Macro for Managers (A506)

1. Macro for Managers (A506)

2. Macro: Why bother? • Macro outcomes and policy matter to Micro • Macro aggregates Micro—with some important wrinkles • key Macro concepts have (light/tangential) applications to Managerial • theory vs. practice of “activism” • SR B’s vs. LR C’s • “activism” and taking credit for correlation • the power of assumptions! • Intro to Macro: graph of GDP since 1900—growth, business cycle, key macro events

3. Economic Growth • know the most; little to discuss! • key macro institutions and micro incentives • aggregation of micro at the firm level

4. Business Cycles • know the least; most to discuss! • defined (vs. “natural rates of growth”—ability of the economy to grow [or not]) • see: slowdown vs. “recession” • goals wrt unemployment and growth vs. inflation • SR & (or vs.?) LR • intro to activism or not—in the face of market “struggle” • see: “gang of 5” • intuitively, depends on speed and accuracy of govt attempts to regulate (theory vs. practice) VS. speed of mkt’s SCM • see: mkt adjustment as quick in micro vs. not-as-much in labor (and sometimes, problems in credit markets)—and thus, struggles in macro

5. Macro theories/models • AS/AD defined • Classical, but Great Depression • Pure Keynesian—with underlying micro/labor markets • stories for “sticky wages/prices, esp. downwards” (confusion, contracts; minimum wages, unions) • Modified Keynesian and old Phillips Curve, but 1970s stagflation • Modern synthesis of SR vs. LR—and New Keynesian vs. New Classical debate on the above • govt can (mostly) change/influence AD (C + I + G) • mkt (mostly) corrects with SRAS (as in Micro, through changes in prices)

6. Govt policy options 1.) monetary policy • money and inflation: fiat money; MS = MB * MM (monetization of debt and “fractional reserve banking”; “goldsmithing” example) • “quantity theory of money”: MV = PQ • policy tools, esp. open market operations and “discount rate” • turns out to be best set of options (vs. fiscal policy), but still limited

7. Govt policy options 2.) fiscal policy • Keynesian G/T with impact on consumption and investment • vs. supply-side change in MTR—adds impact on production too • but size of change; where on Laffer Curve; and temporary vs. long-term

8. Problems with activism (in practice), esp. (Keynesian) fiscal policy 1.) indirect (and direct) crowding out 2.) part of New Classical Economics: how (anticipated) fiscal policy can change SRAS 3.) Bastiat (Hazlitt's Lesson) on more G as T, debt (future T), or inflation T 4.) politics and Public Choice economics (esp. in ldc’s)—w/ app. to… 5.) timing—three (Friedman’s “long and variable”) lags: recognition, implementation, effectiveness 6.) concerns about the accuracy of activism, given:  Epilogue: ultimately, “faith” in ability of govt vs. mkts/prices to adjust, etc. (incl. in general, post-WWII confidence/faith in govt vs. 1960s-present wariness)

9. Key macro events Great Depression • Smoot-Hawley • four tax increases (incl. payroll taxes!) • MS decrease (through MB) • unions strengthened • minimum wages/prices (including Schechter Supreme Court case on low chicken prices) • moral suasion on wages • see: Amity Shlaes 1970’s/80’s • OPEC supply shock (also shifts SRAS) • increasingly active G and incentive to increase MS (especially without indexing)—and Keynesian beliefs about activism—resulted in ratified supply shock, stagflation, double-digit U Great Recession • housing bubble (given various micro policies) • banking crisis, and the unknown of messing with a system based on fiat money • “stimulus” under Bush/Obama • increasing costs/uncertainty throughout the economy) • state/local problems (micro and macro)