The AMU Economics Blog will place a temporary pause on new posts. Our blog host is slowly winding down support and no longer permits the inclusion of images (ARGH!). Luckily, the the university has committed to re-vamp all of the blog sites as part of a university-wide update to the AMU website. We hope to be up and running again by the end of this summer, with periodic posts and updates about our students, faculty, and department events.
We'll continue to make announcements here for our subscribers and we'll announce when the new site is up and running. Much thanks to our subscribers and we look forward to to have things running again soon!
Thursday, April 16, 2020
Monday, March 9, 2020
Will there be a recession in 2020?
Will there be a recession in 2020?
From the stock market to the White House, this is the
question in everyone’s minds. Will I get
to keep my job? Will my business do
well? Or will it take recent college
graduates a long time to find meaningful employment? Will bankruptcies and layoffs become common?
While this is difficult to know for certain (try predicting
if you will be healthy in December, or how long the coronavirus will be a
problem), we can try to answer this question with some fundamental concepts and
with some data. My goal in this post is
not to give a full answer – that would take too long – but to give you a hint
of the sorts of things you should look at.
Here’s the quick take: the visible symptoms are those that typically
precede a recession by about 12 months.
A recessions is a widespread contraction in economic
activity – less buying, less selling, less producing, less hiring – across the
economy, for an extended period of time.
People have jobs if businesses want to produce, and business want to
produce if people want to buy their production.
This suggests some data worth looking at:
·
Retail and food service sales
· Breaking ground for new housing construction
· Automobile sales
· Orders for new machines
· Breaking ground for new housing construction
· Automobile sales
· Orders for new machines
Let’s take each of these in turn. The most obvious sign of a bad economy is
empty shopping districts (nowadays, fewer Prime deliveries). Retail sales took a big dive in the last recession.
In other recessions, we would see a similar pattern – or at least a
significant slowdown in retail sales: for example, retail sales flattened out
in the 2001 recession. Retail sales have
been growing steadily since the recession ended in June 2009, with very few
blips … except for a bad holiday shopping season in 2018 and some significant
“flattening” in the last six months.
It’s too early to tell, but is this a sign of a recession later this
year?
Let’s take a deeper look.
Of all of the purchases families make, the decision to buy a car might
be the most momentous (besides buying a house). Think about a car’s usefulness
– also think about the long-term commitment of a monthly car payment. It tells us a lot about how consumer are
feeling about their personal prospects and their outlook for the economy. Also think about the implications of weak car
sales for production and jobs all across the US.
Car sales were very strong in the nineties. They never really recovered from the 2001
recession, which is an indication of how weak the economy felt back then, even
as housing boomed … but that’s a story for another time. They collapse when the financial crisis
started. Would you replace your beat-up
minivan if your mortgage is underwater (that is, if the price of the home is
less than you borrowed for it) and if you are unsure if you will have a job in
a month? Car sales recovered, but (in
inflation-adjusted terms) have stayed fairly flat over the last three years.
Can we use car sales as a recession predictor? You can see that car sales essentially
flattened out a year before the 2001 recession started and that they began to
fall about two years before the 2008 recession.
Is the slowdown in car sales over the last few years a bad portent?
What about homebuying?
If I buy a new house, I am saying that I believe my personal finances
are stable (and that I believe my employer is likely to do well). So we can use homebuying as a proxy for
consumer confidence.
Even better, we can use home builders’ choice to start
construction as an indicator of their confidence in the economy. A “new housing start” is a sign of builders’
beliefs regarding all sorts of things, from the price of construction materials
to mortgage interest rate to potential buyers’ purchasing power. Home construction also impacts a wide variety
of supporting industries (from contractors and specialists to the financial
industry to moving companies to restaurants that feed the workers). This indicator used to be the most potent
indicator of the health of the economy: the ups and downs of housing starts
almost perfectly matching the upswings and downswings of the whole economy.
In 2001 the link was weakened: a combination of aggressively
low interest rates and tax cuts kept home starts from falling, although
possibly this set up the stage for the housing boom and collapse that
followed. Housing starts in 2009 hit
record lows. Since then, they’ve
recovered to about average (even counting the most recent blip in December of
2019, which could very well be reversed or be an error of measurement). This may be an optimistic sign, a sign of an
evenly-keeled economy. If you were to
worry, you would be concerned about the flattening of this indicator between
mid-2015 and late 2019.
Suppose you are a manufacturer. You see all sorts of signs of a booming
economy, especially how your factory is working overtime. Your machines are so overused, you need to
replace them – or expand your factory.
So you put in “new orders for durable goods,” meaning new
machinery. In inflation adjusted terms,
this indicator also helps us sense when a recession is coming: notice that it
stopped growing about a year and a half before the 2001 recession and about a
year before the 2008 recession.
The “recovery” in the last twelve years has felt flat – and
indeed is flat for producers of manufacturers’ durable goods. Since 2012, except for a small boomlet
between Aug 2017 and Sept 2018 (perhaps in anticipation of the December 2017
tax cut), durable goods orders have not grown like they did in the previous two
expansions, and indeed have been contracting for a year and a half. Manufacturers do not seem convinced that this
is the time to expand their factory.
However, durable goods orders contracted between mid-2014 and mid-2016
without a recession following.
Summarizing: the economy has been behaving in a way that
would be consistent with a late-2020 recession.
Some might argue that, no, what we are seeing is a “soft landing” and
that the economy will just experience lower growth (but no contraction). “Soft landings” are mythical creatures. The flattening of durable-goods sales (for
households and businesses) that we are seeing now is typically followed (a few
months later) by a recession.
Could this be wrong?
Absolutely! We’ll know it when we
get there.
In later installments, we’ll look at other important
determinants of the health of the economy.
In the meantime, I hope I have given you some food for thought!
Monday, February 17, 2020
Essay Winner: Maggie Kennon
- Kealan Vasquez
- Niklas Jenkins
- Max Bodach
- Maggie Kennon
As winners of the essay contest, the students attended the Southern Economics Association conference in late November and they'll have their essays published here. So, without further ado:
One of the most intriguing topics covered in macroeconomics is growth. Long run economic growth, an increase in productivity, is practically synonymous to an increase in technological innovation. In both the endogenous, 𝑌=𝐴𝐾, and exogenous, Δ𝑌/𝑌=Δ𝐴/𝐴+𝛼𝐾(Δ𝐾/𝐾)+𝛼𝑁(Δ𝑁/𝑁), production functions, technology, or A, directly affects output. That is, a percentage increase in technology will lead to the same percentage increase in output. It seems simple to say increasing A will increase productivity, but since there are so many factors that affect technology, the study of economic growth is complex. One such factor that has particularly shaped the American economy is culture.
American culture is defined by a sort of frontier ideology. When Alexis de Tocqueville visited early America, he wrote about a society unlike any he had encountered. He explained this difference as a difference in mores, translated as manners, which is the culture of a country defined by its habits and beliefs. The American mores was encompassed by a spirit of adventure, initiated by the pilgrims that is continued even today. This spirit of adventure could be called a frontier ideology; it is the idea that new possibilities and great rewards are available to those who take risks. The pioneers were those who sought a physical frontier, which continued until America was settled from coast to coast, but the absence of a physical frontier did not signify an end to this frontier ideology. It became manifested in free enterprise and equal opportunity.
This ideology was re-imagined as the American Dream, or the idea that everyone has an equal opportunity to earn reward when risk is taken. America is the frontier of possibility and opportunity, and entrepreneurs became the new pioneers. The frontier was no longer about the quest for land, but about the quest for ideas and innovation.
To appreciate just how much America’s culture has impacted its economic growth, consider other ways in which productivity increases. Increasing capital and labor should increase productivity, but they do not have the long-term effect of technological innovation. By the law of diminishing marginal returns, increasing capital or labor will at some point have very little marginal effect on productivity.
Furthermore, the economy tends to remain at an equilibrium, or steady-state level of capital, where saving per capita is equal to investment, or when enough capital is being invested to replace that which is depreciating and to compensate for the growth in population. Adding capital beyond the steady-state level will not have a long-term effect on productivity because the level of capital will converge to the equilibrium level. Without technological innovation, there would be no real growth in the economy.
American culture is defined by a sort of frontier ideology. When Alexis de Tocqueville visited early America, he wrote about a society unlike any he had encountered. He explained this difference as a difference in mores, translated as manners, which is the culture of a country defined by its habits and beliefs. The American mores was encompassed by a spirit of adventure, initiated by the pilgrims that is continued even today. This spirit of adventure could be called a frontier ideology; it is the idea that new possibilities and great rewards are available to those who take risks. The pioneers were those who sought a physical frontier, which continued until America was settled from coast to coast, but the absence of a physical frontier did not signify an end to this frontier ideology. It became manifested in free enterprise and equal opportunity.
This ideology was re-imagined as the American Dream, or the idea that everyone has an equal opportunity to earn reward when risk is taken. America is the frontier of possibility and opportunity, and entrepreneurs became the new pioneers. The frontier was no longer about the quest for land, but about the quest for ideas and innovation.
To appreciate just how much America’s culture has impacted its economic growth, consider other ways in which productivity increases. Increasing capital and labor should increase productivity, but they do not have the long-term effect of technological innovation. By the law of diminishing marginal returns, increasing capital or labor will at some point have very little marginal effect on productivity.
Furthermore, the economy tends to remain at an equilibrium, or steady-state level of capital, where saving per capita is equal to investment, or when enough capital is being invested to replace that which is depreciating and to compensate for the growth in population. Adding capital beyond the steady-state level will not have a long-term effect on productivity because the level of capital will converge to the equilibrium level. Without technological innovation, there would be no real growth in the economy.
Monday, January 27, 2020
Essay Winner: Max Bodach
Earlier this semester, the Econ dept hosted an essay writing contest inviting students to explore, advance, apply, or illustrate an idea that they found most appealing, counter-intuitive, or poignant in their economics classes. We had 4 winners in no particular order:
- Kealan Vasquez
- Niklas Jenkins
- Max Bodach
- Mairead Kennon
As winners of the essay contest, the students attended the Southern Economics Association conference in late November and they'll have their essays published here. So, without further ado:
My time studying
economics as part of the Political Economy & Government major has been
extraordinarily fruitful. One idea that has consistently stuck in my head from
the very first time we discussed it in Dr. Bartsch’s Principles of
Macroeconomics class is the idea of how international trade and the price
system virtually eliminate the prospect of famines.
Famines have been with
the human race for nearly all our history. Chapter 47 of Genesis relates how
Joseph, serving as Pharaoh’s chief executive, expropriated all Egyptian land
except for priestly holdings and then levied a 20 percent tax on all grain
production in order to stockpile for famines. Famines ravaged European
populations, notably in mid-18th-century Ireland, and sparked mass
migrations. Millions of people in the developing world died due to malnutrition
and starvation. The scourge of famine has stalked us for millennia, claiming
billions of victims.
While many solutions have
been proposed and experimented with, only one solution has actually demonstrably
reduced the incidence of famines significantly. The twin innovations of
international trade and a price system solve a problem that has consistently
bedeviled humanity.
Prices communicate an
enormous amount of information to an enormous number of people. They
incorporate supply of a particular product, demand for a particular product,
and the expectations of both producers and consumers in how the price will
change. The communication of scarcity is particularly helpful in the famine
context because food producers know where to direct their resources in order to
take advantage of rising prices (and therefore rising profits). They also help
food consumers decide how to allocate and prioritize their scarce resources in
order to achieve maximum utility in any given situation,
However, in order for the
price system innovation to function effectively, trade liberalization must be
in force. Free international trade (or at least trade without significant
barriers) enables producers in food-rich countries to meet food demand in
diverse markets across the world, which helps stave off famines before they
even begin. International trade, prices, and an interconnected world have
prevented more famines than ever before in history.
The only famines that
occur in the modern era are caused by armed conflict. This is a massively
underappreciated aspect to daily life that improves the outcomes of millions of
people worldwide. The abstract insights that come from a systematic study of
economics have a concrete consequence in millions of lives. This insight helped
me understand the value of economics and of economic thinking more broadly, and
I am grateful to Dr. Bartsch for explaining it more eloquently than myself.
Monday, January 6, 2020
Essay Winner: Niklas Jenkins
Earlier this semester, the Econ dept hosted an essay writing contest inviting students to explore, advance, apply, or illustrate an idea that they found most appealing, counter-intuitive, or poignant in their economics classes. We had 4 winners in no particular order:
- Kealan Vasquez
- Niklas Jenkins
- Max Bodach
- Mairead Kennon
As winners of the essay contest, the students attended the Southern Economics Association conference in late November and they'll have their essays published here. So, without further ado:
The relationship between
free trade and comparative advantage deserves a great deal of attention, as it provides
the most productive method for mutually beneficial cooperation. They mutually
enable each other and encourage specialization to produce more goods more
efficiently. This idea, always important, has become particularly crucial in
the Information Age, where improved technology allows for much easier trade
over long distances and further increases the potential benefits of
specialization. However, there are those who would selfishly hurt the rest of
society and the world to protect their own interest and restrict the free
market. There should be a push-back against such attempts, as it is deeply
harmful to the economy at any scale. Free trade and comparative advantage are
basic building blocks of a competitive market that work together amazingly
well, and should be protected from the interference of self-interested
groups.
In order to understand the
importance of the relationship between these two ideas, we must first delve
further into them. Free trade essentially means the removal of political barriers
to the exchange of good between nations, while comparative advantage refers to
the ability of an individual or group to produce a good efficiently relative to
others. These are both important to the maximization of total welfare.
Comparative advantage lowers costs, thus also lowering prices, and free trade
ensures that it is much easier to buy at those lower prices. A nation or group
with a comparative advantage in producing a good is thus incentivized to
specialize in production of that good, enabling each country to produce where
they are relatively most productive. It acts as a larger scale example of
removing entry barriers in a smaller scale economy, leading closer to a global
version of perfect competition. As perfect competition maximizes welfare, and
best encourages a properly functioning and unrestricted market, this seems
desirable on a larger scale as well. Therefore, these two functions should be
strongly encouraged by all governments.
Free trade and comparative
advantage grow in importance in the Information Age, where improvements in
technology and communication increase the potential gains from both. A greater
variety of goods and capital means that specialization is even more important,
and comparative advantage grows more pronounced as advanced countries are
better able to produce high-tech products. As an example of how this results in
an improvement overall, better manufacturing opportunities have appeared for
less advanced countries. The overall economic growth from various sources also
means the magnitude of this improvement will be greater.
However, there are challenges that must
be met to enable this growth. Some groups will be hurt by the additional free
trade, as some firms that may previously have been able to sell domestically
lose that market due to the greater availability of cheaper foreign goods. This
will hurt those firms and their employees to a potentially significant extent.
While in the long term it will have good effects such as encouraging more
investment in areas with a comparative advantage, in the short term problems
such as unemployment do arise. This provides an incentive for some groups to
try to prevent free trade. The easiest path to this goal is through lobbying
the government for measures like tariffs and quotas that benefit the affected
sectors to the detriment of everyone else. Producers in particular benefit from
such legislation, which is problematic as they have the resources and unity to
make lobbying much easier. Therefore while free trade and comparative advantage
are highly beneficial, the problem becomes more complicated in practice.
Overall, the takeaway should be that while challenges will
arise, encouragement of free trade and specialization will be for the overall
good. Through them, everyone who participates will be
better off in the long run with patience. Attempts to attack the practice of
these ideas both attacks the freedom of the market and causes long term
harm in service of short term considerations.
Wednesday, December 18, 2019
Our Economics Honors Theses
This past semester we had 3 students taking Econometrics who took their first major step toward a great honors thesis. I'm excited to see what these young ladies conclude. Below are their abstracts. If you encounter these young scholars out in the wild, then be sure to ask them about their research!
(Also, please subscribe to our blog posts by entering your email address to the right of the post)
Mary-Kathleen Dowling-Parra
Micro and Small Enterprise Financing in Peru
Microfinancing is often
seen as the answer to providing financial security and empowerment to small
business owners who often would not have access or be unable to obtain loans or
credit otherwise. In this study, I test the impact of financing on
micro and small businesses in Peru to evaluate whether it truly helps marginalized
business owners and increases their business profits. Using Micro and Small
Business Surveys from Peru's National Institute of Statistics and
Information, I examine which demographics are most likely to receive
financing as well as what type of financing increases a business’s profits the
most. I consider the owner’s
gender, age, and education as well as the age of the business, its technology, number of employees, and their training. I find that male owners
were more likely to receive financing than women - though there is no evidence that
this is due to discrimination or different barriers to access. The
characteristic that most increases the likelihood of an owner receiving financing is when an owner has received business training. As I further my study, I will explore where there is a gender difference in the type of financing that an
owner receives how it affects micro and small
businesses.
Brianna Hougham
The Protection of Women against Domestic Violence Act and Children’s School Outcomes in India
Studies have shown the challenges children face after
witnessing or falling victim to domestic abuse. There is high incidence of
violence at home in India, with fifty-two percent of women believing it is okay
for a man to beat his wife. This violent home environment can have detrimental
effects on children and their school outcomes. I examine whether the implementation
of the Protection of Women against Domestic Violence Act (2005) had a positive
impact on children’s school outcomes. My study uses panel data of school age
children from the 2006 and 2012 Indian Human Development Survey. Additionally, I
use data from the Fourth Monitoring and Evaluation Report 2010 on the Protection
of Women from Domestic Violence Act of 2005, which reports data on the number
of protection officers and the state-level estimated budget set aside towards
implementation of the act. I study whether increased budgets and a greater
numbers of protection officers help in improving school outcomes for children.
My preliminary findings show that states with enforcement of Protection
Officers increased children’s attendance in school. An increase in the budget,
however, led to a decrease in children’s school attendance, suggesting that budgets
for education were decreased in order to fund the act.
Julia Wool
Does increased government health funding impact the discovery of new antibiotics? Previous studies state the importance of antibiotic research given the growing concern of antibiotic-resistant infections. Researchers point to a void in the discovery of new antibiotics that began in 1987 and has continued to the present. The consensus in the literature is that the lack of government and private funding has been a significant contributor to this void. To examine this I use health data from the National Science Foundation on research and development expenditures broken down by type of research: basic, applied, and development. My preliminary descriptive statistics show that since 1953 all three types of funding by the federal government have increased. For the private industry my findings show that both applied and development research and development have increased while basic research and development has stagnated. The preliminary findings from my Probit model show a negative and statistically significant relationship between government funding and the discovery of new antibiotics. However, this result is not consistent with the theory. Therefore, in a future extension, I plan to extend my model to control for regulations that could have disincentivize the discovery of new antibiotics by the private sector.
Wednesday, November 27, 2019
Balser Recording
In case you missed it, below is a link to the audio recording of the Drs. Balser talk in which he discusses maternity leave and maternal health. Unfortunately, we are unable to release his lecture on the promotion gap.
Audio starts at about 8:40:
Audio starts at about 8:40:
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