David Kleykamp

Institute of the Americas and Department of EconomicsTamkang University

Basic Development Question

What is the function of an economy?

0

_ ( ( ))T

sIndividual Welfare u C s e ds

The Goal of Economics is to have High and Stable Consumption Over a Long Life

--- Big C means More Consumption

--- Big T means a Long Life

How Do We Get Big Consumption, C, and a Long Lifespan, T ?

We need more labor, more capital, more human capital, better technology, a good system of justice and rule of law, good social institutions that motivate people to work and succeed – and most importantly we need free markets.

Of course, we need to do this in a system that is open and fair to everyone in the economy. We must worry about the distribution of income because it affects our own outcomes and those who come after us.

Thus, our economy must strive for high efficiency and productivity while at the same time ensuring freedom of choice and an opportunity to improve oneself.

How is the World Economy Doing?

Not Very Well Recently, But there is Cause to Hope

Let’s Look Only at about 70% of the Global Economy

and Focus our Attention on the US, the EU, Japan, and China

The Economic Development of the Global Economy

Global Economy Having Poor Performance in 2013

-- Developed Economies in Recession or Growing Slowly

-- Emerging Markets Slowing Their Growth

-- Policies Seem Ineffective and Harmful

-- Income and Wealth is Very Unequal

IMF World Economic Outlook July 9 2013

Macroeconomic Goals are Two-fold Short Run Stable GDP and Prices --- Long Run High Sustainable

Growth

Important Questions are

What Policies Should the Major Economies Take?Are These Policies Consistent and Coherent?

Differing Views on Policymaking

Passivist Rules - Based PolicyActivist Discretion - Based Policy

Krugman believes that solving our short run economic problems is not hard. We only need to expand discretionary spending and keep interest rates low. The government has the knowledge to solve its problems. Enlightened elites (like himself) can plan to offset the fall in private spending with greater public spending. Debts and deficits don’t matter to the US and there is no fear of inflation or another bubble. Krugman is an unapologetic Keynesian who strongly believes that good government (read Democratic Party controlled government) can be trusted to do the right thing. This is why he advocates discretionary policies. Regulation is good, and more regulation is better. The rich should pay higher taxes and the poor should receive subsidies like food stamps and university grants. Naturally, all this should be paid for by people who have a job and work.

John Taylor is exactly the opposite of Krugman. He believes that households and businesses are forward looking and always planning. Without rules for policies people and firms cannot make proper plans and will need to spend additional time, resources, and effort to alter their plans when necessary. Policy also needs to follow the rule of law, to respect markets and incentives, and limit the scope of its initiatives. Taylor recognizes that governments are just as fallible as the public and cannot be trusted to always do what is right. He appreciates the aphorism that “the perfect is the enemy of the good”. Government trying to make things better may in fact make things worse…much worse. Rules-based policy makes life more predictable and therefore easier to plan. Stable policy can create stable outcomes.

Any Discussion of Short Run Stabilization Policy Must Begin with the Issue of Rules versus

Discretion

This will Ultimately Guide our Fiscal Policy, Monetary Policy, Exchange Rate Policy, and

Regulation Polices

What About Long Run Issues of Global Development ?

This Subject Deals with the Proper Use of Debt and the Creation of Good

Political and Economic Institutions

Debt Should Not be Allowed to Run Too High or a Country Risks Lower Growth in the Long Run

Countries Must Develop Political Systems that Encourage the Formation of Inclusive Economic Institutions Instead of Extractive Economic Institutions

Basic Conclusions

Thank You for Your Attention