Notes from the text of Chapter 24:



CHAPTER 6: ECONOMIC GROWTH, BUSINESS CYCLES, AND UNEMPLOYMENTQuestions and Exercises1.Classical economists felt that if the wage level fell, the Depression would end. They saw labor unions as preventing the fall in wages, and they believed that the government lacked the political will to break up unions.2.Classical economics supported laissez-faire policies because they believed business cycles were temporary glitches which the market would correct. 3.Keynesian economists are more likely to emphasize the fallacy of composition. The fallacy of composition is the false assumption that what is true for a part will also be true for the whole. Keynes carefully distinguished the adjustment process for a single market from the adjustment process for the aggregate economy, arguing that the effects differ significantly between the two. 4.Classical economics grew in importance in the 1970s because Keynesians didn't have a model for inflation, whereas Classicals did.5.Structural stagnation is neither a Keynesian nor a Classical theory. It includes elements of both.6.Potential output is the highest amount of output an economy can sustainably produce and sell using existing production processes and resources. Potential output is not purely a physical measure because unemployed workers do not contribute to potential output, factories may be technologically obsolete, and production must be sustainable to be equal to potential.7.Economic growth is measured by changes in total output and changes in output per person.8.Growth has slowed in recent years in both Western Europe and the United States.9.From 1940 to 1970 the U.S. economy grew at a rate of about 2.5 percent per year, which was lower than Western Europe and Japan but higher than many other countries. In the following decades, U.S. growth was higher than most except for India and China, which have experienced considerable growth. Since 2000 the U.S. economy has been slower than many countries, averaging less than 2 percent per year in the first decade of the 2000s.5943605594350010.A representative business cycle is shown in the accompanying graph. Each of the four phases—peak, downturn, trough, and upturn—is clearly labeled.11.Structural stagnation is a period of protracted slow growth and high unemployment. Because the expansion of the economy is slow with structural stagnation, the economy does not return to its long-term trend. In contrast, a recession is a short period of declining output followed by an expansionary period that returns the economy to its long-term trend.12.The structural stagnation theory is more pessimistic because it argues that the economy must undergo structural changes before it will return to its long-term growth trend. An example is that with structural stagnation, workers will have to accept lower wages or learn new skills before the economy returns to its potential. In the conventional business cycle view, the economic recession is short-lived as those who become unemployed will be rehired without having to accept lower wages or learn new skills.13.Structural unemployment is unemployment caused by the institutional structure of an economy or by economic restructuring making some skills obsolete, whereas cyclical unemployment is unemployment resulting from fluctuations in economic activity. A fall in structural unemployment requires structural changes; a fall in cyclical unemployment does not.14.Structural unemployment, which results from changes in the structure of the economy, is best studied in the long-run framework. Cyclical unemployment goes up and down with the business cycle. 15.Cyclical unemployment, which results from fluctuations in economic activity, is best studied in the short-run framework. Cyclical unemployment goes up and down with the business cycle. Structural unemployment is caused by the institutional structure of an economy and economic restructuring, and therefore is best studied in the long-run framework.16. The unemployment rate is the total number of unemployed as a fraction of the labor force. Unemployment rate = (Number of unemployed/Labor Force) × 100.Unemployment rate = (15/189) × 100 = 7.9%17. Some economists argue that the standard unemployment rate underestimates unemployment because people who have gotten frustrated and stopped trying to find jobs are not counted as unemployed. Also, the standard unemployment rate doesn’t include people who are underemployed such as people who are working part-time but would like to work full-time. Others point out that, because of unemployment insurance, people often say they are looking for work when they really aren't, and therefore unemployment is overstated. Furthermore, these economists believe that people could find a job if they really wanted to and instead turn down jobs they find unappealing. So there are tendencies both to overestimate and underestimate the problem.The official measure of unemployment is based on judgments about who should be counted as unemployed. Keynesians argue that discouraged workers who would like jobs but have left the labor force should be included in the measure of unemployment because there are a lack of decent jobs and affordable transportation. Classicals believe that some of those counted as unemployed are choosing to be unemployed and should not be counted.?18.You are much more likely to be able to calculate this problem quickly with the use of a calculator, but your grandparents didn't have calculators at their disposal, so they learned to do such calculations by hand. While your grandparents may have been employed in “calculator’ jobs, working to solve equations and functions by hand, any teenager today can quickly compute the answer on the calculator programmed into almost all of today’s phones. The jobs your grandparents once held are now obsolete, performed more efficiently and productively by algorithms.This example is indicative of a coming change that will likely impact a vast array of job sectors. Positions that once required human know-how will soon be replaced by algorithms and intelligent software. In the future, as the skills required to perform many mid-level professional jobs are instead done by computers and algorithms, more humans will be most needed to act as technicians, completing any work that may have been missed by the computer and monitoring the software. As learning-based software continues to improve, even the programmers that are needed to code algorithms may be replaced by automated systems that perform the job more efficiently. New jobs will be forthcoming, but they will likely be quite different jobs than we currently have.19.As the information revolution outpaces human intelligence and replaces most mid-level mental strength jobs with computer algorithms, humans are left to either be technicians or be programmers. Most qualified candidates will compete for the high-paying programming jobs, but there are only so many to be filled. Thus, in the future, the low- and mid-level, mundane technician jobs will likely be replaced with algorithms. High-level jobs for the super intelligent will exist—designing algorithms that design algorithms, and supplemental jobs cleaning up the issues that are not efficiently done by algorithms. But these jobs will likely require a different education than students currently have. Questions from Alternative Perspectives1. AustrianAustrians believe that government’s attempts to deal with business cycles can often lead to the creation of government programs that cost a lot but have little benefit. Therefore, when government tries to solve problems, it often creates greater problems.2. InstitutionalistInstitutionalists believe that this proposition is very reasonable. A firms’ focus on making money and financial issues can leave real issues secondary and can bring about waves of pessimism and optimism. Institutionalists believe that the insight that the production of goods is a normal, daily aspect of life in all societies since the beginning of time was fundamental to Mitchell’s analysis. Production occurs because it is necessary to reproduce culture. Institutionalists believe that the money economy has perverted this timeless process by giving control to a group that allows culture to reproduce itself only if that group is able to profit from that activity. Thus, during the Great Depression, farmers destroyed their crops while people went hungry; workers were available, yet factories were empty. Business owners did not expect a profit and thus used their power to idle the economy, imperiling the reproduction of culture and threatening democracy itself. 3. Post-Keynesiana.Since the Great Depression, the government has been more active in the economy and has used monetary and fiscal policy to stabilize the economy. Post-Keynesians believe that these policies are responsible for the avoidance of severe depressions since that time.b.These policies are definitely Keynesian.c.Post-Keynesians believe that these policies are still relevant today, whereas Classical economists argue that such policies will cause much more serious consequences in the long term. 4. Radicala.This is a judgment question, and judgments differ. Radical economists would agree with Vickrey that unemployment should be very low.b.Radical economists believe that unemployment tends to hurt the people who are the weakest and poorest in society and who need the most help. If such policies generate inflation, institutions should be changed to eliminate the inflation through means other than unemployment. c.Vickrey supported a plan put forward by Abba Lerner and the author of this textbook. It was called a market anti-inflation plan in which a firm could raise its prices only if it bought the right to do so from another firm that lowered its price by an offsetting amount. 5. Austrian, Institutionalist, Post-Keynesian, Radical, Feminist, ReligiousIn natural science, there are controlled experiments which allow one to say when a theory has failed and when it has not. In macroeconomics, controlled experiments are much more difficult to conduct, which means that alternative explanations can be given for why the existing theory failed. For example, it can be argued that the theory was correct but the execution of the policy was flawed. When such alternative explanations are possible, it is much more difficult to overthrow a theory. Issues to Ponder1.Deciding what is the purpose of life and therefore what constitutes a desired lifestyle is a complicated issue. To the extent that work provides a sense of self-worth and identity, complete idleness is not desirable. This, however, is a normative question. Unemployment within our culture and set of institutions is a measure of aggregate well-being to the extent that employment provides a sense of well-being and sufficient income to support a desired lifestyle. This example shows that unemployment must be understood within this broader framework; its meaning is specific to a set of institutions and a culture. All else equal, however, reducing the amount of work it takes to produce a given amount of output can generally be seen as a positive change.2.Reducing unemployment to 1.2 percent today is not likely for several reasons. One is that a low inflation rate seems to be incompatible with low unemployment. Another is that today’s economy differs from that of the World War II period, when there was an enormous ideological commitment to the war effort and acceptance of strong wage and price controls.3.a.Possible explanations include Japanese cultural emphases on tradition, honor, and loyalty. In Japan, firms are less willing to lay off workers in times of excess supply and workers are less likely to change employers in search of higher compensation. Another explanation is the nature of Japanese production. One could suggest that Japanese production does not rely on a changing base of skills so that the skills of workers always match the skills demanded by a particular firm.b.It is impossible to say which is better. Each needs to be judged within the broader context of the national economy.c.The answer to this question depends on the distribution of layoffs and hires in each of the economies. If layoffs in Japan were unavoidable and occurred among mid- to low-ranking employees, the average tenure of Japanese employees would rise since those who remain have relatively higher tenure. If instead the elderly were asked to retire earlier, the average tenure would decline. In the United States firms would have to lay off fewer workers than usual as a result of the booming economy, and average tenure would rise. In the United States, the newly hired in an expansion would lower overall tenure. ................
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