Economic InstabilityEconomic Instability

Chapter 14Chapter 14

Goals & ObjectivesGoals & Objectives

1.1. Phases of the business cycle.Phases of the business cycle.

2.2. Identify 5 causes of the business Identify 5 causes of the business cycle.cycle.

3.3. Unemployment & 5 types.Unemployment & 5 types.

4.4. How inflation is measured.How inflation is measured.

5.5. 5 causes & consequences of inflation.5 causes & consequences of inflation.

6.6. Measuring the distribution of income.Measuring the distribution of income.

7.7. Antipoverty programs.Antipoverty programs.

Business Cycles & FluctuationsBusiness Cycles & Fluctuations

Phases: Phases: 1. 1. recessionrecession: GDP declines for two : GDP declines for two quarters in a rowquarters in a row

2. 2. peakpeak: point where GDP stops : point where GDP stops going up.going up.

3. 3. troughtrough: turnaround point where : turnaround point where GDP stops going down.GDP stops going down.

4. 4. expansionexpansion: period of : period of recessionary recoveryrecessionary recovery

5. 5. depressiondepression: high unemployment, : high unemployment, work shortages, supply shortageswork shortages, supply shortages

Business Ups & DownsBusiness Ups & Downs

Great DepressionGreat Depression

October 29, 1929: October 29, 1929: Black TuesdayBlack Tuesday Why? Causes of the Great Why? Causes of the Great DepressionDepression

1.1. Easy Credit: Easy Credit: Federal ReserveFederal Reserve

2.2. Global economyGlobal economy: interdependent : interdependent banking & foreign loan defaults.banking & foreign loan defaults.

3.3. Overproduction: Overproduction: Technology & Technology & increased labor productivityincreased labor productivity

4.4. Speculation: Speculation: Buying on marginBuying on margin

19131913: Federal Reserve Controls Money & : Federal Reserve Controls Money & Banking=Banking=1616 years later: years later: Great DepressionGreat Depression

Causes of the Business CycleCauses of the Business Cycle

1.1. Capital ExpendituresCapital Expenditures: new ventures, : new ventures, capital goods technology, new markets.capital goods technology, new markets.

2.2. Inventory AdjustmentsInventory Adjustments: JIC theory (long : JIC theory (long run) vs. JIT theory (short run).run) vs. JIT theory (short run).

3.3. Innovation and limitationInnovation and limitation: new products, : new products, new technology, new process. (social new technology, new process. (social media, e-commerce).media, e-commerce).

4.4. Monetary FactorsMonetary Factors: Credit & loan policies : Credit & loan policies of the Federal Reserve.of the Federal Reserve.

5.5. External ShocksExternal Shocks: Oil prices, wars, free : Oil prices, wars, free trade agreements, international boycotts & trade agreements, international boycotts & strikes.strikes.

Unemployment

Unemployed: people out of work who made a specific effort to find a job during the past month: Employment Office

Limitations of Unemployment Rate: does not count people who are not looking for work or people with part-time jobs.

Unemployment & Education

Unemployment & Underemployment Rates

Kinds of UnemploymentKinds of Unemployment

1. 1. Frictional UnemploymentFrictional Unemployment: workers : workers between jobs.between jobs.

2. 2. Structural UnemploymentStructural Unemployment: changes in : changes in technology. Military Base closures.technology. Military Base closures.

3. 3. Cyclical UnemploymentCyclical Unemployment: recessionary : recessionary periods: automotive market, housing periods: automotive market, housing marketmarket

Kinds of UnemploymentKinds of Unemployment

4. 4. Seasonal UnemploymentSeasonal Unemployment: Life-guarding, : Life-guarding, snow skiing, summer school teachers.snow skiing, summer school teachers.

5. 5. Technological UnemploymentTechnological Unemployment: : automation that replaces less skilled automation that replaces less skilled workers.workers.

Concept of Full EmploymentConcept of Full Employment

Does not mean 0 unemployment rate. Does not mean 0 unemployment rate. Opinions vary: Most economists consider Opinions vary: Most economists consider

4.5% the margin of full employment.4.5% the margin of full employment.20002000: 3.9%: 3.9%

Inflation

Measuring Inflation: 1. deflation: decrease in the general price level.

Degrees of Inflation: A. creeping inflation: 1-3 % a year B. galloping inflation: 100-300 % a year

C. Hyperinflation: 500% or more per year

Supply-Side Economics 1980

Comparison Inflation Rates

Causes of Inflation

1. Demand-Pull Theory: government deficit/spending causes inflation.

2. Rising Input Costs: labor and wages, Unions, taxes, gov’t regulations/fees/fines.

3. Collusion: OPEC, large corporations 4. Excessive Monetary Growth: Federal

Reserve; Quantitative Easing (Q3)

Demand-Pull Inflation

Wage-Price Spiral: Cost-Push Inflation

Consequences of Inflation

1. The dollar buys less. Devaluation: Hard on fixed incomes, minimum wage earners.

2. Can cause people to change their spending habits: Decrease in spending.

3. Increases speculation: Rising home prices in 90’s

4. Alters the distribution of income. Lenders hurt more than borrowers. Gov’t Bailouts:

Poverty and the Poverty and the Distribution of IncomeDistribution of Income

•Reasons for Reasons for Income InequalityIncome Inequality: : – 1. Educational levels1. Educational levels– 2. Wealth: Savings vs. Spending2. Wealth: Savings vs. Spending– 3. Discrimination: Jim Crow & 3. Discrimination: Jim Crow & Affirmative ActionAffirmative Action

– 4. Ability: Talents, productivity4. Ability: Talents, productivity– 5. Monopoly Power: Cooperatives, 5. Monopoly Power: Cooperatives, SubsidiesSubsidies

Government Monopolies & Government Monopolies & RegulationsRegulations

Lower Education = Poverty Rate Lower Education = Poverty Rate IncreaseIncrease

PovertyPoverty

15 % of Americans in poverty; 46 15 % of Americans in poverty; 46 million Americans. Median Income: million Americans. Median Income: $50,000 year$50,000 year

The The Growing Income Gap: Growing Income Gap: 1. Industry to Service jobs1. Industry to Service jobs 2. Diminishing Educational Standards2. Diminishing Educational Standards 3. Declining Unionism3. Declining Unionism 4. Divorce, Single-parent families.4. Divorce, Single-parent families.

War on Poverty RatesWar on Poverty Rates

Poverty by CountyPoverty by County

Anti-poverty ProgramsAnti-poverty Programs

• WelfareWelfare--- Public & Private --- Public & Private assistance based upon financial need.assistance based upon financial need.

1.1. Income AssistanceIncome Assistance: TANF vs. AFDC, SSI.: TANF vs. AFDC, SSI.

2.2. General AssistanceGeneral Assistance: Food Stamps, : Food Stamps, Medicaid, Obama-care (Affordable Care Medicaid, Obama-care (Affordable Care Act).Act).

3.3.Social Service ProgramsSocial Service Programs: Foster care, : Foster care, child welfare, day-care, WIC.child welfare, day-care, WIC.

4.4.Tax CreditsTax Credits: EITC or redistributed cash : EITC or redistributed cash to low income workers; to low income workers; Negative Income Tax Negative Income Tax CreditCredit..

Entitlement Spending Entitlement Spending 65%65%

War on Poverty cost to War on Poverty cost to taxpayerstaxpayers

Anti-Poverty ProgramsAnti-Poverty Programs

5. 5. Enterprise ZonesEnterprise Zones: areas where : areas where companies can locate to avoid companies can locate to avoid federal, state & local taxes with federal, state & local taxes with limited operating restrictions. limited operating restrictions.

6. 6. Workfare ProgramsWorkfare Programs: exchange some : exchange some labor for government benefits. labor for government benefits.

7. 7. Negative Income Tax CreditNegative Income Tax Credit: cash : cash payments to “certain” groups below payments to “certain” groups below the poverty line. the poverty line. Demand-Pull Demand-Pull InflationInflation..

Growth of Entitlement Growth of Entitlement SpendingSpending