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We can take the first thirty minutes or so to review before most of you take the Macroeconomics and International Economics Exam.

Here's a link to the review page. (You can bring a single sheet of notes again if that is helpful to you.)

Here's the format:

• 25 multiple choice (25 points)
  
• 3 problems - components of GDP, currency conversions, effects of Federal Reserve actions on the money supply (10 points total)
• 3 "short essay" - You choose 3 from the list of options and can write outside of class. Due on Wednesday, May 8th. (5 points each)

These will be due on Wednesday, May 8th.

A. Martians have landed on the earth, and they want to better understand the American economy. You are allowed to teach them about the two (and only two) economic measures or indicators that you believe reveal the most about the economy. Which two would you choose to explain? Why?

B. Assume that the United States needs a new "chief economist". You have been tapped for the job. At your Senate confirmation hearing, you are asked if your macroeconomic "view" relies more heavily on the "demand" approach or the "supply" side. What would you tell them? Why?

C. Taxes are, however unfortunately, a fact of life in America. Assume that you are on the committee appointed to look at "tax reform". What would you recommend as the best system of taxation in America? (You don't need to talk about specific numbers, but be sure that your choices reflect the values you would want to emphasize in our society.)

D. Here's a "softball" for you. What do you believe should be the role of government in managing and/or regulating the economy?

E. The Federal Reserve Board has been responsible for conducting our nation's money supply for decades. Critics charge that it is often ineffective, sometimes making things worse. Based on what you know, should changes be made in the way the Fed operates? Why or why not?

F. You and one of your Economics classmates have recently been elected the leaders of two of the world countries. Using specific examples (names, products, and countries), demonstrate your understanding of the terms "absolute advantage" and "comparative advantage".

G. Assume that you are teaching a class of second graders some basic economic principles. You need to explain why the nations of the world benefit from trade. Keeping in mind that the authors of The Armchair Economist will sue plagiarists, develop an analogy or story that gets this point across. (By the way, The Armchair Economist was the source of the "Iowa Car Crop" story...)

H. You are the new headline writer for the StarTribune. Tomorrow's issue is a special edition devoted to globalization. You are in charge of writing five "headlines" for the pro-globalization forces and their best arguments and five "headlines" for the anti-globalization forces and their best arguments. What would those headlines be?

I. The rest of the world has gotten tired of arguing about globalization. They have left you to cast the deciding vote. Is globalization helpful or harmful? Why?

J. You have been named the President of the World Bank. You unexpectedly have an additional $15 billion in funds to loan out for the purposes of development assistance. In broad terms, tell us what you would do with that money. Where/how would you spend it?

HOMEWORK for tomorrow - Friday, May 3rd

I'd like all of the Naked Economics blogs to be posted by the end of the weekend. There is now an Extra Credit Blog Entry posted that will has choices from the "Epilogue."

You should now have access to a copy of Thomas Friedman's, The World Is Flat. Please have chapter 1, "While I Was Sleeping," read for class on Monday. That's pages 3 through 50. You'll again be required to make blog entries related to the readings on occasion.

We'll get right to our simulation today...

Remember, in addition to "normal" open market operations, the Fed has also purchasing hundreds of billions of dollars in Treasury securities over the last several years as part of "QE2," its expansionary monetary policy of "quantitative easing." While that wouldn't always be an "action item" at an FOMC meeting, we'll let you talk about it as well if time permits.

Federal Reserve Board simulation: Even though the "real" one is taking place in another weak, we'll do our simulation of a Federal Reserve Board Federal Open Market Committee (FOMC) meeting. You'll each play a role as either a representative of one of the Federal Reserve districts, a member of the Board of Governors or as an economist. The federal funds rate (the one you will consider changing) is currently targeted at 0.25%. (Four years ago, it was at 1.00%. When I did this six years ago, it was at 5.25%.) Those of you wanting more historical data should look at changes in the federal funds rate over time.

Agenda for the Simulation:

• Chairman Bernanke calls the meeting to order. We can pretend that it is the next scheduled meeting of the FOMC, which is a two-day meeting that begins April 30th in Washington DC.
  
  
• Federal Reserve District President presentations: (We'll go through the districts in "numerical" order. In your two minutes of fame, try to cover these...)
  
  
• provide an overview of current economic conditions in your district
  
• discuss the prospects for economic conditions for the near future
  
• identify any economic issues of special concern at the present time
  
• recommend whether short-term interest rates should be raised, lowered or kept the same.
• Chairman and Board of Governors offer recommendations regarding the direction for short-term interest rates
  
  
• Discussion of issues of controversy
  
  
• Each member of the Board of Governors and the Bank presidents cast a vote regarding the direction for interest rates, with the decision going to the majority.

HERE ARE SOME RESOURCES TO HELP IN YOUR PREPARATION...

Preparing for the simulation: Many of you will represent one of the districts. Figure out who you "are" by consulting "your" district's home page. Browse around there for a while. In addition, go to the "Beige Book" below, and be sure to read both the overall summary and the page for "your" district.

Several of you will represent the Federal Reserve Board of Governors itself, and another of you will be Ben Bernanke. You might brief yourselves on the summary information, and you might browse the homepage of the Board of Governors of the Federal Reserve. By the way, only four Reserve Bank Presidents (plus the NY Fed President) at a time actually serve on the FOMC, but we'll let you all come to the meeting...

The Federal Reserve Districts and Banks - Clicking on the area of the map you represent will take you to that district's home page. There you can find information relating to your region.

The FRB "Beige Book - This collection of information is compiled 8 times a year for use at the FOMC meetings. We'll use the April 17th data. This link will take you to the overall summary. In addition, the links on the top will take you to "your" district. There, you can find a one "page" overview of recent developments in your district.

CHECK THESE OUT:

Here are the text of the minutes and press release issued on March 19th-20th, at the end of the last FOMC meeting.

HOMEWORK for tomorrow - Thursday, April 25th

Naked Economics Blog Entry #5 is now due.

Our new Economics material for today will center around organizing a preparing for a simulation of a Federal Reserve Board's Federal Open Market Committee meeting that will be held tomorrow.

Banking and the Federal Reserve System:

The Federal Reserve System was created in 1913 to strengthen the nation's banking systems. You can learn more about how it works by consulting "The Federal Reserve System."

The nation is divided into twelve districts, and most banks within each district are members of the system. Each district has a Federal Reserve Bank. These twelve banks are governed by the seven members of the Federal Reserve Board in Washington DC. These members are appointed by the President to serve fourteen year terms, so they are designed to be the "independent" authority for monetary policy. The Chairman of the Federal Reserve system is also a Presidential appointment, and that is currently Ben Bernanke. (Alan Greenspan finished finished his fifth 4-year term as Chairman several years back. Reagan, Bush, Clinton and Bush all named him to that post.)

The "Tools of Monetary Policy" - The Fed has three main tools at their disposal.

Reserve requirements: These are the percentages of deposits that banks need to keep on hand in their vaults or on deposit at a Fed bank.

• If the reserve requirement were raised, banks would have less money available to lend.
• If the reserve requirement was lowered, banks would be able to increase lending.

Discount rate: This is the interest rate that the Fed charges banks for loans.

• When the discount rate rises, it would typically slow economic activity.
• When the discount rate is lowered, it would typically stimulate economic activity.

Open market operations: This is when the Fed buys or sells previously issued government (Treasury) securities.

• If the Fed wants to expand the money supply (boost the economy), they buy Treasury securities. That puts additional money into the banking system, and that should influence interest rates downward.
• If the Fed wants to tighten the money supply (slow the economy), they sell Treasury securities. That removes money from the system, and that should influence interest rates upward.
  

Here's Bankrate.com's tracking of a wide variety of interest rates.

Federal Reserve Board simulation: Tomorrow, we'll do a simulation of the Federal Reserve Board and a Federal Open Market Committee (FOMC) meeting. You'll each play a role as either a representative of one of the Federal Reserve districts or a member of the Board of Governors.

This group normally meets eight times a year. The FOMC discusses current and near-term economic and financial conditions, prior to making a decision to raise, lower or keep short-term interest rates the same. We'll "deliberate" after hearing the statements from the member banks.

The federal funds rate (the one you will consider changing) is currently targeted at 0.25%. (Two years ago, it was at 1.00%. When I did this five years ago, it was at 5.25%.) Those of you wanting more historical data should look at changes in the federal funds rate over time.

Agenda for the Simulation:

• Chairman Bernanke calls the meeting to order. We can pretend that it is the next scheduled meeting of the FOMC, which is a two-day meeting that begins April 30th in Washington DC.
  
  
• Federal Reserve District President presentations: (We'll go through the districts in "numerical" order. In your two minutes of fame, try to cover these...)
  
  
• provide an overview of current economic conditions in your district
  
• discuss the prospects for economic conditions for the near future
  
• identify any economic issues of special concern at the present time
  
• recommend whether short-term interest rates should be raised, lowered or kept the same.
• Chairman and Board of Governors offer recommendations regarding the direction for short-term interest rates
  
  
• Discussion of issues of controversy
  
  
• Each member of the Board of Governors and the Bank presidents cast a vote regarding the direction for interest rates, with the decision going to the majority.

HERE ARE SOME RESOURCES TO HELP IN YOUR PREPARATION...

Preparing for the simulation: Many of you will represent one of the districts. Figure out who you "are" by consulting "your" district's home page. Browse around there for a while. In addition, go to the "Beige Book" below, and be sure to read both the overall summary and the page for "your" district.

Several of you will represent the Federal Reserve Board of Governors itself, and another of you will be Ben Bernanke. You might brief yourselves on the summary information, and you might browse the homepage of the Board of Governors of the Federal Reserve. By the way, only four Reserve Bank Presidents (plus the NY Fed President) at a time actually serve on the FOMC, but we'll let you all come to the meeting...

The Federal Reserve Districts and Banks - Clicking on the area of the map you represent will take you to that district's home page. There you can find information relating to your region.

The FRB "Beige Book - This collection of information is compiled 8 times a year for use at the FOMC meetings. We'll use the April 17th data. This link will take you to the overall summary. In addition, the links on the top will take you to "your" district. There, you can find a one "page" overview of recent developments in your district.

CHECK THESE OUT:

Here are the text of the minutes and press release issued on March 19th-20th, at the end of the last FOMC meeting.

SITE OF THE DAY: FederalReserveEducation.org is great. Check it out. We'll take a closer look at their "The Economy - Crisis & Response" feature yet this week.

HOMEWORK for tomorrow - Wednesday, April 24th

Naked Economics Blog Entry #5 is due tomorrow.

Just a reminder that you are being asked to read through Chapter 9 in Naked Economics over the weekend. Please have read Chapter 10 read by Tuesday's class.

We'll start tout with a good video clip. Here's another Hans Rosling clip (2009) that I think you'll like from those TED conferences - "Let my dataset change your mindset." It's a good segue into the types of international issues we will soon be considering. (As a reminder, here's the Gapminder webpage.)

What is money? I know, dumb question. However, the reality is a bit more complicated.

Money is something that we can use to make purchases with. Generally speaking, there is a continuum of ways to make purchases, but some are clearly easier than others. Liquidity refers to the ease with which an instrument can be used to buy things.

What is considered "money"? Certainly, the currency and coins in your pocket are money. What about checks? Credit cards? Savings accounts? Bonds? Well, the answer depends on just who you are asking.

The Federal Reserve holds that money has three functions:

• serves as a medium of exchange - People will accept money in exchange for goods and services.
• serves as a standard of value - Money is a unit of measurement that can be used to specify the value of other things.
• serves as a means of saving or storing purchasing power - Money is a form in which wealth can be held.
  

Various definitions of "Money Supply": These are the most common classifications. They get "bigger" as you go down the list.

• M1: currency (in circulation), demand and checkable deposits (banks and thrifts)
• M2: M1 and savings accounts, additional (small time) deposits, and retail money-market funds
• M3: M2 and additional (longer time) deposits, and eurodollars, and institutional money-market funds

"Money Supply for Dummies" - If you can get past the demeaning title, this is a really informative article.

If you want to look at changes in the money supply (M1) over recent years, you can manipulate this data from "Economagic" to produce graphs.

Banking and the Federal Reserve System: To fully understand banking, you need to get beyond seeing banks as simply places where people keep money. Only a small percentage of deposits are actually on hand at a bank at any given time. Instead, we operate on the fractional reserve system. Banks keep a percentage of deposits on hand, but they are able to loan out the remaining funds in order to generate profits. Think about how that fits into our macroeconomic model of the economy.

The Federal Reserve System was created in 1913 to strengthen the nation's banking systems. You can learn more about how it works by consulting "The Federal Reserve System."

The nation is divided into twelve districts, and most banks within each district are members of the system. Each district has a Federal Reserve Bank. These twelve banks are governed by the seven members of the Federal Reserve Board in Washington DC. These members are appointed by the President to serve fourteen year terms, so they are designed to be the "independent" authority for monetary policy. The Chairman of the Federal Reserve system is also a Presidential appointment, and that is currently Ben Bernanke. (Alan Greenspan finished finished his fifth 4-year term as Chairman several years back. Reagan, Bush, Clinton and Bush all named him to that post.)

The "Tools of Monetary Policy" - The Fed has three main tools at their disposal.

Reserve requirements: These are the percentages of deposits that banks need to keep on hand in their vaults or on deposit at a Fed bank. (The Fed last changed this rate in April of 1992, and it is a rarely used tool of monetary policy.)

• If the reserve requirement were raised, banks would have less money available to lend.
• If the reserve requirement was lowered, banks would be able to increase lending.

Discount rate: This is the interest rate that the Fed charges banks for loans. Member banks can borrow from the "discount window" at this lower rate. This is now rather symbolic, as the Fed considers itself to be the "lender of last resort." Banks are encouraged to borrow from other banks.

• When the discount rate rises, it would typically slow economic activity.
• When the discount rate is lowered, it would typically stimulate economic activity.

Open market operations: This is when the Fed buys or sells previously issued government (Treasury) securities.

• If the Fed wants to expand the money supply (boost the economy), they buy Treasury securities. That puts additional money into the banking system, and that should influence interest rates downward.
• If the Fed wants to tighten the money supply (slow the economy), they sell Treasury securities. That removes money from the system, and that should influence interest rates upward.
  

As of today, the discount rate is at 0.75% (down from 6.25% when I taught Econ in Spring 2007), and the prime rate is now at 3.25%. (It was 8.5% in 2007.) Both of those rates are unchanged from three years ago. These drive a wide variety of interest rates for different types and durations of borrowing.

SITE OF THE DAY: The FED's own education site is pretty good. Check it out. We'll be setting up a simulation of a FED meeting yet this week.

Assuming we have time, I was planning to close with another video clip. (We'll do it another day if need be.) Maybe some of you have heard of Khan Academy. (It'll come up in a couple weeks when we talk 21st century education.) Here's a clip of Sal Khan's talk at TED 2011 when he explains what he has set out to do. (I was originally planning to show a clip with him talking about the economic crisis in CNN a while back, but I thought this might help lay the groundwork for both our upcoming look at education and his own program.)

HOMEWORK for next session - Tuesday, April 23rd

Naked Economics Blog Entry #5 is posted, and it will be due on Wednesday.

At this time, you are supposed to have read Chapter 8, "The Power of Organized Interests," and Chapter 9, "Keeping Score." You should post a response of at least one good paragraph to one or more of these questions by the end of Wednesday, April 24th. (You can also react to other posts.)

CHAPTER 8

1. "When it comes to interest group politics, it pays to be small." (page 179) Imagine that your world is limited to the MPA community. Give an example that you think supports this claim made by Wheelan. (You should avoid mentioning names if it might be controversial or hurtful in any way.)

2. What SHOULD we do when it comes to ethanol?

3. How do we keep interest groups from using/abusing the political process to "generate regulation that either helps them or hobbles their competition?" (page 181) Should we even try to control this? Why or why not?

4. Is giving a president "fast-track authority" desirable? (page 186) Why or why not?

5. "Creative destruction" is a term coined by Joseph Schumpeter. (page 183) Using examples from today's world, comment on the desirability and/or drawbacks of such a process from your perspective.

CHAPTER 9

1. After you finishing reading the joke on pages 191-192 you tell yourself, "I can be funnier than that." Here's your chance. Write an anecdote, story, joke that makes a commentary about our current economy. Keep it clean, and no stealing someone else's material.

2. After reading about the Gross Domestic Product, assess its usefulness as a measure of economic progress. Is there another measure you think we should use?

3. During the Great Depression, FDR once said that we have "nothing to fear but fear itself." (page 202) Is that good economic advice for today? Explain why or why not using a specific example or examples.

4. We've spent time talking about both monetary and fiscal policy. (pp. 206-209) Assume that an economic recession is on the horizon. (OK, this year you can assume it is already here...) Which of these tools, or what combination, would you want government to use?

Initially, we'll look at taxes today, and then we'll take two cracks at figuring out the "big picture" of the economy.

Here's a much more extensive set of debt (and other) clocks than the one I showed you yesterday.

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.

(As of 2011, these specific numbers were correct.) For married couples, the 15 percent rate currently applies to taxable income up to $69,000, whereas the 25 percent rate applies to taxable income between $69,000 and $139,500. Here is the Internal Revenue Service website. 

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's some data on State Income Taxes for the rest of the nation.

Looks like we missed it. For the purposes of federal income taxes, "Tax Freedom Day" came on April 18th. However, if you were living in Canada, it would not be until June.

>>>>>>>>>>>>>>>>>>>>>

Demand, demand, demand: Let's 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. (I think this material is as potentially confusing as any that we will use this quarter.) We'll look at a visual representation of this.  I have a handout for you.

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

By the early 1970s, serious questions emerged about relying solely on Keynes' 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.

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.

Naked Economics Blog Entry #4 is posted (Chapters 6 and 7). You should be caught up through the four of those ASAP.

Today, we'll take a look at how the government gets its money and how it spends it. The budget, the budget deficit and the national debt will be the big topics for the day.

To set the mood, here's an interesting visual. What does one TRILLION dollars look like?

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

Here's the history of the US budget deficits and surpluses since 1940.

Here's a look at the CBO budget inforgraphic. Here's a slideshow with projections for the future budget and overall economy.
Here's what the future looks like for Medicare and Social Security.

Let's check out Budget Explorer: The Complete U.S. Federal Budget. You'll get your chance to balance this whole thing...

Obama's 2012 Budget Proposal: How It's Spent - Here's an interesting graphical look at the budget proposal for FY 2012 done by The New York Times.

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.

What are the risks associated with budget deficits? (Be sure you understand the theory of "crowd out" by the time we're done.)

We'll give you a few minutes to read "The Mythology of Deficits" and see what you think about that.

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... I also have a series of charts from the report cited below to show you.

Grandfather Economic Report: Michael Hodges had put together this large site concerned with presenting information on the national debt. (To make it clear, I'm NOT agreeing with all of this guys recommendations or conclusions. I just think it is interesting what an "average" citizen is doing here.)

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. We'll share those in a while.

The Naked Economics Blog Entry #4 is posted (Chapters 6 and 7). I'm asking you to have that posted before tomorrow's class if possible, but please make sure it is taken care of that no later than this weekend.

• Taxes were due on Monday. What does your group see as the two biggest benefits of a system of taxation like that of the United States? What are the two biggest drawbacks?
  
  
• When it comes to the economy, does our government try to do too much or too little?
  
  
• Should government do more to redistribute income?  Why or why not?
  
  
• What experiences have you had with the type of issues raised in "Economics of Information?" (Some of the issues included adverse selection, racial profiling, incomplete information, asymmetry of information, and branding/signaling.)

Fiscal v. Monetary Policy - Let's make sure you understand the basics of these two concepts, since we'll come back to them again and again.

Today we have two more big "economic indicators to consider: Inflation and Unemployment

Inflation: We'll be looking at inflation today, since it might be the economic issue of most concern to policymakers and consumers. (I suppose that would be more true when the economy isn't emerging from its most serious challenges since the Great Depression...) This topic will come up several times, but we'll get some of the basics out of the way.

Defining "inflation": Inflation is a sustained increase in the overall level of prices. The most widely reported measurement of inflation is the consumer price index (CPI).

The Consumer Price Index measures prices of goods and services in a market basket of goods and services that is intended to be representative of a typical consumer's purchases. The percentages currently used to describe the categories of goods and services that market basket are as follows.

• Food and beverages 15 %
• Recreation 6 %
• Housing 42 %
• Education 3 %
• Clothing 4 %
• Communication 3 %
• Transportation 17 %
• Medical care 6 %
• Other goods and services 4 %

Consumer Price Index and Inflation, February 2013 - This includes the text of the most recent inflation report from the National Council on Economic Education. We can take a look at some of the graphs and charts for a minute. This little application is pretty cool...

You probably looked at hyperinflation with Germany after WWI last year. Here and here are signs that your economy is undergoing hyperinflation.

Much of the following information is simply copied from the EconEd website for our convenience in class today...

Causes of Inflation: Over short periods of time, inflation can be caused by a decrease in production or an increase in spending. We get the names for the two major types from this: demand-pull and cost-push.

Inflation resulting from an increase in aggregate demand or total spending is called demand-pull inflation.

Inflation can also be caused by increases in costs of major inputs used throughout the economy. This type of inflation is often described as cost-push inflation. Increases in costs push prices up.

A relatively minor, third cause - Over longer periods of time, that is, over periods of many months or years, inflation is caused by growth in the supply of money that is above and beyond the growth in the demand for money.

Costs of Inflation: Here's one short summary of some of the costs of inflation.

• High rates of inflation mean that people and business have to take steps to protect their financial assets from inflation.
  

• High rates of inflation discourage businesses planning and investment as inflation makes the forecasting of prices and costs more difficult.
  

• Inflation does reduce the purchasing power of money.

• Inflation does redistribute income. People on fixed incomes such as pensions or whose salaries are slow to adjust are negatively affected by unexpected inflation.

(I HAVE NO IDEA WHY THE FONT CHANGES SIZE...)

Unemployment: This, in many ways, is sort of the flip side of what we did with inflation.

Defining "unemployment:  The unemployment rate is the percentage of the U.S. labor force that is unemployed. It is calculated by dividing the number of unemployed individuals by the sum of the number of people unemployed and the number of people employed. An individual is counted as unemployed if the individual is over the age of 16 and is actively looking for a job, but cannot find one. Students, those individuals who choose to not work, and retirees are therefore not counted in the unemployment rate.

The Current State of Unemployment: This is a lot of numbers, but just browse it for a couple minutes. Here are the newest charts from the Bureau of Labor Statistics.

Questions to consider and discuss:

• What surprises you (if anything) about the statistics and graphs above? What explanations do you have for the discrepancies?

• In January 2002, a falling unemployment rate was accompanied by a significant fall in employment. How can the number of individuals employed fall and the unemployment rate fall at the same time?
  
  

Unemployment in your backyard (or anyone else's) ... You can go to the Bureau of Labor Statistics website and check the Local Area Unemployment Statistics for your city and/or state.

Answer these questions:

1. Is unemployment in our area higher, lower, or roughly the same as the national average? What about your favorite vacation spot? Your grandma's hometown?

2. What factors contribute to our area's unemployment rate? (Think about recent news...)

• Which industries have expanded?
• Which industries have contracted?

3. Will the recent changes affect you?

4. If avoiding inflation were your highest concern, where should you move? If you like the idea of unemployment, what cities would you recommend for your next move?

• Do you think unemployment benefits are appropriate in Minnesota?
• What changes, if any, would you make?
• Do you think these benefits are a disincentive to work?
  
  

The Relationship between Inflation and Unemployment: The Phillips Curve - Economists have long claimed an inverse relationship exists between unemployment and inflation. This "Phillips Curve" quickly gets very technical, but you can see the basics at this link. Browse around for a bit.

HOMEWORK for tomorrow - Thursday, April 18th

Please continue in your reading of Naked Economics. You should have Chapter 7 ("Financial Markets") read for Thursday.

Blog Entry #4 (Chapters 6 and 7) will be posted yet today and it will be due on Friday.

The Gross Domestic Product:

Things to note:

• Both goods and services are included.
• Current market prices are used to aggregate outputs. Government purchases, many of which do not occur on markets, are valued at their cost of production.
• Only final goods and services are included. This avoids "double counting".
• US GDP measures production by US citizens and foreigners alike inside the borders of the United States.
• GDP is an annual flow, a rate of production for the economy.

What's the difference between GDP and GNP (gross national product)? Many people, including your teacher, grew up discussing GNP. In 1992, the United States joined the rest of the world in using GDP as its national economic accounting system. GDP measures output produced inside the United States, whether by foreigners or US citizens. GNP, by contrast, measures output of US citizens, no matter where they are located in the world. As a result, US GNP tends to be about .3% higher that GDP, but that gap has been shrinking.

Here's a list of GDPs by Country you might find interesting. Scroll down that page to find some links to similar lists. Here's another visual you might find interesting.  What if individual states were renamed for countries with similar GDPs?

What other names are used to refer to the nation's annual output of goods and services? Some you will find in the media include: output, total output, national output, income, total income, national income, and aggregate supply.

How do we calculate GDP? A formula created by John Maynard Keynes is used to total the four categories that make up the Gross Domestic Product.

GDP = C + I + G + NX (or X-M)

or Gross Domestic Product = Consumption + Investment + Government Expenditure + Net Exports

Don't forget the difference between nominal and real GDP values. Real GDP takes inflation into account.

Of course, GDP per capita is often the more useful statistic for us to consider. Here is what Wikipedia shows as the countries with the highest (and lowest) GDPs per capita. Here's an extensive set of GDP per capita graphs that look at all sorts of things.

Is it the "Gross Deceptive Product"? Here are some potential weaknesses in using GDP.

• Some things are produced but never sold, so they are not included in GDP. What examples can you think of?
• Some expenditures are hidden from data gathers, so they are unrecorded transactions. Examples?
• Some items are included in GDP that do not reflect net benefits to society. Consider the Exxon Valdez.
• Government expenditures are based at cost, despite the fact that market forces might value them differently.
• Cross-country comparisons are made difficult because of climate, cost of living, and other differences.
  
  

Let's test your understanding: Which of the following raise GDP by $500?

• A steel company sells $500 of steel to an auto manufacturer.
• You are hired by the government to shuffle paper uselessly for $500.
• You are hired by General Motors to shuffle paper uselessly for $500.
• An antique dealer sells a $5000 painting, pocketing her 10% commission.
• You receive $500 in an unemployment insurance check from the government.
• You win $500 betting on the Mounds Park Academy soccer team.
  

SITE OF THE DAY #2:  College Budget Calculator

As I mentioned earlier, we'll do some "personal" or "consumer" economics throughout the course at different times. Sometimes, it will match up perfectly with what we are doing in class. Other times, I'll just stick it in when I feel like it. (This is one of those times...)

Let's take a closer look at the costs of college. You can do this in a number of places on the web, but I thought this was pretty user friendly.

Before you begin: You may need to make some assumptions. For example, if you have applied to several schools, run the program with the various numbers. Or, try it each way depending on whether you do or don't get that "big scholarship". In many cases, you'll have to make estimates, but maybe I can help with those. Remember, if you come up with "scary" answers, that is what college loans and other sources of financial aid are for. Don't just decide not to go...

DO THIS: Run through the activity first doing your best guesses on college you'll attend, costs, and income.

Now, do it for another of your college choices, or change another significant variable (live off campus, get a job, whatever). Share that new figure if you would like. We can discuss any of this today if you'd like. Alternatively, we can come back to it in the future.

HOMEWORK for tomorrow - Wednesday, April 17th

You should have three Naked Economics blog postings done by class time tomorrow if you want to be on schedule. If you are behind, get them done. (There is a separate blog entry for each one that you should be posting on.)

Please have Chapter #6 ("Productivity and Human Capital") of Naked Economics read for class tomorrow.

• "How to Lie Without Statistics"
• "The Enormity of the Fiscal Gap"
• "Declining Admissions Rates at Top Colleges"
• "An Auction"
• "Taxes Per Person"

• "How to Stack the Cards in a Broccoli v. Chocolate Study"
• "Not from the Onion:  NYC to Stop Paying Teachers to Do Nothing"
• "Who Really Failed?"
• "Why Do Colleges Care About Extracurricular Activities?"

• "Why Businesses Don't Experiment"
• "The Long-Term Effects of Short-Term Emotions"
• "Monkeys Like to Mix It Up"
• "The Power of Defaults in How We Eat"

Defining "unemployment:  The unemployment rate is the percentage of the U.S. labor force that is unemployed. It is calculated by dividing the number of unemployed individuals by the sum of the number of people unemployed and the number of people employed. An individual is counted as unemployed if the individual is over the age of 16 and is actively looking for a job, but cannot find one. Students, those individuals who choose to not work, and retirees are therefore not counted in the unemployment rate.

The Current State of Unemployment: The most recent figures we have take us through December.  This is a lot of numbers, but just browse it for a couple minutes. Here are the newest charts from the Bureau of Labor Statistics.

Questions to consider and discuss:

• What surprises you (if anything) about the statistics and graphs above? What explanations do you have for the discrepancies?

• In January 2002, a falling unemployment rate was accompanied by a significant fall in employment. How can the number of individuals employed fall and the unemployment rate fall at the same time?
  
  

Unemployment in your backyard (or anyone else's) ... You can go to the Bureau of Labor Statistics website and check the Local Area Unemployment Statistics for your city and/or state.

Answer these questions:

1. Is unemployment in our area higher, lower, or roughly the same as the national average? What about your favorite vacation spot? Your grandma's hometown?

2. What factors contribute to our area's unemployment rate? (Think about recent news...)

• Which industries have expanded?
• Which industries have contracted?

3. Will the recent changes affect you?

4. If avoiding inflation were your highest concern, where should you move? If you like the idea of unemployment, what cities would you recommend for your next move?

• Do you think unemployment benefits are appropriate in Minnesota?
• What changes, if any, would you make?
• Do you think these benefits are a disincentive to work?
  
  

The Relationship between Inflation and Unemployment: The Phillips Curve - Economists have long claimed an inverse relationship exists between unemployment and inflation. This "Phillips Curve" quickly gets very technical, but you can see the basics at this link. Browse around for a bit.

HOMEWORK for tomorrow - Friday, April 23rd

Your Naked Economics Blog Entry #4 is posted (Chapters 6 and 7). It is due by class time on Friday.

Please try to read Chapter 8 in Naked Economics for tomorrow and Chapter 9 over the weekend.

These will be due on Wednesday, January 9th, 2009.

A. Martians have landed on the earth, and they want to better understand the American economy. You are allowed to teach them about the two (and only two) economic measures or indicators that you believe reveal the most about the economy. Which two would you choose to explain? Why?

B. Assume that the United States needs a new "chief economist". You have been tapped for the job. At your Senate confirmation hearing, you are asked if your macroeconomic "view" relies more heavily on the "demand" approach or the "supply" side. What would you tell them? Why?

C. Taxes are, however unfortunately, a fact of life in America. Assume that you are on the committee appointed to look at "tax reform". What would you recommend as the best system of taxation in America? (You don't need to talk about specific numbers, but be sure that your choices reflect the values you would want to emphasize in our society.)

D. Here's a "softball" for you. What do you believe should be the role of government in managing and/or regulating the economy?

E. The Federal Reserve Board has been responsible for conducting our nation's money supply for decades. Critics charge that it is often ineffective, sometimes making things worse. Based on what you know, should changes be made in the way the Fed operates? Why or why not?

F. You and one of your Economics classmates have recently been elected the leaders of two of the world countries. Using specific examples (names, products, and countries), demonstrate your understanding of the terms "absolute advantage" and "comparative advantage".

G. Assume that you are teaching a class of second graders some basic economic principles. You need to explain why the nations of the world benefit from trade. Keeping in mind that the authors of The Armchair Economist will sue plagiarists, develop an analogy or story that gets this point across. (By the way, The Armchair Economist was the source of the "Iowa Car Crop" story...)

H. You are the new headline writer for the StarTribune. Tomorrow's issue is a special edition devoted to globalization. You are in charge of writing five "headlines" for the pro-globalization forces and their best arguments and five "headlines" for the anti-globalization forces and their best arguments. What would those headlines be?

I. The rest of the world has gotten tired of arguing about globalization. They have left you to cast the deciding vote. Is gloablization helpful or harmful? Why?

J. You have been named the President of the World Bank. You unexpectedly have an additional $10 billion in funds to loan out for the purposes of development assistance. In broad terms, tell us what you would do with that money. Where/how would you spend it?

HOMEWORK for tomorrow - Friday, December 19th

Read Naked Economics Chapter 12, "Development Economics," before class time on Friday.

Take advantage of the generous terms of the "MPA Economics Bailout" and get caught up on any of your missing blog entries.

Your Blog Entry #11 should be posted before class time on Friday. (We'll call the MPA Forum entry Blog #10 so there's no missing entry.) I'll post #12 before the end of the week, and that will be your final required entry.

We'll get right to our simulation today...

Federal Reserve Board simulation: We'll conduct our Federal Open Market Committee (FOMC) meeting.

This group meets eight times a year. The FOMC discusses current and near-term economic and financial conditions, prior to making a decision to raise, lower or keep short-term interest rates the same.

The federal funds rate (the one you will consider changing) is currently targeted at 1.00%. (When I last did this two years ago, it was at 5.25%.) Those of you wanting more historical data should look at changes in the federal funds rate over time.

Resources:

Several of you will represent the Federal Reserve Board of Governors itself, and another of you will be Ben Bernanke. You might brief yourselves on the summary information, and you might browse the homepage of the Board of Governors of the Federal Reserve. By the way, only five Reserve Bank Presidents at a time actually serve on the FOMC, but we'll let you all come to the meeting...

The Federal Reserve Districts and Banks - Clicking on the area of the map you represent will take you to that district's home page. There you can find information relating to your region.

The FRB "Beige Book" - This collection of information is compiled 8 times a year for use at the FOMC meetings. The October 15th data was the most recent at the time of Wednesday's class. Of course, keeping with our theme of change, here's the data hot off the presses for DECEMBER 3. This link will take you to the overall summary. In addition, the links on the left will take you to "your" district. 

Agenda for the Simulation:

• Chairman Bernanke calls the meeting to order.

• Federal Reserve District President presentations: (We'll go through the districts in "numerical" order. In your three minutes of fame, try to cover these...)

• provide an overview of current economic conditions in your district
• discuss the prospects for economic conditions for the near future
• identify any economic issues of special concern at the present time
• recommend whether short-term interest rates should be raised, lowered or kept the same.

1st District - Based in Boston
2nd District - Based in New York
3rd District - Based in Philadelphia
4th District - Based in Cleveland
5th District - Based in Richmond
6th District - Based in Atlanta
7th District - Based in Chicago
8th District - Based in St. Louis
9th District - Based in Minneapolis
10th District - Based in Kansas City
11th District - Based in Dallas
12th District - Based in San Francisco

• Chairman and Board of Governors offer recommendations regarding the direction for short-term interest rates

• Discussion of issues of controversy

• Each member of the Board of Governors and the Bank presidents cast a vote regarding the direction for interest rates, with the decision going to the majority.

• Hypothetical situations (if we have time...)

Please make sure you read Chapter 8, "The Power of Organized Interests" by Monday's class if you have not already done that. I'll post a blog entry for that yet today and hope to have your entries posted by Tuesday.

One of the best ways to understand the role of the FED, at least in more normal times, is to simulate one of their meetings. We'll set up a process today by which we can do that tomorrow.

First, we can briefly chat about either Chapter #7 or Chapter 10 in Naked Economics.

A reminder that FED 101 is a great website on topics related to money and banking. Check it out.

Federal Reserve Board simulation: Next time, we'll do a simulation of the Federal Reserve Board and a Federal Open Market Committee (FOMC) meeting. You'll each play a role as either a representative of one of the Federal Reserve districts or a member of the Board of Governors.

This group normally meets eight times a year. The FOMC discusses current and near-term economic and financial conditions, prior to making a decision to raise, lower or keep short-term interest rates the same. We'll "deliberate" after hearing the statements from the member banks on Thursday.

The federal funds rate (the one you will consider changing) is currently targeted at 1.00%. (When I last did this two years ago, it was at 5.25%.) Those of you wanting more historical data should look at changes in the federal funds rate over time.

Here is the text of the press release issued on October 29th, at the end of the last FOMC meeting. 

"The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent.

The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.

Recent policy actions, including today's rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."

* Chairman Bernanke calls the meeting to order. We can pretend that it is the next scheduled meeting of the FOMC, which is December 15th and 16th.

* Federal Reserve District President presentations: (We'll go through the districts in "numerical" order. In your three minutes of fame, try to cover these...)

* provide an overview of current economic conditions in your district
* discuss the prospects for economic conditions for the near future
* identify any economic issues of special concern at the present time
* recommend whether short-term interest rates should be raised, lowered or kept the same.

* Chairman and Board of Governors offer recommendations regarding the direction for short-term interest rates

* Discussion of issues of controversy

* Each member of the Board of Governors and the Bank presidents cast a vote regarding the direction for interest rates, with the decision going to the majority.

* Hypothetical situations (if we have time...)

HERE ARE SOME RESOURCES TO HELP IN YOUR PREPARATION...

Preparing for the simulation: Most of you will represent one of the districts. Figure out who you "are" by consulting "your" district's home page. Browse around there for a while. In addition, go to the "Beige Book" below, and be sure to read both the overall summary and the page for "your" district. Several of you will represent the Federal Reserve Board of Governors itself, and another of you will be Ben Bernanke. You might brief yourselves on the summary information, and you might browse the homepage of the Board of Governors of the Federal Reserve. By the way, only five Reserve Bank Presidents at a time actually serve on the FOMC, but we'll let you all come to the meeting...

The Federal Reserve Districts and Banks - Clicking on the area of the map you represent will take you to that district's home page. There you can find information relating to your region.

The FRB "Beige Book" - This collection of information is compiled 8 times a year for use at the FOMC meetings. We'll use the October 15th data. (If the December 3 data is published by class time, we can switch to that.) This link will take you to the overall summary. In addition, the links on the left will take you to "your" district. There, you can find a one "page" overview of recent developments in your district.

HOMEWORK for tomorrow - Thursday, December 4th

Get ready for your role in tomorrow's simulation.

Please have your Blog Entry #6 ASAP. (I'll update all the blog entries during the day Friday, so get it in by then.) Blog Entry #7 should also be up by tomorrow.

We'll make the Blog Entry #10 (also out of order) due by the start of class on Monday, December 8th.

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

Our main focus today will be on money and banking, but we've got a couple things to take care of off the top...

• Article jigsaw - We'll hear from the four groups with the various articles I handed out yesterday.
• Naked Economics - Chapter 7, "Financial Markets" - We'll hear what you thought about this chapter.

What is money? I know, dumb question. However, the reality is a bit more complicated.

Money is something that we can use to make purchases with. Generally speaking, there is a continuum of ways to make purchases, but some are clearly easier than others. Liquidity refers to the ease with which an instrument can be used to buy things.

What is considered "money"? Certainly, the currency and coins in your pocket are money. What about checks? Credit cards? Savings accounts? Bonds? Well, the answer depends on just who you are asking.

The Federal Reserve holds that money has three functions:

• serves as a medium of exchange - People will accept money in exchange for goods and services.
• serves as a standard of value - Money is a unit of measurement that can be used to specify the value of other things.
• serves as a means of saving or storing purchasing power - Money is a form in which wealth can be held.

Various definitions of "Money Supply": These are the most common classifications. They get "bigger" as you go down the list.

• M1: currency (in circulation), demand and checkable deposits (banks and thrifts)
• M2: M1 and savings accounts, additional (small time) deposits, and retail money-market funds
• M3: M2 and additional (longer time) deposits, and eurodollars, and institutional money-market funds

"Money Supply for Dummies" - If you can get past the demeaning title, this is a really informative article.

If you want to look at changes in the money supply (M1) over recent years, you can manipulate this data from "Economagic" to produce graphs.

Banking and the Federal Reserve System: To fully understand banking, you need to get beyond seeing banks as simply places where people keep money. Only a small percentage of deposits are actually on hand at a bank at any given time. Instead, we operate on the fractional reserve system. Banks keep a percentage of deposits on hand, but they are able to loan out the remaining funds in order to generate profits. Think about how that fits into our macroeconomic model of the economy.

The Federal Reserve System (FED) was created in 1913 to strengthen the nation's banking systems. You can learn more about how it works by consulting "The Federal Reserve System."

The nation is divided into twelve districts, and most banks within each district are members of the system. Each district has a Federal Reserve Bank. These twelve banks are governed by the seven members of the Federal Reserve Board in Washington DC. These members are appointed by the President to serve fourteen year terms, so they are designed to be the "independent" authority for monetary policy. The Chairman of the Federal Reserve system is also a Presidential appointment, and that is currently Ben Bernanke. (Alan Greenspan finished finished his fifth 4-year term as Chairman several years back. Reagan, Bush, Clinton and Bush all named him to that post.)

The "Tools of Monetary Policy" - The Fed has three main tools at their disposal.

Reserve requirements: These are the percentages of deposits that banks need to keep on hand in their vaults or on deposit at a Fed bank. (The Fed last changed this rate in April of 1992, and it is a rarely used tool of monetary policy.)

• If the reserve requirement were raised, banks would have less money available to lend.
• If the reserve requirement was lowered, banks would be able to increase lending.

Discount rate: This is the interest rate that the Fed charges banks for loans. Member banks can borrow from the "discount window" at this lower rate. This is now rather symbolic, as the Fed considers itself to be the "lender of last resort." Banks are encouraged to borrow from other banks.

• When the discount rate rises, it would typically slow economic activity.
• When the discount rate is lowered, it would typically stimulate economic activity.

Open market operations: This is when the Fed buys or sells previously issued government (Treasury) securities.

• If the Fed wants to expand the money supply (boost the economy), they buy Treasury securities. That puts additional money into the banking system, and that should influence interest rates downward.
• If the Fed wants to tighten the money supply (slow the economy), they sell Treasury securities. That removes money from the system, and that should influence interest rates upward.

As of today, the discount rate is at 1.25 (down from 6.25% when I last taught Econ in Spring 2007), and the prime rate is now at 4%. (It was 8.5% last time.) These drive a wide variety of interest rates for different types and durations of borrowing.

SITE OF THE DAY: FED 101 is great. Check it out.

HOMEWORK for tomorrow - Wednesday, December 3rd

Please have your Blog Entry #6 ASAP. (I'll update all the blog entries during the day Friday, so get it in by then.) Blog Entry #7 should also be up by Thursday.

I'll be asking you to read Chapter 10, "The Federal Reserve," out of order for tomorrow's class. 

Please also read the handout, "The Mythology of Deficits," for tomorrow. (Assuming I remember to hand it out this time... Oops.)

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

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.

Employment and Unemployment: Today's topic, in many ways, is sort of the flip side of what we did with inflation.

Defining "unemployment:  The unemployment rate is the percentage of the U.S. labor force that is unemployed. It is calculated by dividing the number of unemployed individuals by the sum of the number of people unemployed and the number of people employed. An individual is counted as unemployed if the individual is over the age of 16 and is actively looking for a job, but cannot find one. Students, those individuals who choose to not work, and retirees are therefore not counted in the unemployment rate.

The Current State of Unemployment: The most recent figures we have take us through December.  This is a lot of numbers, but just browse it for a couple minutes.

Since I can't figure out how to get charts onto the blog, follow this link to my old page and scroll down to the charts...  Here are the newest charts from the Bureau of Labor Statistics.

Questions to consider and discuss:

• What surprises you (if anything) about the statistics and graphs above? What explanations do you have for the discrepancies?

• In January 2002, a falling unemployment rate was accompanied by a significant fall in employment. How can the number of individuals employed fall and the unemployment rate fall at the same time?

Unemployment in your backyard (or anyone else's) ... You can go to the Bureau of Labor Statistics website and check the Local Area Unemployment Statistics for your city and/or state.

Answer these questions:

1. Is unemployment in our area higher, lower, or roughly the same as the national average? What about your favorite vacation spot? Your grandma's hometown?

2. What factors contribute to our area's unemployment rate? (Think about recent news...)

Which industries have expanded?

Which industries have contracted?

3. Will the recent changes affect you?

4. If avoiding inflation were your highest concern, where should you move? If you like the idea of unemployment, what cities would you recommend for your next move?

Unemployment Insurance:  Go to the website for the Minnesota WorkForce Center. Browse through the links and see what kinds of benefits are available in this state.

• Do you think unemployment benefits are appropriate in Minnesota?
• What changes, if any, would you make?
• Do you think these benefits are a disincentive to work?

The Relationship between Inflation and Unemployment: The Phillips Curve - Economists have long claimed an inverse relationship exists between unemployment and inflation. This "Phillips Curve" quickly gets very technical, but you can see the basics at this link. Browse around for a bit.

"Inflation" is our topic for today, but we'll do a couple things off the top here first.

I'll return the quizzes that I have so that you can take a look at them.

Wachovia College Budgeting Calculator: Anything interesting come up here?

Naked Economics - Chapter 5: You were asked to have this read for today. I think this is one of the most interesting chapters, and I am curious as to what you found the most interesting.

Fiscal v. Monetary Policy - Let's make sure you understand the basics of these two concepts, since we'll come back to them again and again.

Inflation: We'll be looking at inflation today, since it might be the economic issue of most concern to policymakers and consumers. (I suppose that would be more true when the economy isn't facing its most serious challenges since the Great Depression...) This topic will come up several times, but we'll get some of the basics out of the way.

Defining "inflation": Inflation is a sustained increase in the overall level of prices. The most widely reported measurement of inflation is the consumer price index (CPI).

The Consumer Price Index measures prices of goods and services in a market basket of goods and services that is intended to be representative of a typical consumer's purchases. The percentages currently used to describe the categories of goods and services that market basket are as follows.

• Food and beverages 15 %
• Recreation 6 %
• Housing 42 %
• Education 3 %
• Clothing 4 %
• Communication 3 %
• Transportation 17 %
• Medical care 6 %
• Other goods and services 4 %

Inflation and the CPI, April 16, 2008 - This is the text of the most recent inflation report from the National Council on Economic Education. We can take a look at some of the graphs and charts for a minute.

Much of the following information is simply copied from the EconEd website for our convenience in class today...

Causes of Inflation: Over short periods of time, inflation can be caused by a decrease in production or an increase in spending. We get the names for the two major types from this: demand-pull and cost-push.

Inflation resulting from an increase in aggregate demand or total spending is called demand-pull inflation. Increases in demand, particularly if production in the economy is near the full-employment level of real GDP, pull up prices. It is not just rising spending. If spending is increasing more rapidly than the capacity to produce, there will be upward pressure on prices.

Inflation can also be caused by increases in costs of major inputs used throughout the economy. This type of inflation is often described as cost-push inflation. Increases in costs push prices up. The most common recent examples are inflationary periods caused largely by increases in the price of oil. Or if employers and employees begin to expect inflation, costs and prices will begin to rise as a result.

Over longer periods of time, that is, over periods of many months or years, inflation is caused by growth in the supply of money that is above and beyond the growth in the demand for money.

Living with Inflation: We'll do a quick activity here looking at the effects inflation had on the former Soviet Union and its neighbors in the years after the fall of the Berlin Wall and the shift to market economies.

The Costs of Inflation: Here's one short summary of some of the costs of inflation.

• High rates of inflation mean that people and business have to take steps to protect their financial assets from inflation. The resources and time used to do so could produce goods and services of value.

• High rates of inflation discourage businesses planning and investment as inflation makes the forecasting of prices and costs more difficult. As prices rise, people need more dollars to carry out their transactions. When more money is demanded, interest rates increase.

• The adage "inflation hurts lenders and helps borrowers" only applies if inflation is not expected. For example, interest rates normally increase in response to anticipated inflation. As a result, the lenders receive higher interest payments, part of which is compensation for the decrease in the value of the money lent. Borrowers have to pay higher interest rates and lose any advantage they may have from repaying loans with money that is not worth as much as it was prior to the inflation.

• Inflation does reduce the purchasing power of money.

• Inflation does redistribute income. On average, individuals' incomes do increase as inflation increases. However, some peoples' wages go up faster than inflation. Other wages are slower to adjust. People on fixed incomes such as pensions or whose salaries are slow to adjust are negatively affected by unexpected inflation.

Questions to consider: We'll get to them in a few days...

• How does the US government work to prevent and/or control inflation?

• What level of inflation should we aim for?

For one perspective on that issue, here's what Alan Greenspan had to say at a 1989 Congressional hearing:

"Maximum sustainable economic growth over time is the U.S. Federal Reserve's ultimate objective. The primary role of monetary policy in the pursuit of this goal is to foster price stability. For all practical purposes, price stability means that expected changes in the average price level are small enough and gradual enough that they do not materially enter business and household financial decisions."

 Maybe a "non-answer," but it seems to translate into a 2 or 3 percent rate in practice.

HOMEWORK for tomorrow - Thursday, November 20th

Your Blog Entry #5 should be posted before the start of class time on Friday.

Please have Chapter #6 of Naked Economics, "Productivity and Human Capital," read for Monday's class.