What should Widodo do? Indonesia is a large, populous middle-income country. It faces no major near-term security threats. It has a small manufacturing base and no major non-commodity export sectors. What is the best non-bureaucratic 10 page economic development briefing document and set of prescriptions that one could write for Indonesia’s president?
Here’s my analysis of Belarus, using many complementary concepts.
When Javier Milei became President of Argentina in December 2023 there was lots of discussion about how he would fix monetary issues. Several economists have advocated dollarisation and the abolishment of the central bank. For example:
Here is an explanation of the Birthday Paradox (and here is an intuitive proof). Notice that the probability calculation assumes a uniform distribution (i.e. that there’s a 1/365 chance of being born on any given day). In fact, birthdays in July, August and September are more common than other months.
The identification of behavioural anomalies has often been used as a justification for government intervention. But as Mike Munger warns,
“Every flaw in consumers is worse in voters”
Therefore we should be skeptical of fixing market failures through democracy.
Poundstone, William (2010) Priceless: The Hidden Psychology Of Value Oneworld
Kahneman, Daniel (2011) Thinking, Fast and Slow Farrar Straus and Giroux
Lambert, Craig “The Marketplace of Perceptions”, Harvard Magazine, March-April 2006 – A summary of chief insights from behavioural economics and neuroeconomics
Poundstone, W., (2011) “Prospect Theory” (Chapter 16) and “Ultimatum Game” (chapter 18) from Priceless: The Hidden Psychology of Value, One World – Good introductions to key concepts
Tabarrok, A., “A Phool and His Money” Review of PHISHING FOR PHOOLS: The Economics of Manipulation and Deception, by George A. Akerlof and Robert Shiller, Princeton University Press – A defence of standard economic theory against behavioural claims
Learning Objectives: Apply a range of examples of behavioural anomalies to real business situations. Understand behavioural anomalies in light of an ecologically rational framework.
The incredible data visualisation used at the beginning of my lecture is from Gapminder. I strongly encourage you to visit their website and play around with the tools. In particular, try to create a chart showing GDP per capita against infant mortality and then see how the data has changed over time.
Here’s a thread of photos showing people in the Netherlands living in poverty before the second world war. Here is a video:
Here is another example of how much of the UK’s productivity is dependent on London (source):
In the lecture I argue that infant mortality figures are better proxies for living standards than life expectancy. As Hans Rosling argues, “this measure takes the temperature of the whole society” (p.20). This is because children are fragile, and you therefore require lots of good circumstances in order for children to routinely survive – it tells us about access to basic health care, the literacy of mothers, etc. In this video, Hans Rosling argues that most od the world is better off than you think:
And here’s the magic washing machine:
Although washing machines are magic, Tim Harford (“50 Things that Made the Modern Economy”) has argued that we now tend to have more clothes and wash them more regularly, and therefore haven’t actually saved much time. Therefore, a better example of a household technology that has unambiguously increased leisure time may be TV dinners and other forms of processed food. (And yet people are now pushing back against “ultra processed food”, unfortunately).
A great article that reveals the advances in living standards for typical American families is here, but unfortunately I haven’t found this online!:
Cox, W. Michael, and Richard Alm, “How Are We Doing?”, The American July/August 2008
This chart reveals the stunning progress that China has made at lifting people out of poverty:
Here is an example of progress in India:
In the lecture I included some data on the long term declines in violence. You can see more about this in Steven Pinker’s Enlightenment Now, but one common rejoinder is US gun crime. According to this article by Pew Research, gun murder rates have increased in recent years, but are still below their 1968 values.
Similarly, this chart shows a recent rise in violent crime, but within the context of a steady decline since the early 1990s:
Here is the documentary by Peter Santenello:
Finally, this review of Bryan Burrough’s 2015 book, ‘Days of Rage’, highlights a separatist movement that “bombed NYC like 300 times, killed people, shot up Congress, tried to kill POTUS (Truman). Nobody remembers it.” They “bombed 2 theaters in the Bronx, injuring eleven, in 1970. [And yet] NYT gave it 6 paragraphs.” For those who think street violence is new, “You have to understand: in 1968, many radicals absolutely believed that the United States was getting ready to collapse.”
Learning Objectives: Understand the empirical evidence around economic growth and globalisation
Focus on diversity: Esther Duflo has done highly impactful research on the role of RCTs in combating poverty. She has shown how field research is an important part of the economics toolkit.
The concepts discussed in this section should help students to understand the rationale for Georgia’s “Law on Economic Freedom”, which limited the government to the following (see Lawson and Powell, 2019, p. 114):
Annual budget deficit of no more than 3% of GDP
National debt of no more than 60% of GDP
Annual government spending of no more than 60% of GDP
No new tax without voter approval
“Macro Policy Workshop: Solutions”, March 2018
Macro Policy Practice Exam
Learning Objectives: Test understanding and utilisation of important macro concepts.
Focus on diversity: In 2014 Janet Yellen became the first female chair of the Federal Reserve. In 2020 she was widely tipped to become the first female U.S. Treasury secretary. This would mean that she’s occupied the twin positions of being in charge of monetary and fiscal policy. You can learn more about her here.
Read more about the Big Mac index at The Economist. When the Argentinian government wanted to mask how much inflation was occurring they imposed price controls on the Big Mac. McDonald’s therefore tried to remove them from the menu to avoid having to sell them at a loss. For more, see:
Conventional monetary policy is a simple link between a target (usually inflation) and a tool (interest rates). During the lecture I implied that central bankers change interest rates relative to the current rate. In some cases, however, they may be trying to move the policy rate closer to some sort of benchmark. A common benchmark can be calculated using a Taylor Rule. For examples, see Kaleidic Economics.
A corridor system is when the central bank targets three policy rates. We looked at how those rates changed from 2003-2015 in the Eurozone. The ECB website has more recent data.
Recent changes to central bank targets include:
In August 2020 the Fed announced that it would replace a flexible 2% inflation target with a flexible average 2% inflation target (see here).
In July 2021 the ECB announced that it would replace a target of “below but close to 2%” with a symmetric 2% target over the medium term (see here).
The lecture also introduces the concept of the signal extraction problem. This isn’t the most intuitive concept to grasp, but it explains how nominal shocks can have real effects. In other words how changes in the money supply can affect inflation and real growth. A good article on this is Steve Horwitz’s ‘The Parable of the Broken Traffic Lights“. Here is an article from 2023 in The Guardian, claiming that excess profits drive inflation. The signal extraction problem implies this causality is backward, and Justin Wolfers explains the failure here:
This episode from Conversations with Tyler, Mark Carney on Central Banking (May 2021) does a nice job of setting the objectives of a central banker, in a modern economy, related to issues such as climate change and digital currencies. It provides an engaging awareness of some of the differences between major central banks.
The Macro Musings episode with Jens van ‘t Klooster on Recent ECB Policy (May 2022) discusses the recent change in the ECB’s remit, how ECB actions differ from the Federal Reserve, and does a really nice job of whether the 1990s model of central banks is outdated and needs to evolve due to changing circumstances and priorities (such as climate change and elevated sovereign debt).
For my account of the 2007-2008 financial crisis:
Learning Objectives: Understand the root causes of inflation, and contribute to policy discussions. Understand how monetary policy affects business decision-making and thus generates macroeconomic fluctuations. See the operation of a conventional monetary policy regime in practice. Contrast the ways in which the Fed and the ECB acted during the global financial crisis.
Cutting edge theory: Nominal income targeting and surveying current monetary indicators.