DeLongs Macroeconomics

1
DeLongs Macroeconomics

• Why write this book?
• History of the market
• Five innovative advantages
• Head-to-head text comparisons
• Q A
• Supplements

2
Why Write This Book?

• My experience at the Treasury
• Politicians read last generations textbooks
• Dissatisfaction with existing texts
• Teach wrong or irrelevant stuff
• Teach it in a student-hostile fashion
• Belief I could do a better job
• Clean off the barnacles

3
My Experience at the Treasury

• The High Politicians views are shaped by what
  their textbooks taught them
• The entire debate is shaped by the textbooks
• Treas, Secy. Summers on the range of options
• Trying to convince Treas. Dep. Secy. Frank Newman
  of the importance of savings
• Hence the vital importance of having good, honest
  textbooks

4
Dissatisfaction with Existing Textbooks

• Ive been teaching this off and on for more than
  a decade and a half
• Current textbooks--Mankiw, Abel and Bernanke,
  Blanchard--brilliant pieces of work
• But too much of what they teach is wrong or
  irrelevant
• Time to clean off the barnacles

5
History of the Market

• Dornbusch and Fischer
• The short run with an unstable Phillips curve
• Mankiw
• Start with growth
• A more classical treatment of the short run
• Abel and Bernanke
• A bigger book than Mankiw
• A less readable book than Mankiw

6
Five Innovative Advantages

• Growth theory so students can understand it
• Growth facts covered in depth
• International economy from the get-go
• Central banks control interest rates they dont
  set money stocks
• Real-world Phillips curve, not abstract aggregate
  supply-aggregate demand model

7
Growth Theory so Students Can Understand It

• Mankiw took the bold step of adding growth to
  macroeconomics
• He did so by taking the graduate student version
  and dumbing it down
• As a result, often it doesnt work very well
• Compare Mankiw vs. DeLong on how to calculate
  steady-state output per worker levels

8
Mankiw Calculating Steady-State Output per Worker

• Determine the value of capital-per-effective
  worker k for which the equation s f(k) -
  (ngd)k 0 is satisfied
• Call this value k, the steady-state value of
  capital per effective worker
• Use the production function f to calculate output
  per effective worker, y f(k)

• Determine if the version of the model is one with
  or without technological change
• If the version of the model is one without
  technological change, then you are done
  output-per-worker is equal to output-per-effective
  -worker
• If the version of the model is one with
  technological change, then multiply output per
  effective worker by the efficiency of labor E to
  get output per worker.

9
DeLong Calculating Steady State Output-per-Worker

• Calculate the steady-state capital-output ratio
  k (s/(ngd))
• Raise k to the power of the growth multiplier l
  (a/(1-a))
• Multiply the result by the efficiency of labor E.
  You are done.

10
Growth Facts Covered in Depth

• The origins of modern economic growth
• The population explosion and its likely end
• Structural change and economic growth
• Global divergence in productivity levels
• Convergence within selected groups of countries
• Microfoundations of rapid economic growth

11
International Economy from the Get-Go

• 50 years ago the U.S. economy was effectively
  closed to international trade
• 50 years ago textbooks taught about a closed
  economy
• Now the U.S. economy is open to world trade not
  a single issue lacks an important international
  dimension
• Its time for textbooks to drop the closed
  economy case

12
Central Banks Set Interest Rates

• Central banks set interest rates
• (and the money stock adjusts to be consistent)
• In textbooks, central banks set money stocks
• (and let interest rates adjust blah, blah,
  blah...)
• This difference matters
• Money stock targeting adds complexity in economic
  theory
• Students who think central banks set money stocks
  have a hard time understanding news about the
  Federal Reserve

13
Real World Phillips Curve

• Macro textbooks spend a lot of time developing
  the aggregate demand-aggregate supply model
• They then drop that model when it comes time to
  talk about economic policy, and use the Phillips
  curve instead
• Why not start by tightly linking the two
  together, so you dont waste time on analytical
  tools you never use?

14
Head-to-Head Text Comparisons

• Growth theory calculate steady-state
  output-per-worker
• Aggregate demand understanding a Federal Reserve
  meeting
• Aggregate supply the Phillips curve vs. AS-AD

15
Growth Theory

• To come...

16
Aggregate Demand

• To come...

17
Phillips Curve

• To come...

18
Supplements

• Turn it over to Paul...