ECON 104 1st Edition Lecture 3 Outline of Last Lecture I. Economic StatisticsII. Basic Economic DefinitionsIII. Different Economic IdeologiesOutline of Current Lecture I. The Development of MacroeconomicsA. Where Macroeconomics Came FromB. How We Affected the MacroeconomyC. How Inflation Enters the Formula II. Depression vs. RecessionA. Definition/ExamplesB. Differences With Latest RecessionIII. The Three Goals of MacroeconomicsIV. Goal #1: EmploymentA. Current UnemploymentB. How Unemployment is MeasuredC. How Labor Force Participation Rates Show Us Problems With The EconomyD. Five Types of UnemploymentE. Costs of Unemployment and UnderemploymentCurrent LectureI. The Development of Macroeconomics Where Macroeconomics Came FromTHEN* considered a depression; crisisNOW* considered a recession; meltdownOctober 1929 – Stock Crash- Stocks fell 91% between October 1929 and June 1932- Dow fell 31% overall in the last yearSeptember 2008 – Stock Crash- Stock prices fell to half their peak values, similar to initial 1929 These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.decline1930-1932 – Financial Meltdown- 9000 banks fail- No bail-out, not FDIC- Overall GDP falls by 25%2008-2012 – Financial Meltdown- 465 banks fail (54 in 2012), 20 so far in 2013 (only 25 total 2000-2007, avg. 3.1/year- Huge government bail-out, FDIC- GDP decline today closer to 2%1933- 25% U.S. Unemployment: World Depression  this is about 12.5 million people out of a labor force ofabout 50 million- 1930-1933, 1938-Deflation 2010- Unemployment peaks at 10.6 %; 15 million people out of a labor force of 155 million- Alternative Measures (U-6) went as high as 18%- 2009-deflation, -.4% increase in prices How We Affected the MacroeconomyTHEN NOW1933Federal Deposit Insurance Corporation (FDIC) - Federal Reserve Bank (FED) since 1913FDIC - Still a huge part of the solution today- Insures deposits and manages bank failures1935Social Security passed to create future stabilitySocial Security- In pretty good shape today- Surplus of trillions1936John Maynard Keynes, The General Theory of UnemploymentTARP (2008)- Bailed out the large banks1940s- WWII, recovery of economy- Unemployment down to 1.2% in 1944Stimulus Act of 2009- 800 billion by government over 2 years1946- Employment Act“The Congress hereby declares that it is the continuing policy and responsibility of the Federal Government…to promote maximumemployment, production and purchasing power”* The things we did during the greatdepression, and what we learnedfrom it; that is the beginning ofmacroeconomics ** Note that the stock market didn’t cause the Great Depression, but merely triggered events that eventually caused it.* Also note that the initial decline in 2008 was similar to that in 1929, but it did not continue for as long. This time banks got bailed out and people were insured so they eventually go their money back, unlike in 1929.  How Inflation Enters the Formula- 1972-1982: high inflation (average 8.2%) Three Years (1979-1981): over 10%- Stagflation: high inflation and unemployment Unemployment average 6.9% from 1979-1981- Currently (and for many years) inflation is not a problem. Right now, and for the last 4 years, we have had more concerns about deflation (or too little inflation)YEAR 2007 2008 2009 2010 2011 2012 2013INFLATION RATE (CPI-U)2.8% 3.8% -.4% 1.6% 3.2% 2.1% 1.5%II. Depression vs. Recession Definition/Examples- Recession: 3 quarters of economic turndown- 2008 was the worst recession since the Great Depression- Paul Volker (former FED Chairman) – “Great Recession”- Art MacEwan (UMass Boston) – “Repression” brought about by economic policy of deregulation, pro-rich and anti-labor policy Differences With Latest Recession- Women are now half of workforce, more likely to be breadwinners (3/4 of jobs lost in recession were to men) yet women only make 78 cents for a man’s dollar- Consumer debt is much higher than any time in U.S. history, so peoplehave less savings to start with and higher mortgages III. The Three Main Goals of MacroeconomicsGOALS PROBLEMSEmployment UnemploymentPrice Stability (Low Inflation) High Inflation or DeflationGrowth Lack of Growth, StagnationIV. Goal #1: Employment Current Unemployment- Current Unemployment: 6.7% (as of August 2013), with 10,400,000 unemployed workers Alternative measures of unemployment (U-6) put unemployment at 13.1%- On January 11, 2011, the chair of the Federal Reserve Bank, Ben Bernanke, said it would probably take 4-5 years for unemployment to fall to a normal level of 6% an two years to fall to 8%.  Seems like he is right so far. Which year are you graduating? Under 8% - September 2012 (1. 75 Years) at or under 6%... (3 years and counting) and 4-5% would be much better news. How Unemployment is Measured- Unemployed: anyone who wants to work, is not currently employed, and is currently seeking unemployment (within the past 4 weeks)- Unemployment Rate: # employed / labor force- Labor Force: number of employed plus unemployed- Labor Force Participation Rate: fraction of the working-age population that is employed or seeking employment (unemployed) How Labor Force Participation Rates Show Us Problems With The Economy- Current labor force participation rate: 62.8%- Current size of labor force: 154.937 million people The population is growing but the labor force is not (e.g. from 65.7% in 2008 to 63.6% in 2012)- ^^For comparison, the LFPR in December 2000 was 67.3% (lowest since 1978 at 62.3%) LFPR grew in general from 1948-1999, but is has been shrinking since then Five Types of Unemployment1. Frictional Unemployment: searching for jobs. Number of jobs equals number of workers; good for efficiency, utility2. Seasonal Unemployment: work varies with the seasons. Predictable; we make seasonal adjustments 3. Structural Unemployment: mismatch between skills needed in jobs, and skills possessed by job seekers. Number of jobs equals number of workers, but they can’t get together without retraining, etc. These first three are when the economy is at capacity, or part of full-employment. This type of unemployment is considered efficient – unfortunate for many of the individuals, but good for the economy When the economy does not create enough jobs, as a result ofa recession, we add the