All Terrain Thinking

A Compendium of things I think are Important

Economics: It's not just whats' in your wallet

Basics of Macroeconomics I

The Setting

"Fashions in economic ideas come and go, like fashions in women's clothes....the history of economic thought is closer to the history of women's fashion than to the history of astronomy or physics. " _{Herbert Stein in Presidential Economics p 397}

" the great enemy of truth is very often not the lie - deliberate, contrived, and dishonest - but the myth, persistent, persuasive, and unrealistic." _{John F. Kennedy}

"Incumbent parties almost always keep the White House if inflation is moderate and the unemployment rate is falling in the year leading up to the election." _{Paul Krugman, The Age of Diminished Expectations p 1}

"The electoral cycle causes substantial macroeconomic fluctuations.

    In the United States, the electoral-economic cycle from 1948 to 1976 (other than the Eisenhower years) has consisted of:

• A four-year presidential cycle in the unemployment rate, with downturns in unemployment in the months before the presidential election and upturns in the unemployment rate usually beginning from twelve to eighteen months after the election.

These patterns are consistent with the character of the economic tools..." _{Edward Tufte Political Control of the Economy p26}

"neither a state nor a bank ever has had unrestricted power of issuing paper money, without abusing that power; in all States, therefore, the issue of paper money ought to be under some check and control; and none seems so proper as that of subjecting the issuers of paper money to the obligation of paying their notes, either in gold coin or bullion."_{David Ricardo}

"We must act, and act quickly... If we are to go forward we must move as a trained and loyal army willing to sacrifice for the good of a common discipline, because, without such discipline, no progress is made, no leadership becomes effective... I am prepared under my constitutional duty to recommend the measures that a stricken nation in the midst of a stricken world may require.... I shall... wage war against the emergency as great as the power that should be given to me if we were in fact invaded by a foreign foe." Roosevelt - inaugural speech

"Until we restore full prosperity and the budget-balancing revenues it generates, our practical choice is not between deficit and surplus but between two kinds of deficits: between deficits born of waste and weakness and deficits incurred as we build our strength... 1962 Economic Report of the President

"This year, as in 1932, our country is divided, our people are out of work, and our national leaders do not lead.   Roosevelt's opponent in that year was also an incumbent president, a decent and well-intentioned man who sincerely believed our government could and should not with bold action try to correct the economic ills of our nation. " _{Jimmy Carter in his Labor Day speech in 1976}

"I regret to say that we are in the worst economic mess since the Great Depression." _{Ronald Reagan New York Times Feb 6, 1981}

Overview of Basics

Why Macro?

Macroeconomic models

I: Circular Flow Diagram

II: National Income Identity

(1) Q = C + I + G + X - M

Aggregate Supply = Aggregate Demand

Withdrawals = S + M + TA - TR

Injections = I + X + NFP + G

(2) I + G + X + NFP = M + S + T

Injections = Withdrawals

(3) (S - I) = NFP +(X - M) + (G - T)

X - M = trade surplus

(G - T) = budget deficit

III. Aggregate Supply - Aggregate Demand Model

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