Economic Education

Intro Economics Textbooks Are Changing

Ronald Shereni Current Events, Economic Education, Principles of Economics 0 Comment

If you are interested in teaching economics an excellent resource is the teach-econ listserve. I encourage anyone interested in teaching it to follow it up.   Don Coffin, who is a regular contributor, recently made the following post on it referring to the following Krugman blog entry:

Don writes:

“It’s about a year old, but interesting (although not everyone, obviously, will agree with everything/most/much/any of what Krugman has to say.

I’ve long believed that much of what one reads in intro econ books (particularly in intro macro) reflects the macroeconomic issues that were facing people when they were in grad school.  So, for example, from my generation of grad students (the 1970s), I would have expected (and, I should note, got) a focus on inflation and stagnation and real shocks.  It’ll be interesting (if I’m still around and (capable of) paying attention) to see what intro macro looks like in, say, 2025…”

Here is my response to Don on the Teach-Econ Listserve.

“Actually, intro economics textbooks are already changing. Consider the most recent, and just published, 9th edition of my textbook. In it I have an entire chapter on the structural stagnation policy dilemma. The chapter discusses how the current economic situation differs from previous seemingly similar situations, and why many economists believe the slow growth will continue for years. I call it the structural stagnation view.

In that chapter (you can read here: Structural Stagnation Policy Dilemma Colander 9e)  I contrast that structural stagnation view with the standard Krugman shortage of aggregate demand view that was presented as Keynesian thinking, and also with the Classical self-correcting view that was presented as Classical thinking in what we learned. (Neither of those presentations was satisfactory; both Classicals and Keynesians were both more nuanced than what was presented, but that’s another story.)

The reality is that what students get in graduate school today is all too often simply a math bootcamp with little true discussion of policy. One student when I asked where their views of fiscal policy came from for my book, the Making of an Economist Redux, responded that it didn’t come from classes. He said that monetary policy might have been in one of the variables in the model, but it was lost in the equations. Since graduate students are never trained in discussion of policy that reflect the nuanced views of Keynesians and Classical economists, they find it difficult to teach those nuanced views. Instead, they rely on textbooks to define what they teach. After all they can’t teach what they haven’t learned. That’s sad.”

First Published : April 26, 2013

Why the U.S. Unemployment Rate Is So Hard to Reduce?

Ronald Shereni Current Events, Economic Education, Policy 0 Comment

Macro policy has focused on driving the unemployment rate back down to a desired rate, about 5 percent. That policy is, in large part, misplaced. The reason can be explained with some textbook microeconomics. In the microeconomics texts we drill into students that excess supply is meaningful only in relation to price. For example, there could be excess supply at a price of $10 and excess demand at a price of $8.00. In macro we seem to forget this central notion when we talk about the unemployment rate. Unemployment is excess supply so to talk about unemployment, you have to have some achievable equilibrium wage in mind. But that wage is not part of the discussion in macro policy discussions, where we discuss unemployment as if it were independent of the wage rate. If people are holding out for a job at $30 an hour, they may not be able to find one, but they might easily get a job at $9 an hour. Are they unemployed, or are they choosing not to work? You can’t answer that without specifying the equilibrium wage for a person with that skill set.

Historically, the macroeconomic concept of the unemployment rate was developed in reference to a non-globalized world in which the wage/price relationship was assumed to be relatively constant. In such a world, it is possible to define domestic unemployment independently of the wage rate since the wage was a constant reference point. The only relative wage that mattered in a non-globalized world was the wage relative to price, and that was assumed to be constant. In a globalized world, that is not the case. When a company can locate production globally, wages, unemployment, and hence the unemployment rate has to be defined in relationship to wages in other countries. The global relative wage will largely determine the sustainably achievable unemployment rate. If non-wage productivity advantages are not enough to offset wage differentials, then a person’s reservation wage can be too high for the market conditions.

Unfortunately, for many of the unemployed in the United States that is precisely the case. Their wage is above the globally competitive wage for their skill set. Such unemployment is not solvable with increases in domestic demand, and we should stop pretending that it is. There may be global demand for their work at a lower wage, but not at their current reservation wage. Increased demand will simply create jobs abroad, and worsen the U.S. trade deficit. It won’t lower the U.S. unemployment rate.

What will solve the problem? Lower wages, higher skills, a fall in the exchange rate, or in increase in general advantages in U.S. productivity. None is likely to change soon, so it is time for policy makers to accept this reality and stop trying to achieve the unachievable.

First Published : December 4, 2012