Article Review 3

David Stockman goes on again about how the world is drifting towards economic collapse. This time he does that by ranting about the collapse of credit-based spending. He claims that the central banks of developed economies were responsible for pumping economies full of money and falsifying financial market data and prices which led to an increase in credit spending by households. This has led to a $185 trillion growth in worldwide debt which is 3.7 times as much as the corresponding growth in GDP (which he claims has also been overstated by the central banks and other stuff). He then goes back to complain about the Fed's decision not to raise rates (his favorite topic to rant about) and claim that that pumping of free money into the financial sectors of the economy is creating financial bubbles. He continues to go on about how financial firms such as Goldman  Sachs are happy with the "lunacy" of 100 straight months of interest rates at 0 because it gives them free funds for their "gambling." He then reminds the reader that the global system is so interconnected that issues in Brazil are related to issues in North Dakota, which is probably the most reasonable thing he's said yes.
It is relatively easily to understand what he's saying because he's said it over and over again: the world economy is destined to fail.

Chapter 8 Summary

Chapter 8 was relatively simple and easy to understand. It discussed in more detail the costs of taxation that were introduced in the previous chapter. Taxes are necessary to allow government to carry out its necessary functions; however, they have a cost on welfare--that is, the total economic well-being of a market. This is closely related to the idea of surplus. The cost of taxation ends up being higher than the revenue raised by the government. Tax revenue is equal to the area to the left of the tax wedge--that is, the area between what buyers pay and what sellers receive and the quantity sold. This benefit to government is eventually passed back along to consumers and producers who the government spends the revenue to benefit. When a tax is passed, the losses to buyers and sellers exceed the revenue raised by the government. This is the deadweight loss of the tax and is represented by the triangle between the tax wedge and the 2 curves. The deadweight loss is caused by the distortion of incentives the tax creates, which prevents some buyers and sellers from carrying out trades that otherwise would be mutually beneficial. The size of the deadweight loss is determined by the elasticities of supply and demand. The greater the elasticities of supply and demand, the greater the deadweight loss, which is logical because a change in price due to the tax will produce a larger change in quantity for more elastic markets. The Laffer curve shows that a larger tax can actually reduce revenue in addition to increasing deadweight loss.

Chapter 7 Summary

Chapter 7 began to discuss the idea of welfare economics--that is; the study of how the allocation of resources affects the well-being of people within the economy and therefore the economy as a whole. It began by introducing the idea of consumer surplus--that is; how much someone is willing to pay for an item minus how much they actually pay for it. In general, this is a reflection of economic well-being. Consumer surplus is a measure of how much extra value consumers receive for a good and can easily be measured by finding the area under the demand curve and above the market price. Obviously, the lower the price, the greater the consumer surplus. Producer surplus is defined similarly--the amount producers receive minus their cost (which is a measure of willingness to sell and should be considered to include opportunity cost as well as monetary costs). Like consumer surplus, it is a measure of the benefit paid to sellers and is measured by the area above the supply curve and below the market price. Obviously, a higher price raises producer surplus. The sum of consumer and producer surplus, called total surplus, is a good measure of society's total economic well-being. If an outcome maximizes total surplus, it is efficient. In addition to caring about efficiency, one might also care about equity--or how resources are divided up. At equilibrium, markets are most efficient, however, not necessarily the most equitable as that depends on values.

Article Review 2

This article was slightly easier to follow in a way than the first one. The author's primary claim is that a global collapse in commodity prices is beginning to cause problems in the financial sector and is also having an increasing effect on the US economy. The author notes that commodity prices have dropped 50% over the past 3 years, which is threatening to burst numerous bubbles in financial systems worldwide. He uses the examples of Shell's abandoning of Arctic drilling, Alcoa's split into 2 companies, and Glencore's stock collapse. The author then decides to go off on China, claiming that their economy is in collapse due to capital outflows and that the Communist party is trying to prop up a house of cards with more controls on the market and through devaluation of the yuan. He then connects this collapse in Chinese financial markets with an overproduction of commodities, including steel, that has led to overbuilding in Chinese cities that now threatens to become a "freight train of deflation" that will eventually make its way over to America. He then questions why people would overpay for stocks (19.6X earnings right now) when China, the driver of previous economic growth, is in such great trouble. He claims that markets would've long since corrected for the impending global economic slowdown if it weren't for the actions of the Fed. He finishes by claiming that the situation is much worse than what occurred in 2008, and Brazil's near-depression is evidence of that.

Chapter 6 Summary

Overall, chapter 6 was relatively easy to understand. It was primarily an application of the material from previous chapters to government policy and actual issues in the real world. The first examples are price ceilings and price floors. Price ceilings are a legal maximum price for a good and price floors are a legal minimum price for a good. Price ceilings and floors can either be non-binding or binding, depending on if they are above or below the market price. If they are binding, they change the market price and do not allow it to reach equilibrium. A binding price ceiling will create a shortage, meaning that some method will have to develop to ration the good (as more is demanded than is supplied). Therefore, while the ceiling was intended to help buyers, it actually makes some of them worse off. This idea can be applied to explain why government price controls were partly responsible for the gas lines of the 1970's. Combining this with elasticity can also show that rent control, while perhaps effective in the short run, in the long run leads to a significant shortage of housing. Price floors function similarly to price ceilings, except they create a surplus. Minimum wage is a price floor and the surplus it creates reflects in unemployment. The effect is especially pronounced on low-wage, low-skill workers (because higher-skill workers have higher equilibrium wages and therefore the floor is non-binding). The final policy discussed is taxes which are necessary for governments to raise revenue. Importantly, taxes on buyers and sellers both have the same result: a lower quantity and a higher price to buyers and a lower one to sellers. This tax will fall primarily on the less-elastic side of the market. I have no questions about the material.

Chapter 5 Summary

Chapter 5 covered the idea of elasticity and how elasticity works. Elasticity is defined as how much buyers and sellers respond to changes in the market. Specifically, demand for (or supply of) a good is elastic if the quantity demanded changes substantially with a change in price, and inelastic if it isn't. The price elasticity of demand is the percent change in the quantity demanded divided by the percent change in price. Elasticity of supply is defined analogously. The midpoint method provides a more accurate definition of the elasticity of any good. If elasticity is greater than 1, the good is elastic, if it is less than 1, it is inelastic, and if it is 1, the good is unit elastic. The extreme case of an elasticity of 0 is known as perfect inelasticity. The other extreme, of an undefined elasticity, is known as perfect elasticity. Price elasticity of demand is influenced by the availability of substitutes, the necessity of the good, the definition of the market, and the time horizon under consideration. Price elasticity of demand allows for the calculation of total revenue, or price times quantity. If demand is inelastic, price and total revenue are directly related. If demand is inelastic, they are inversely related, and if demand is unit elastic, total revenue is constant. In addition to price elasticity of demand, there is also income elasticity of demand and cross-price elasticity of demand.
There are many applications of price elasticity of supply and demand. It can show that even though farmers' total revenue decreases from adopting more efficient wheat production methods, they must adopt it because of the forces of a competitive market. The changes in elasticity with respect to time horizon explain why OPEC failed to keep prices high for long periods of time.
I have no questions about this material. Difficulty: 1/3.

Article Review 1

This article was rather difficult to understand; however, I think I was able to grasp the main points. The article railed against the so-called "Keynesian Chorus" and their opposition to a Fed rate hike, which would lead to "tightening" (that is, making it more difficult to get a loan), on account of the Fed already having tightened too much. This is of course ridiculous because interest rates are so low that it is very easy to get them. His attack on the statistics used to enable this belief is rather difficult to understand but the general point is clear: the market is not tightened as the Keynesians claim.
He then moves on to attack the foundation of the Keynesians' argument on why interest rates should remain low; that is, the idea that low rates will encourage borrowing which will encourage spending which will stimulate aggregate demand. His claim that the actual impact of low rates has inflated the market for financial assets (such as stocks) rather than having any real impact on actual consumer spending and economic growth is logical and seems supported by the evidence. This leads to the logical conclusion that since lower rates haven't helped stimulate aggregate demand, higher rates won't hurt aggregate demand. A more interesting claim is the one that this has created a financial bubble, which the author claims is the largest of the century. My questions are as follows:
1. What would the response of a Keynesian to this defense be?
2. What other reasons might there have been for the Fed to not raise rates?