these functions in terms of how you would anticipate using "financial instruments" at that point in your life. Explain why you ordered them that way.

2. Are you more "risk adverse" or "risk tolerant" when it comes to financial issues? React to one or more of the insurance anecdotes (or another with which you are familiar) in this chapter.

3. Later in the chapter, Wheelan shares some "lessons" about the markets. Comment on anything you "learned" in the anecdote about the "brownstone" or anything else.

4. On pages 130 and 131, Wheelan talks of a monkey picking stocks. (OK, a fictional monkey, maybe Curious George?) What do you make of this story? Does it change your level of "confidence" in financial markets?

5. In the section entitled "Diversify" (page 134), Wheelan urges his students to flip coins. Do you think this is a valuable activity here? Can you think of another that you would recommend for students learning about financial markets?

REMINDER: I had trouble getting this one posted. Now, obviously, it works. So, in order to receive full credit, let's say these comments need to be posted by class time on Thursday. Remember that this is a public site, and you are responsible for the content of your postings.

At this time, you are supposed to have read Chapter 6, "Productivity and Human Capital." You should post a response of at least one good paragraph to one or more of these questions. (You can also react to other posts.)

1. (pp. 98-99) "Meanwhile, one in five American children - and a staggering 40 percent of black children - live in poverty." Should our federal government be doing more to change these numbers? If so, what? If not, why not?

2. "Human capital is an economic passport." (p. 100) Provide an additional example/examples of where this is/has been the case. It can be someone specific or a more general case that illustrates what you believe Wheelan means by this.

3. Given the recent controversy over outsourcing and the on-going process of globalization, what do you make of the "lump of labor fallacy" that Wheelan introduces? (p. 103) Do we need to rethink this?  Why or why not?

4."There is a striking correlation between a country's level of human capital and its economic well-being." (p. 106) Assuming this is true, give at least three specific nations around the world where you think this will prove very positive or very harmful in the near future. Give a reason why for each nation.

5. Is rising inequality a price worth paying if it is accompanied by rising productivity? You can answer as an economist, a moralist, a patriot, or whatever... (This is most directly addressed beginning on page 111.)

6. "Take" Cornell economist Robert Frank's survey on page 114.  What would you select? What do you think that says about you? Ask three people not in the class and report on which they picked.

The Government and Taxes: Last time we were together, we looked at the "numbers". Today, we'll try to make some sense of them...

We can talk a little bit about Naked Economics Chapter 7, "Financial Markets." We can also look at anything interesting you found in the various websites from last Tuesday.

• Office of Management and Budget: Fiscal Outlook
• The National Debt: Here's the Debt Clock. 
• Grandfather Economic Report: Michael Hodges had put together this large site concerned with presenting information on the national debt. You're directed to the portion of the site concerning economic issues, but you may want to look around further.

On to the new stuff for today...

Taxes: There's an old saying that, "there's nothing certain but death and taxes." Today, we'll spend some time looking at the less depressing half of that adage... Hopefully, you've been convinced by now of the economic necessity of some form of taxation. (If not, contemplate life without roads, schools, police, and national defense for a while...)

So, if we work from the common assumption that taxes are a necessity, there remain several questions:

• Who should be taxed?
• What should be taxed?
• How (at what rate) should the tax be levied?
• What should happen to the money collected from the tax?

Let's start our look at some internet resources with this... Taxpolicy.com invites you to "Build Your Own Tax Policy." It asks you a series of questions and then sketches out your broad views on taxes as derived from those answers.

The history of taxation: Of course, the history of taxation is long. If you want more information than you can ever use, consult "The History of Taxation" at the "Taxworld" website.

Types of taxes: There are several broad categories of taxes. Economists generally classify taxes as progressive, regressive, or proportional. (Another type of tax is called a "head" tax. Everyone pays the same amount.) Let's make sure we understand the differences.

Discuss: Which type of tax do you think is most fair? Are there any that you strongly oppose? Is the sales tax regressive?

The Federal Income Tax: This, of course, is the "big one". It has been in place since 1913, and it is the single largest source of governmental revenue.

One of the legacies of the Reagan years was a period of tax reform. Now, there are six federal income tax rates: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent.

For married couples, the 15 percent rate currently applies to taxable income up to $63,700, whereas the 25 percent rate applies to taxable income between $63,700 and $128,500. Here are the more complete 2007 federal income tax rate schedules.

Discuss: Do you think it is fair to tax higher levels of income at a higher rate? Would you like to see a more or less progressive income tax?

Of course, Minnesota gets its share of income as well. You can learn more about that at the "Minnesota Department of Revenue Home Page." You can also browse around here to find a copy of the tax forms you would need to file as well.

For comparisons, here are State Income Taxes for the rest of the nation.

The "Flat" Tax: One of the "new" movements in tax reform has been the call for a flat tax. Here are two articles to consider...

• Christian Science Monitor: "US already moving toward a flat tax."
• Economist: "The flat-tax revolution."

Current Events - Articles jigsaw - We'll give you one of four articles and ask you to be reading to discuss it tomorrow. 

Homework for next session - Tuesday, December 2nd

Please have your Blog Entry #6 ASAP. (I got that posted late, so we'll give you a day or two to get that done.) 

I'll be asking you to read Chapter 10, "The Federal Reserve," out of order for Wednesday's class. You could also take care of that. 

Please also read the handout, "The Mythology of Deficits," for tomorrow.

I'd like you to read Naked Economics Chapter 8, "The Power of Organized Interests," for Thursday's class. 

Some of you might be interested in this Civics Quiz.

Supply, supply, supply: We'll look at the competing theory to the previous lesson's "grand explanation" of the economy.

For quite a while, the ideas we learned about last time were almost completely accepted in economic circles. Keynes' analysis, even though it focused almost completely on demand, was accepted as economic "gospel".

By the early 1970s, serious questions emerged about relying solely on this explanation:

• Supply "shocks", such as the OPEC oil embargo of 1973, hit the economy, but the Keynsian model alone could not offer advice for dealing with these crises.
• For the first time, America was facing rising unemployment and rising inflation. The Keynsian approach alone couldn't explain these type of departures from the "business cycle" model.
• This approach tended to be short-term in its focus, and that diverted attention from longer term issues like economic growth and standard of living.

It was out of these concerns that a new approach, supply-side economics, emerged. It had its strongest impact during the Reagan years. (Many called it "Reaganomics".) Although the overall approach doesn't find as many supporters among economists today, looking at its approach still helps fully understand macroeconomic theory.

Here it is; a brief tour of the "supply side"...

The first key idea was found in the early 1800s when a French economist named J.B. Say got a law named after him...

Say's Law: "Supply creates its own demand..." This idea held that overproduction and underproduction would never be problems since production itself generated enough income to purchase what is produced. "Gluts" or shortages would lead to price adjustments until the glut or shortage disappeared. According to the theory, full employment would soon reappear.

The experience of the Great Depression, and its sustained, high unemployment, led to an acceptance of the ideas of Keynes and discredited "Say's Law".

Modern "supply-siders":

The key to understanding this approach is the idea of incentives. Keynes assumed that an increase in demand automatically meant an increase in supply unless the economy was at "full capacity". Supply-siders disagree, saying that the production won't happen if the costs are too high.

What could make the costs too high? Things like taxes and interest rates.

The "solution"? Incentives- particularly in the form of lower taxes.

• They argued that reducing costs will lead to more production by business.
• Also, lower taxes would encourage household savings, creating more funds for investment.
• Further, some claimed that decreasing tax rates would lead laborers to work more, furthering the cycle.

The second key difference is the effect of government deficits, or the theory of crowding-out.

Here's the argument: When spending exceeds taxes, the government borrows money in financial markets. (States and locals also sell revenue bonds to finance projects.) The federal government also sells treasury bonds.

Supply-siders say these actions pull money (capital) out of the private markets and raise interest rates. These actions "crowd out" private investment, lowering output and employment.

You may have noted a potential contradiction here. How can you hope to both cut taxes to stimulate the economy and avoid budget deficits that might crowd out investment? What do you think?

Remember, although relatively few economists still hold these ideas, the concepts of "supply-side" economics still influence public policy decisions today.

The Debate over Government: What do you think? An introductory discussion...

• Is the US government responsible for ensuring that all its citizens have an adequate standard of living? If so, how should they go about doing that? If not, why not?
• To what degree should the US government pursue policies of "income redistribution?" How?
• What "transfer payments" (welfare, social security, unemployment, etc.) do you support? Why? Are their changes that you would make?
• Should recipients of welfare be required to work in order to receive benefits?
• What would be the fairest system of taxation in this country?

The Government and Its Role: Today, we'll focus on the numbers. These numbers, of course, will vary from year to year...

Where does the federal government get its revenue from?

44% from individual income taxes
36% from Social Security payroll taxes
11% from corporate income taxes
4% from excise taxes
2% from customs duties

Where does the federal government spend its money?

22% is spent on Social Security
20% is spent on defense
9% is for other "direct" spending
10% on Medicare
6% on Medicaid
15% on interest on the national debt
other areas are smaller
about 2% is spent on welfare
less than 1% is spent on foreign aid

The largest single source of revenue for state governments is the sales tax. Local governments depend most heavily upon property taxes.

The Fiscal Year 2009 Budget: These links are from the Federal Government's Office of Management and Budget, and they deal with the most recent budget proposal.

Office of Management and Budget: Fiscal Outlook: DO THIS: Look through this overview and find three budget priorities that you support and three that you disagree with. Make note of these for discussion in class.

The National Debt: This is simply the sum of all outstanding government deficits.

Here's an example of a Debt Clock that we mentioned earlier. See what your share is today...

Grandfather Economic Report: Michael Hodges had put together this large site concerned with presenting information on the national debt. You're directed to the portion of the site concerning economic issues, but you may want to look around further.

DO THIS: Browse through this report. The pictures and graphs are very user-friendly. Find five things (statistics, graphs, comparisons) that are of interest to you, and make note of them to share in class. Then, make at least two "policy recommendations" for the US government based on what you have learned.

Homework for next session - Monday, December 1st

I'd like you to read Naked Economics Chapter 7, "Financial Markets," for Monday's class. (I'll be asking you to read Chapter 10, "The Federal Reserve," out of order for Wednesday's class. You could also take care of that.)

Please have your Blog Entry #6 completed by Monday's class as well.

We've only got two days this week, but we'll try to start putting the pieces together to get more of an "overall" look at the macroeconomy.

First, I'm interested in talking both about your Blog Entry #5 posts as well as the reading in Naked Economics Chapter 6 that you were asked to do for today. 

Demand, demand, demand: We're starting to put the "big picture" together here in our look at the macroeconomy. Today, we'll look at flows in the economy, particularly as they originate on the demand side. We'll largely be looking at work pioneered by John Maynard Keynes.  This is clearly the dominant theme of chapter 6 from Economics Explained. We'll make use of that in class.

We're going to try and work through this a couple different ways.

First, we'll literally try and walk through the explanations from the reading.  (I think this material is as potentially confusing as any that we will use this quarter.) Second, we'll look at a visual representation of this.  I have a handout for you.  

Continuing with our "Oh, great. Economics has changed again. What all economists thought for decades is now being challenged" theme, here's a Freakonomics blog entry that questions this whole "Keynesian economics" idea.

The credit crisis as Antarctic expedition - As we get closer to having a more complete idea of our economy, it's time to start looking more closely at just what has been going on in recent weeks. I found this video by Marketplace Senior Editor Paddy Hirsch very helpful. Let's see what you think. It's about 8 minutes.

HOMEWORK for tomorrow - Tuesday, November 25th

I'd like you to read Naked Economics Chapter 7, "Financial Markets," for Monday's class. (I'll be asking you to read Chapter 10, "The Federal Reserve," out of order for Wednesday's class. You could also take care of that.)

Please have your Blog Entry #6 completed by Monday's class as well. (I'm having trouble posting that. I keep getting error messages, but I'll get it straightened out yet today.