Monetary and Fiscal Review

Here is the review I promised.

Go to the following link and scroll down to monetary and fiscal policy. You should check out each of the reviews under that heading.

http://reffonomics.com/textbook/macroeconomics.html

What rung of the ladder are you on?

More bad news about the recession. This information is somewhat similar to consumer confidence but much more forward looking. Check the following link to read about the methods used to arrive at this conclusion.

http://freakonomics.blogs.nytimes.com/2008/11/13/the-economic-downturn-takes-its-toll-on-well-being/

It’s a Time to Listen, and to Obey the Laws of Arithmetic

This editorial appeared in the New York Times. The author is one of the smartest and most gifted economists of our time. Obama should listen to his advice. Bush had him as his economic advisor but did not, in my opinion, utilize him very well. Mr. Mankiw forgot he was in Washington, inconveniently spoke the truth to the press, and was immediately gagged by the White House. - McKay

By N. GREGORY MANKIW
Published: November 8, 2008
IT was a good campaign, and a historic victory. As the president-elect gets ready for new responsibilities, here are four ways to become a reliable steward of the economy:

LISTEN TO THE ECONOMISTS During the campaign, Senator Barack Obama assembled an impressive team of economic advisers from the nation’s top universities, including Austan D. Goolsbee of the University of Chicago and David Cutler and Jeffrey Liebman of Harvard. The campaign’s director of economic policy, Jason Furman, is a smart, sensible and well-trained policy economist. I know: he is a former student of mine.

It would be a good idea to pay close attention to what they have to say. They will often give advice quite different from what will be coming from the Congressional leaders Nancy Pelosi and Harry Reid. To make sure the views of economic advisers are heard, they should have offices close to the Oval Office. The chief of staff should invite them to all the relevant meetings.

EMBRACE SOME REPUBLICAN IDEAS No party has a monopoly on truth. It would be wise to adopt the best Republican policy proposals, as Bill Clinton did with welfare reform in 1996.
Health policy is a case in point.

Over the past several months, Senator Obama lambasted Senator John McCain’s proposal to reform the tax code to include a refundable health insurance tax credit. But long before Mr. McCain ever proposed this idea, it was advanced by Mr. Furman, the Obama campaign’s policy director. He can explain why the Furman-McCain plan makes a lot of sense.

Now the new president may decide that this plan does not go far enough. He may want a more generously funded social safety net to help the less fortunate get health care. Fair enough, but in pursuing that goal, he will run into the next issue.

PAY ATTENTION TO BUDGET CONSTRAINTS The nation faces a long-term imbalance between government spending and tax revenue. The fundamental problem is that the federal government has promised the elderly more benefits than the tax system can support. This fiscal imbalance will become acute as more baby boomers retire and start collecting Social Security and Medicare benefits.

Yet during the campaign, Mr. Obama promised to cut taxes for 95 percent of Americans, to vastly expand health insurance coverage and never to cut Social Security benefits or raise the retirement age. The new administration will almost surely have to renege on some of these promises. As the economic team will often say, even if the laws of arithmetic are ignored during campaigns, they become a real constraint when making actual policy.

RECOGNIZE PAST MISTAKES As a new senator, Mr. Obama voted along predictable left-wing lines. As president, he will need a more eclectic, nuanced approach.

Consider trade policy. In the Senate, he voted against the Dominican Republic-Central America Free Trade Agreement. He opposed free-trade agreements with Colombia and South Korea. He supported Senators Charles E. Schumer and Lindsey Graham in their quest to put tariffs on Chinese goods if China failed to revalue its exchange rate. He supported the Byrd Amendment, which encouraged domestic companies to file antidumping suits against foreign competitors. He supported subsidies for domestic producers of corn-based ethanol and tariffs on imports of more efficient sugar-based ethanol.

The team of economists can explain why these positions were wrong-headed. Economic isolationism is not in the national interest. A high point of the Clinton presidency was the enactment of the North American Free Trade Agreement, which passed both the House and Senate with a majority of Republicans and a minority of Democrats.

Last Tuesday, many people voted for Mr. Obama hoping that he would achieve the kind of economic success that Mr. Clinton enjoyed in the 1990s. The best chance of delivering what they want requires abandoning some positions and pursuing a more moderate, bipartisan course.

More Ammunition for People Who Hate Daylight Saving Time

By Stephen J. Dubner
Even if you hate daylight saving time, you tell yourself: Hey, I shouldn’t be so selfish, it’s good for the economy, or for the environment, or for farmers, or something. Right?

Well, um, perhaps not. Consider a new working paper, “Does Daylight Saving Time Save Energy? Evidence From a Natural Experiment in Indiana,” by Matthew J. Kotchen and Laura E. Grant:

The history of daylight saving time (D.S.T.) has been long and controversial. Throughout its implementation during World Wars I and II, the oil embargo of the 1970’s, consistent practice today, and recent extensions, the primary rationale for D.S.T. has always been to promote energy conservation.

Nevertheless, there is surprisingly little evidence that D.S.T. actually saves energy. This paper takes advantage of a natural experiment in the state of Indiana to provide the first empirical estimates of D.S.T. effects on electricity consumption in the United States since the mid-1970’s.
Focusing on residential electricity demand, we conduct the first-ever study that uses micro-data on households to estimate an overall D.S.T. effect. The dataset consists of more than 7 million observations on monthly billing data for the vast majority of households in southern Indiana for three years.

Our main finding is that — contrary to the policy’s intent — D.S.T. increases residential electricity demand.

Estimates of the overall increase are approximately 1 percent, but we find that the effect is not constant throughout the D.S.T. period. D.S.T. causes the greatest increase in electricity consumption in the fall, when estimates range between 2 and 4 percent.

These findings are consistent with simulation results that point to a tradeoff between reducing demand for lighting and increasing demand for heating and cooling. We estimate a cost of increased electricity bills to Indiana households of $9 million per year. We also estimate social costs of increased pollution emissions that range from $1.7 to $5.5 million per year. Finally, we argue that the effect is likely to be even stronger in other regions of the United States.

On the bright side, if President-elect Obama is looking for some quick hits on energy conservation, here’s one that’s all teed up and ready to go: Kill D.S.T.!