The Three Little Graphs

Wow! This was easy to do!

Below is a Google Docs spreadsheet. It contains three pages. Each page has calculations and a graph. The graphs are off to the right, near the top, but you won't see them unless you go looking.

This post is mostly in the nature of a test. Probably not much here of interest. This is the spreadsheet used to develop graphs for my comments at The Secret Economist.

No, That's Not True

Mankiw, again.

From Chapter 2 of Macroeconomics:

"The goal of GDP is to summarize in a single number the dollar value of economic activity in a given period of time."

Endogenous Drivel

(and other big words)

Looking thru N. Gregory Mankiw's Macroeconomics (fourth edition, 2000). He writes:

"Models have two kinds of variables: endogenous variables and exogenous variables."

Ooh, I need this. I don't know these big words. I'm interested in the economics, but the big words are a problem for someone of little memory. (The big words are so troubling that I don't even notice Mankiw uses the word variables three times in that sentence.)

"Endogenous variables are those variables that a model tries to explain. Exogenous variables are those variables that a model takes as given. The purpose of a model is to show how the exogenous variables affect the endogenous variables."

Okay this is good. I'm looking at it like computer programming. Send some values to a function, and get a return value. The values I send are exogenous. The return value (calculated by the function, based on the values I send) is endogenous. I get it.

Mankiw continues:

"In other words, as Figure 1-4 illustrates, exogenous variables come from outside the model and serve as the model's input, whereas endogenous variables are determined inside the model and are the model's output."

Just like a function in C. Arguments come from outside the function and serve as the function's input, while return values are determined inside the function and are the function's output. Okay.... (Arguments, or parameters maybe. I'm not always clear on the big words.)

Anyway I wanna see his Figure 1-4...

The Wrong War

Back in the early 1990s I was all gung-ho for Milton Friedman: Prices go up because the quantity of money goes up, always and everywhere. Amen.

And then I got a new job with a small steel warehouse. The counter man -- Wesley, his name was -- once said something I never forgot. He said, "We have to raise our prices, because our costs are going up."

This wasn't Milton Friedman's explanation. It was something else. As I look back now, it is clear to me that "always and everywhere" is not the same as "only." Friedman said prices go up when the quantity of money goes up, always and everywhere. He didn't say that was the only reason prices go up.

When you raise your prices because your customers have "too much money," your good profit gets better. When you raise your prices because you have to, it's because your profit is being squeezed. These two worlds are totally unlike one another.

Milton Friedman explained demand-pull inflation. Wesley introduced me to cost-push. Everybody today is familiar with Wesley's problem. Our costs are going up. Health care costs. Gasoline and heating oil. Candy bars and coffee. Costs are going up and it's tough to make ends meet. We have met the enemy and it is cost-push inflation.

All In Fun

It's all fun and games until somebody gets hurt.

From Krugman of 15 October 09:

...one thing that’s hard to convey is how boring business seemed in the 1960s and 1970s. (”I’ve got just one word for you: plastics.”)

But even a decade later, it was the guys who went off to investment banks who were buying the third homes.... And it wasn’t just the money: business stopped being so boring, and was even getting to be fun for some people.

I thought that was an interesting observation. What else was happening at that time?

And While We're On the Subject

Pandering to Bad Arithmetic

The problems of our economy are often attributed to excessive government spending.

I have all kinds of problems with that. But suppose it is true. If excessive government spending is the cause of our economic problems, then a lessening of the excess should reduce our economic troubles. Right?

Balancing Act

Was It Worth It?

Bush the Elder went into Iraq with 500,000 troops. Bush the Younger couldn't muster 200,000. In the intervening years Bill Clinton balanced the budget. He did it by cutting the military.

Krugman, Again

I'm not picking on him. Honest.

From PK's post of 7 October 09:

Everyone agrees that this is a stopgap, and we want to get the Fed out of the business of private lending over time.

But here’s my question: why does it have to be a return to shadow banking? The banks don’t need to sell securitized debt to make loans — they could start lending out of all those excess reserves they currently hold. Or to put it differently, by the numbers there’s no obvious reason we shouldn’t be seeking a return to traditional banking, with banks making and holding loans, as the way to restart credit markets. Yet the assumption at the Fed seems to be that this isn’t an option — that the only way to go is back to the securitized debt market of the years just before the crisis.

Why? Are we still convinced that securitization is a far superior system to conventional banking, and if so why?

Inquiring minds want to know.

Negative Feedback

It's not what you think.

If I said I was getting "positive feedback" you'd probably figure I heard from people who like my posts. If I said "negative feedback" you'd figure they didn't like 'em. Fair enough. That's probably what I'd mean. But y'know, if that was all there was to it, I wouldn't be writing this post.

Tack the word "loop" on to those feedback phrases, and the meanings are totally different. A positive feedback loop is a self-reinforcing loop. A negative feedback loop is self-negating. These are not at all the meanings we ordinarily use. We might think of a bad situation making itself worse as a negative thing. But it's a positive feedback loop.