The Lucas Critique implications for current policies

I can't resist sharing this article about Robert Lucas, one of the most influential economists of the last 50 years. In an interview, Lucas is asked how his findings relate to the current economic slowdown. Lucas suggests that while a stimulus might have been the right idea in 2008, its time has past. He now supports structural reforms that realign incentives towards growth. This dovetails nicely with his research on the importance of people's expectations and incentives.

See article:
(WSJ 9-24-11) Chicago Economics on Trial by Holman W. Jenkins Jr.


For a 4 min bio on Robert Lucas and an summary of his famous "Lucas Critique"
Short Youtube video clip on Robert Lucas, life and works

The Shrinking Middle Class and the Gini coefficient

(WSJ 9-12-2011) As Middle Class Shrinks, P&G Aims High and Low by Ellen Byron

In this WSJ article, Ellen Byron proves to sceptical economics students that businesses actually do use Gini coefficients. Gini coefficients are a handy measure of how evenly income is distributed in a country. A Gini coefficient of 0 would indicate everyone in the country has exactly the same income. A Gini coefficient of 1 would indicate one person collects all income. The U.S. is in the middle of the global rankings. Almost all countries in Central and South America and Sub-Saharan Africa have more income inequality. China also has more income inequality - primarily due to its rural/urban divide. European countries and Canada have had less income inequality than the U.S., but that may change as many governments are forced to cut back on spending.

The article points out that the U.S. Gini coefficient has been growing in the current recession, and suggests that it is likely to stay higher. This shrinking of the middle class is forcing many companies like Proctor and Gamble to change strategies. 

Questions for students: 

1.  Have you observed this phenomenon in your company's industry?

2.  If so, has your company changed its target consumer or altered its marketing/production strategies in response to these changes?

3. Do you think this a problem? Should policy makers address this shift? If so, how?

For the curious, here is a nice graph demonstrating the Gini coefficient (thanks to Wikimedia Commons). 

Taking stock of current conditions

Professor Tyler Cowen of George Mason University writes a blog (The Marginal Revolution) that ranked 21rst on WSJ's list of top economics blogs (see WSJ ranking of economics blogs 2009).


Video Interview with Tyler Cowen (13 minutes)

Cowen raises an interesting point;  this recession exposed structural problems that have been brewing in the U.S. for decades.  In particular he thinks the U.S needs to improve its education system in order to sustain growth and innovation.

Economics as a profession is also open for reform.  Cowen suggests that academic economists have become too specialized and don't have much to say - without devolving to partisan politics. This has created a niche for bloggers without pedigrees to weigh in with important ideas.

Despite a libertarian bent, Cowen supports more Fed action to help the U.S. economy recover.

For a good overview of the current state of the U.S. economy see:


(The Economist 8-27-2011) The Economy's Prospects

Here is a question for my students. What do you think about the relative merits of:

1. Further government spending in the short run (say on infrastructure),
    perhaps linked to long term budget agreements.
 
2. Fed activity to lower long term interest rates

3. Tax and regulation reform