Module 4 Extra Credit Posts for Spring 2024

For April 1 (rescheduled from March 27)

In a red state like Utah, it can be hard to convince macroeconomics students of facts about Democrats.

One point I try to stress is that all elected officials like to spend money on their pet government "programs". Perhaps Republicans are a little less inclined to do this.

Both parties try pretty hard to sell the ideas that Democrats always want to spend more and Republicans always want to cut spending. There isn't much evidence to support this.

The same thing happens with taxes. All elected officials like to cut taxes because they think this will help them get your vote. Perhaps Democrats are a little less inclined to do this.

Both parties try pretty hard to sell the idea that Republicans always want to cut taxes and Democrats always want to raise them. Again, the evidence is pretty weak on this.

The reality is that both parties have bought in hard to the Keynesian idea that increasing government spending and cutting taxes will improve the economy. The corollary to that is that voters will return incumbents to office if the economy is doing better.

Of course, both of those moves will increase the deficit. If you wonder why we seem to always have a deficit, there's your answer.

So, it's refreshing to see a piece like the one entitled "Biden, Promising Corporate Tax Increases, Has Cut Taxes Overall". This originally appeared in The New York Times, but this link should continue to be free.

It cites research commissioned by The New York Times (a very Democratically leaning newspaper), done by an economist at the Urban-Brookings Tax Policy Center (a very Democratically leaning newspaper) bemoaning the facts that while Biden has repeated promised to raise taxes on corporations, he's been more successful at offering them tax breaks, so that on net corporations are paying less now than when he came into office. Oops.

For March 29

A problem with a disaster, like the ship hitting the bridge in Baltimore, is that it upsets supply chains.

Supply chains are the links from sources of resources, through manufacturers, warehouses, and retailers, through to final consumers. These are like trees with many branches: literally thousands of branches for most of the products you buy.

A disruption at any point in that supply chain can have effects both downstream (all the way to consumers) and upstream (all the way to resource extractors). 

Recall that during the early part of CoVid/lockdowns that the store shelves were empty? Recall that about 18 months after that (in late 2021) we had additional problems with getting stuff on shelves. Those are the visible effects of supply chain disruptions.

The closing of the port of Baltimore won't create huge disruptions, since it's not a really major port. But it will create some.

Interestingly, the biggest disruption is probably going to be to cars imported from Europe for sale in the northeast. Almost all of those come through Baltimore. Why is that? Because what's called a roll-on-roll-off ship carries about 5,000 cars (for perspective, the SUU campus has about 4,000 parking spots, but they're never all full at the same time). They all arrive at the same time, and the port that they all go to is the one that already has big parking lots built, for the cars to be unloaded into. Then they all get trucked out, to create room for the next ship's cargo. There's really just one of those on the east coast: Baltimore.

The other thing that will be affected is coal mines in Pennsylvania, Maryland, and West Virginia. Students tend not to know this, but most coal burned in the U.S. is hard, and relatively clean, and comes from strip mines in Wyoming. The softer, dirtier coal, from tunnel mines that we all have in our imagination isn't used much anymore. It's mostly found in the Appalachian mountains, and exported to places like India. And most of it goes through ... Baltimore.

For March 27

On Monday we discussed how the announced deficit is not as accurate as it sounds. This is because the government doesn't actually know how much it will spend or receive in advance. For example, natural disasters can make the deficit worse because extra money is spent in disaster relief.

Then on Tuesday a cargo ship hit and collapsed a bridge, effectively blocking the harbor of Baltimore.

At this time it isn't clear who own the bridge, or to what extent it was insured. But, the state of Maryland almost immediately announced they don't have the money to rebuild it. This is not surprising: most big transportation infrastructure projects are funded by the federal government, with the work managed at the sate level. So, it should not be surprising that within a day the federal Department of Transportation announced they would be getting the bridge rebuilt as quickly as possible.

I am not sure how much a bridge that's both long, and high, over water, will cost. My guess is $5B. If I'm right, while this will increase the deficit, it won't increase it by much: the deficit is roughly $1.7T/year or $1,700B/year. That works out to be less than 1%.

The people in the federal government are not as dumb as most people think. There is money set aside for this sort of thing. But, just like households that save for a rainy day, that amount will help, but may not cover the whole cost. That money has already been allocated by Congress, so it's considered "spent" already, and would not add to the deficit. Anything extra on top of that would add to the deficit.

For March 25

The FOMC met last week to determine monetary policy for the next 6 weeks.

No one was surprised. The expectation all semester has been that they would keep interest rates unchanged, and that's exactly what they did.

They are balancing the ideas of 1) lowering the rate to help the economy grow, and 2) raising the rate because they continue to be worried about inflation. They didn't do (1) because the economy is growing with rate where they are, and doesn't seem to need encouragement. They didn't do (2) because, while inflation isn't as low as they'd like it to be, it has already come down a lot and perhaps it will continue to behave itself.

Here's a quote from their statement with comments in italics from Dr. Tufte.

Recent indicators suggest that economic activity has been expanding at a solid pace. (covered in other posts) Job gains have remained strong, and the unemployment rate has remained low. (covered in other posts) Inflation has eased over the past year but remains elevated.(covered in other posts)

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. (This is required under the Humphrey-Hawkins Act, mentioned in a post a couple of weeks back) The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance.(better balance is a good thing) The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.(but, the balance is better, but they're still more worried about inflation)

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent ... (no baby steps yet, as shown in the Figure from Chapter 11)

Also, in an election year, they're less likely to change rates generally, because they don't want to be seen as favoring one party over another.

The meeting followed the normal pattern: all day on Tuesday, plus Wednesday morning, with a press conference (with some Q&A) in the early afternoon (video here). They also put out a press release (quoted above). I didn't cover it because it was an exam day.

For March 22

This is the one I could not get to work for Monday. Let me know if the link doesn't work.

The article is about what Ken Rogoff said on TV last week. He's a Harvard professor. Probably the most respected expert on government debt in the world. And a probable future Nobel Prize winner.

“Washington in general has a very relaxed attitude towards debt that I think they’re going to be sorry about,” Rogoff said on Bloomberg Television’s Wall Street Week with David Westin. “It’s just not the free lunch that Congress and perhaps the two presidential candidates have gotten used to.”

This is from the Yahoo Finance article entitled "Rogoff Says Biden, Trump Favor ‘Blowing Up’ US Debt". It's rare in this day and age for people to assert that both parties have it wrong.

National debt is one of the things we discuss in Section IV of the class. 

A textbook from a major publisher can't get away with saying this sort of thing, but a professor can: from a macroeconomic perspective, the candidates and parties are a lot less different from each other than most people think. They have more in common with each other than they do with you.

FWIW: Do note that I worry a lot less about the debt than Rogoff does.