The above clip (at the 7 minutes 35 second mark) features a debate between Paul Krugman (Nobel laureate) and George Papaconstantinou (Greek Minister of Finance).   Paul Krugman thinks Greece should leave the euro area in order to have a chance to grow.  Krugman acknowledges that leaving the euro would be very destructive for Greece, far worse than the current austerity package. Nonetheless he advocates exiting the euro so that Greece has a chance to grow (presumably by devaluing currency). George Papaconstantinou argues that Greece is better off staying in the euro area, assuming Greece can negotiate a growth package from the rest of the euro area. This is clearly a big assumption.

If the countries in the euro area could miraculously and quickly agree to trade sovereignty for financial security ( The Economist (5-26-2012)), perhaps a deal could be brokered in which Greece adopts more market oriented policies in exchange for a generous growth package. Greece would have to overcome political resistance to later retirement, fewer vacation days, smaller pensions, less guaranteed employment, and a smaller government sector.  

Both Krugman and Papconstantinou agree that austerity alone (cutting government spending and raising taxes) is not going to get Greece growing.


The following Forbes article notes the parallels between the European Union and the early United States. Warren notes that in the early 1800's many states were unable to pay their debts and defaulted. As a result the U.S. economy plunged into severe recessions.  The U.S. relied on high import tariffs to promote domestic industry and to recover from the state debt crises.  Warren ponders whether high import tariffs could help Greece stay in the euro area.

Forbes (6-4-2012) "Looking For Euro-Saving Ideas In U.S. History" by Randy Warren

There is at least one major drawback with this suggestion. The high tariff strategy would require rewriting EU treaties and would likely lead to disputes with other members of the World Trade Organization (WTO). 

Alternatives to high import tariffs that would also result in import substitution industrialization (ISI) include: cheap currency (i.e. exit euro and devalue the drachma), quotas on imports, and government investment in infant industries. The case for fiscal and regulatory ISI policies has grown less compelling. India started dismantling its ISI policies in the 1980's, leading to rapid growth. Many countries in Latin America have also abandoned ISI, at the urging of the IMF.  Corruption and inefficiency plague this strategy.

 If European politicians fail to act decisively and very soon, the cheap currency option grows more likely.

Why do U.S. politicians want to see the yuan appreciate and what does that mean?

Many U.S. politicians have accused China of keeping its exchange rate artificially low. These politicians are primarily concerned about U.S. jobs.  All else equal, if goods made in China became more expensive (due to currency appreciation) people in the U.S. would buy more domestically produced goods and fewer Chinese goods.  Factories in the U.S. then might hire more U.S. workers.

So that you can impress interviewers, make sure you use the right vocabulary when discussing Chinese currency. The official name of the Chinese currency is the Renminbi (RMB) and a unit of this currency is the yuan. Yuan should be pronounced something like U.N. (for an audio clip go here NPR audio clip). To further complicate matters, the symbol for the RMB is ¥ and it is quoted on currency exchanges as CNY, short for Chinese Yuan. 

This 3 minute news clip was made 6 months ago, when the U.S. Senate was considering a bill to punish China for an undervalued currency. Despite sympathy from President Obama, the bill did not make its way through the House and did not become law.  China warned that passage of the bill could cause a trade war. http://youtu.be/WQQtreKkljg


In the intervening months, China has let its currency appreciate. China just recently announced that it would let its exchange rate fluctuate in a wider band, which potentially could lead to more appreciation.  See this WSJ article for details.
WSJ (4-16-2012) China Loosens Grip on Yuan by LINGLING WEI

In this recent 3 minute clip from the English language news channel of China Central Television (CCTV News), two Chinese economists argue that the main problem for U.S. workers is not an undervalued Chinese currency, but rather factory automation.


This screenshot was taken at http://www.chinaknowledge.com/Travel/Currency.aspx on 4/16/2012. This table shows how many CNY (ChineseYuan) it would take to buy a unit of various foreign currencies (Other/CNY).  To learn how to read this table consider the USD/CNY exchange rate listed as 6.3199. This means $1 U.S. dollar costs 6.3199 Chinese yuan. Equivalently, the CNY/USD exchange rate = 1/6.3199 = .15823. This means that 1 Chinese yuan costs almost 16 cents in U.S. currency.

Self-quiz for students:
For extra motivation, questions like these will appear on your final exam.  Assume  1 yuan = .15823 USD or  equivalently, 1 USD =   6.3199 yuan.
1. What is the price in dollars of a coffee pot that costs 100 yuan?
2. What is the price in yuan of a coffee pot that costs $20?
3. What would be the new CNY/USD exchange rate if the RMB appreciates by 10%?
4. What would be the corresponding USD/CNY exchange rate?
5. After the RMB appreciates, what would be the new price in dollars of a coffee pot that costs 100 yuan?
6. After the RMB appreciates, what would be the new price in yuan of a coffee pot that costs $20?


          Post  Questions:
1. How might appreciation of the RMB affect employment for coffee makers in the U.S.?
2. How might appreciation of the RMB affect the trade balance, GDP, and unemployment rate of the U.S. (all else equal)?

3. Whose views on the CNY/USD exchange rate do you think are more valid, the U.S politicians or the Chinese economists?

Self-quiz key:

1. $15.82

2. 126.40 yuan

3. .174053

4.  5.7454

5. $17.41

6. 114.91 yuan 

TED Talks

In class, I was surprised to learn that some of you have never seen a TED talk. This week your assignment is to watch one and report back. In a TED talk, a major innovator in science, education, art, health, or anything creative is asked to talk. TED stands for Technology, Education and Design. It started out in 1984 as a conference in California and has grown to include projects, prizes, and the speaker series.

This is one is a good TED intro. It draws on several other recent TED talks.




http://www.ted.com/talks/peter_diamandis_abundance_is_our_future.html

My son's favorite:
http://www.ted.com/talks/david_blaine_how_i_held_my_breath_for_17_min.html

Here are some of my other favorites:

Bill Gates on malaria:
http://www.ted.com/talks/lang/en/bill_gates_unplugged.html

Sugata Mitra on a education
http://www.ted.com/talks/sugata_mitra_the_child_driven_education.html

Salman Khan on online learning
http://www.ted.com/talks/salman_khan_let_s_use_video_to_reinvent_education.html

To find your own favorite TED talk, go here: http://www.ted.com/talks

Bernanke's college lecture series

http://www.federalreserve.gov/newsevents/lectures/about.htm

link to 1rst lecture
link to 2nd lecture

The PowerPoints for these lectures will eventually be available at the following link:

Link to Fed Board of Governors' web page on lecture series

A brief summary of this lecture can be found in the following articles (and many others)

WSJ (2-21-2012 Bernanke Goes Back to School by JON HILSENRATH and KRISTINA PETERSON

or


Washington Post (3-21-2012) Bernanke revisits college delivering first of 4 lectures on Federal Reserve at GW University

Despite having read quite a few books and articles about the Fed, I still learned something from Bernanke's lecture. Bernanke, after all, was an academic master of the economic history of the Great Depression and the Fed before assuming his current role as Chairman of the Fed. One tidbit that I learned was why Walter Bagehot (1826-1877) merits having a standing column in the Economist magazine named after him. In addition to an early being editor-in-chief of the magazine, Bagehot was one of the first to analyze and write about the benefits of a central bank. I also finally learned how to pronounce his name; it sounds like badge-it.

Class, your challenges are:
1. list the advantages of a central bank outlined by Bagehot.
2. list three reasons Bernanke is not in favor of a gold standard. He gave MANY reasons.

What do you think about the gold standard, and why do you think it periodically pops up in politicians' wish lists?