ALL OF ECONOMICS IN ONE GRAPH

A study of macroeconomics usually reveals that the best time to buy anything is last year. ~ Marty Allen

Economics has enjoyed more prominence and attention for several decades, especially in developing and assessing macroeconomic policies.  Whole troupes of economic experts make pronouncements that are reported 24/7; everything from inadequate GDP growth to the local price of kale. Economic precepts surround our everyday lives, but this expansion of economics has been accompanied by a fractured focus that mostly ends up explaining only small, individual facets of economic goings-on in our broad economy.

To counter this unfortunate lack of synthesis, please examine the following "All of Economics in One Graph." With a dollop of humor, this single graph combines many disparate parts of economics into one comprehensive amalgam. The diagram mingles Adam Smith and John M. Keynes with Janet Yellen and Fredrik Hayek as well as the answer to the ultimate question of life. Also illustrated are the relationships between Detroit, the demand for kale, Wall Street, Gourmet Ghetto restaurants and the Bottom 50% among other economic activities. All this is linked to the price of bliss, iPhones, college tuition and the dearly-departed Zimbabwean hyperinflation.

This  graph is founded on the standard textbook depiction of macroeconomic aggregate supply and aggregate demand to explain the relationship between the economy's overall price level (Price) and national output (Real GDP). If you're interested, here's more information about this model. [You can click on the graph to enlarge it.]

All of Economics in One Graph

 

 

Troy Gelobter provided graphical assistance.

Glossary for "All of Economics in One Graph"

42 – Douglas Adams' well-regarded answer to the "ultimate question of life, the universe and everything." 42 is mentioned in Adams' Hitchhikers' Guide to the Universe. If you seek more guidance, go here.

Bicycle – No, the bicycle is not a specialized form of a business cycle, but it is related (from afar). The first modern bicycle was introduced in 1817 by German Baron Karl von Drais. However, when visiting Vinci, Italy I saw a bicycle model based on drawings from this city's most famous son Leonardo that looked remarkably similar to a modern bike. What's 300 years or so? Since their introduction, bicycles have contributed to growth and good times in many business cycles beyond imperious messenger services. Bikes are important. Why else would Thomas Piketty mention in his best-selling book, Capital in the 21^st Century, that in terms of bikes' production advances, our purchasing power has increased an impressive 40-fold between 1890 and 1970. Speaking of which, after the first mountain bikes appeared in the San Francisco Bay Area in the late 1970s they soon were purchased (and ridden) around the globe. Those were the days; it's all downhill from here.  

Bliss – Economically speaking, bliss is achieved when the economy is in long-run equilibrium that occurs as short-run macro supply, long-run macro supply and macro demand all intersect with stable prices at full-employment real GDP. Unfortunately, economists rarely know when we are actually enjoying such a blissful state. Alas, it is only after the fact (when data become available) that we can hypothesize that the economy was in a blissful state. So it goes…

The Bottom 50% of taxpayers earned a mere 11.6% of total adjusted gross income (AGI) in the U.S. according to 2011 tax returns. The Top 1% received 18.7% of total AGI. All by themselves the Top 0.1% accounted for 8.9% of total AGI.

Fredrik Hayek was a prominent member of the Austrian School of Economics, best known for espousing classical liberalism in his book, The Road to Serfdom. He taught at the University of Chicago and received the Nobel Prize for Economics in 1974.

John M. Keynes – John Maynard Keynes was a British economist considered to be the father of modern macroeconomics. Unlike most of his predecessors, Mr. Keynes believed that aggregate demand – labeled Macro Demand in the graph – was also responsible for an economy's overall activity, not just supply. He also believed aggregate demand could be influenced by the government's use of appropriate fiscal and monetary policies. Mr. Keynes' ideas made him one of the most influential economists of the 20^th century.

Rolls Royce Wraith – Perhaps Rolls Royce's most beautiful car, the Wraith is a 2-door, 4-seat coupe with an uncommon legacy. The first Rolls Royce Wraith was produced in 1938; it was re-introduced in 2013. If you have to ask, you probably can't… However, for those who do ask, pricing starts around $285,000, but can easily reach $400,000 or more, depending on the owner's desires. It's not your father's Camry.

Adam Smith was a pioneering Scottish political philosopher who wrote the Wealth of Nations in 1776 that laid the foundation for modern, systematic inquiry of economic systems. [P.S., I'm pretty sure he's not a relative.]

Janet Yellen is the Chair of the Federal Reserve System. As the head of the Fed, she manages this nation's money supply (S_$), regulates the nation's banks and has responsibility for maintaining steady prices and full employment. This challenging, herculean job probably makes Dr. Yellen the single most influential economist on the planet now. Her realm is thus pretty vast.

Zimbabwe hyperinflation occurred in 2008-09 and is a distressing example of gross mismanagement of a nation's economy. The inflation rate (the rise in overall prices in an economy) in Zimbabwe reached an unfathomable 231 million percent in July 2008, and prices kept rising. The ever more worthless Zimbabwean dollar was finally abandoned and placed in dustbins by early 2009. Since then, Zimbabweans have used South African Rand and U.S. dollars as their currencies. Thus, there are now many Benjamins in Harare.

 

 

 

 

OUR MISSING MACROECONOMIC POLICY

Fiscal policy is not just, or even principally, the purview of the president. ~ Carly Fiorina

 

Appropriate fiscal policy has been missing-in-inaction (MII) since 2009. Every Econ101 student learns there are two complementary, federal macroeconomic policies – monetary and fiscal policy – that the government uses (ideally) to keep our nation's economy in "just-right" balance (not too much unemployment, not too much inflation). Monetary policy concerns changing the nation's money supply mostly by altering interest rates. Fiscal policy involves changing government spending and taxes through Congressional legislation.

All political eyes were focused last week on monetary side of macro policy. Fiscal policy remained the unspoken elephant in policy-makers' rooms, as it has for all too long. Why monetary policy? Because Janet Yellen was talking.

It was interesting to hear Ms Yellen testify before the Senate Banking Committee. She is expected to be the next Chairwoman of the Federal Reserve Bank (the first time that title has been used at the Fed). But before she receives the monetary scepter as this nation's (and the world's) primo central banker – and be in charge of US monetary policy – she needs to be confirmed by the Senate. Hence her testimony.

During her tenure on the Federal Reserve Board –as vice-Chair for the past 3 years and President of the San Francisco Federal Reserve Bank from 2004-10 – she has generally supported Fed's and Ben Bernanke's innovative, expansionary and controversial monetary policy called quantitative easing (QE). She has been correct in her support. Most recently, QE has involved buying $85 billion per month of long-term Treasury bonds and other financial assets to stimulate the economy. As a result of QE and other financial activities, the Fed now has more than $3.59 trillion of financial securities' assets on its balance sheet. Before the 2007 recession, the Fed held between $700 and $800 billion of Treasury note assets on its balance sheet.

Several senators questioned her testimony and implicitly her qualifications. Two of them, Senator Bob Corker (R-TN) and Senator Sherrod Brown (D-OH) characterized the Fed's QE-based monetary policy as “an elitist policy” and “a sort of trickle-down economics," respectively. They said monetary policy only helps the well-to-do Americans who participate in the (now rising) stock market rather than middle-class folks whose finances are far more precarious and puny. They have a point.

But politicians like Sen. Corker deserve gold medals for extreme hypocrisy and ironic blindness. The idea that a Republican Senator was berating Ms Yellen of implementing "elitist policy" would almost be humorous except for the huge harm Republican politicians like Sen. Corker have loaded onto working Americans during the past 4 years – because of their caustic, elitist policies. Recent examples include opposing increases in Federal (and state) minimum wages, drastically reducing funding for the food stamp (SNAP) and low-income food and nutrition (WIC) programs and opposing increased infrastructure spending. Such policies are terribly hurtful snap judgments.

If these senators want non-elitist, non-trickle-down economic policies, they themselves can create them – they're called fiscal policies. Republican and Democratic congress folk should wake up from their stupor and pass a fiscal stimulus bill, based on fiscal policies that have worked in the past.

Instead, after taking the Congressional hypocritical oath ("do no harm to those who pay for my re-elections"), Congress continues to sit on its thumbs and criticizes prospective monetary policy-makers like Ms Yellen for not doing what Congress itself (and President Obama) should be doing. Successful expansionary fiscal policy would offer much more broad-based economic benefits that come from directly increasing employment, putting more money in the wallets of middle- and working-class people and providing necessary support to folks who can't afford food, care and/or housing.

Why does fiscal policy remain MII? Why doesn't Congress authorize expansionary economic policy? Have its members forgotten what fiscal responsibilities they have? Not likely; it's because many of its members are too duplicitous and ideological to do what's needed for the public at large. They remain falsely fearful of non-existent inflation from ever-moderating deficits.

Ms Yellen was too demure in not forcefully stating to the Banking Committee that the Fed – soon to be her Fed – cannot by itself pull the US out of its continuing economic malaise with only its monetary efforts. Congress must re-activate its fiscal authority by passing substantive expansionary fiscal policy legislation. This means lowering taxes for the 97%, increasing government expenditures to improve infrastructure like roads, bridges and the internet, providing more employment-training funding, especially for the long-term unemployed, and increasing SNAP and WIC budgets. Senators Corker and Brown can rest assured these fiscal expenditures will not be elitist or trickle-down policies.

We would have all benefited from hearing Ms Yellen clearly describe the elephant in room and tell Congress to get on its fiscal stick and start doing its part to revitalize the economy, rather than berating the Fed for not doing Congress' job.