How can losses on mortgage-backed bonds, a small share of US financial assets, lead to the loss of millions of jobs? In a micro world they can’t. A small segment of a large market is, well, small. Demand for a single farmer’s wheat may be highly elastic in price, but that’s not true for wheat as a whole, and wheat is but one grain, and grain but one (important!) component of food. Changes are attenuated, and so it makes sense to focus on individual markets in isolation.
That’s not the case in the macro world, the economy as a whole. Everything is interconnected: income affects expenditure affects income. In micro jargon, this is an externality. When everything has to add up to 100%, changes can be amplified. What is impossible in a purely micro world turns out to be all too real in a macro one. Changes don't necessarily average out, and so we can and do see recessions in which millions lose jobs, and booms that generate sustained price rises – inflation – but fail to raise our standard of living. What government does affects the economy: used adroitly, policy can lessen booms and mitigate busts. But policymakers aren't always capable or publicly minded. Can policy rules improve upon discretion? Perhaps not, but we need the metrics and analytic tools that we develop over the course of the term to make that argument.
One task is to develop metrics. There's the economy as a whole, GDP, and (un)employment, growth, and movements in overall prices (inflation). We also need to disaggregate the economy into parts amenable to analysis – interest rates and financial markets, investment, consumption, international trade, and government activity, and capital and labor and productivity. We model the behavior of these individual components and then put the pieces together using the concepts of aggregate supply and aggregate demand. The interactions of those two theoretical constructs allow us to understand how monetary policy and fiscal policy affect the economy, and to elucidate tradeoffs between unemployment and inflation and growth.
Unlike in the typical microeconomics course, we focus on real-world empirical data. On a regular (more-or-less daily) basis we will look at the specifics of the US economy, using FRED. We will also read about the macroeconomic history of Europe, Japan and the developing world, to better put our experience in perspective. That's also important because we live in a global economy: the US after all accounts for only about 5% of the world's population. Our share of global output and income is higher, but (thankfully) many less developed economies are growing rapidly. In concrete terms, in 1945 the US economy was many times larger than those of Europe and China. Now we are #3 in "real" (PPP) terms, behind China and the EU.
By the end of the term you should:
- know the core subsystems used to disaggregate the larger macroeconomy, such as Consumption (C) and Investment (I)
- understand the impact and tradeoffs of monetary policy (MP) and fiscal policy (FP)
- be able to explain key linkages between the US economy and the rest of the world (ROW) through trade and financial markets
- be able to trace key examples how a macroeconomy can amplify small changes, for better and for worse
- understand the significance and limitations of key metrics such as unemployment and inflation
- be able to explain the sources of long-run growth
- be familiar with current policy issues, such as (Federal) deficits and debts, including their magnitude relative to the overall economy
Texts – see the Texts tab. We use Krugman & Wells Principles of Macroeconomics and Levinson, An Extraordinary Time. Note that the 5th edition of K&W just came out this month, but most material is identical to that in the 4th edition. If you have access to a 4th edition, that will be fine, and may save you money.
I will reinforce the core definitions and models in class, with a few modifications to those in K&W. We will also discuss current data almost every class; the focus of what we do is the US economy in 2018 and beyond. You will write two papers on An Extrordinary Time, to help you relate our models to the post-WWII economy. Two midterms and a final will help you apply what you learn to narrower problems. You will also be asked to (co)author two blog posts and participate in online discussion of yours and those of your peers. That will help us focus on contemporary topics, and keep up-to-date with what's going on in the economy.
I will provide a topic and a detailed guide for each paper. All will draw on Levinson’s An Extraordinary Time. Note that I want all papers as a hard copy. For help formulating your paper strategy and editing your draft, please make use of the professional writing consultants at the Williams School CommCenter
I will ask you to do two blog posts this term, paired with another student and due on a specified day. I suggest a topic, but you all are free to "pitch" your own. See guidelines under the Guidelines tab. With about 20 students per section, that gives us 10 pairs and 2 posts per week. Of course you are then expected to read and comment on your classmates' posts. I will add a few posts as well. (See too my own blog, Autos & Economics on Google blogspot.) Except as you've pitched a different topic, I urge you to do a data-driven post using the data available on FRED. We will often discuss the latest post at the start of class.
Both midterms are takehome exams. When the time comes the questions will be posted on the website and handed out in class. As with other Williams School courses, you will need to take your final exam in Huntley during one of the standard end-of-term am/pm exam slots. Bring your own Blue Book. You will find cold tests from last term on the web site.
The Krugman and Wells text is quite clear, so as W&L students you ought to be able to learn the material on your own. But be realistic: the discipline of attending class helps. Given our 12 week term, we don't have time to cover everything in the text, while current issues mean some material will be added. Class helps you prioritize material. Furthermore, parts of macroeconomics are counterintuitive. Reiteration and discussion help.
All grades are letter grades. I post grades to Sakai but note that it won't accept letter grades, and rounds down not up. I set A+=100, A=96, A-=92, B+=88, B=84, B-=80 and so on. A slashed grade is intermediate, for example B/B+ = 86.
I will be available:
- 4-7 pm Monday evenings, but with delays for the monthly university faculty meeting and
- Tuesday afternoons from 2:00-5:30 pm at Lexington Coffee Shop on Washington Street. Coffee is on me – I run a tab, tell them you're there to meet me.
- Wed & Thurs by arrangement. If neither time works, take the initiative and contact me.
In addition, if you walk past my office and I'm there, invite yourself in. I'm in Huntley 125B, on the lower level next to the the handicap ramp entrance. I prefer that you email me at email@example.com, but for last-minute issues call or text me at 460 - 6288.
My midterms are takehome tests. Please pledge. Ditto papers. I encourage you to have others edit, and to acknowledge their input as well as to cite outside sources (as per paper guidelines).
Please contact me in private, as per the university policy quoted below. Note that you will need to work in advance with the staff administering final exams if you need a separate room or extra time.
Washington and Lee University makes reasonable academic accommodations for qualified students with disabilities. All undergraduate accommodations must be approved by the Title IX Coordinator and Director of Disability Resources. Students requesting accommodations for this course should present an official accommodation letter within the first two weeks of the term and schedule a meeting outside of class time to discuss accommodations. It is the student’s responsibility to present this paperwork in a timely fashion and to follow up about accommodation arrangements. Accommodations for test-taking must be arranged at least a week before the date of the test or exam, including finals.