[MUSIC] Well, good afternoon. It's nice to have you almost live here to talk about some of the questions that you've had that were not, addressed directly in the videos. What I did was I went through the forums, as I am following you. And I chose not only the questions that were voted on in that specific form for this, for these office hours, but also some questions that had attracted a lot of attention. Or some questions that could not easily be answered in a straightforward way by you reading the textbook or, or looking at something online and also questions that will not be addressed in future sessions. So I hope that this assortment of questions is agreeable to you. If you have something that didn't get answered and you really are concerned, continue to post and to insist on that question, and we'll have a second set of office hours at, near the end of the course.

So the first question I wanted to address is a question about GDP as a measure of well-being. And it's, it's very well known, as Harris and Chris mentioned to us in the forum, that GDP is not a perfect measure of progress. It has a lot of drawbacks. Actually, it's quite a young indicator. It was developed in the 50s by economists at Harvard University. And, it, is a snapshot of what the economy has produced at a given moment in time.

And in that sense it's, it's nice because it's one number. Easy to work with, relatively easy to measure with all of its complications. And I think that's we've tended to lean on it as our main measure of well being, but of course it's incomplete, as you know from your readings from your lectures, it leave out things like leisure time, it leave out the quality of the environment. It leaves out peoples health. It leaves out, you know, the desirability of the goods we're producing and so there are a lot of alternatives that have been proposed. Some of these I've mentioned in the textbook, some of these you can see if you just start searching this issue online. The OECD is working on an alternative measure of progress. France has had projects. The UK has had projects. The ideas is for us to get a broader indicator, and I think this would be desirable, and maybe we'll get it in your lifetimes. Because if we had a broader measurement and it were our main indicator we would start thinking about other things, not just growth but okay. In this year, did we protect our environment? In this year, did we improve quality of life measured in a broader sense? So I think that's desirable. And I think we're on the way towards something, different from GDP. We have

another question, an interesting question that's very, very relevant right now, posed by anonymous. Sorry that I can't address you. Also addressed by [UNKNOWN] Alexander. Which is why is it that restrictive fiscal policy is being use in the EU, but we could broaden this to other countries, in a moment of recessionary gap? And this is a really valid question, and you're absolutely right in your focus that if we're thinking about the economy and prescribing what it needs, diagnosing its problems, in the way I've discussed.

We need to have a, at the moment of a recessionary gap we should have an expansive fiscal policy, and that would be ideal. But we also mentioned particularly last week in our discussion that if governments are really thinking about balancing the budget across the cycle, if they're acting in a way that's fiscally responsible. We should have surpluses in moments of inflationary gap, and then those could be used to repay the deficits that we have in moments of recessionary gap, and of course leading up to crisis not very many countries were doing that. In fact, we talked about Sweden, and I showed you in the book how Sweden has a rule requiring them to produce a surplus every year, at potential GDP. But a lot of countries, and here we can talk about the U.S., we can talk about the UK, France and Italy who have not had surpluses since the 70s, we can talk about Greece, Portugal, countries that were having deficits even in years of inflationary gap. So when the crisis hit, what happens? Well, a lot of the notions that we've talked about fit in here. Markets look at the rising deficit in those countries, which is natural. Thinking of automatic stabilizers. They look at the rising deficits and they say wow The deficit is growing and look at the size of the debt already. Remember we said this is important when you're thinking of the debt as too large. How big is it already? Markets say okay, Italy. It's okay for Italy to have a deficit during the recessionary gap. But, look at the size of its debt already. I don't think they can pay. And then In that secondary market that we talked about a lot of bondholders, if there's a lot of foreign ownership of those bonds, might begin to sell bonds, and the interest rate would go up. So the government, facing the economic situation, and maybe even wanting to to expansive fiscal policy. Would find the interest rates on borrowing had gone up so much in the secondary market that at that moment of asking for new money the interest rates were to high, and it was simply to expensive for them to keep borrowing. So if we put these pieces together we say why is it that countries in a deep recessionary gap are using restrictive policies. Snd we could blame the Troika, we could blame Germany. We could blame the IMF, and we know the IMF in the past has often prescribed very restrictive fiscal policies, Latin America, other countries that are having debt problems or financing problems. But the reason they have to do this is not just that they're wrong headed. Right. It's that the country has made a lot of fiscal mistakes in the past. They've been fiscally irresponsible. So they come to that moment of recessionary gap, with a debt that's way too big. All right. And markets say, I don't think they can pay. That interest rates rise, as the price of bonds fall. The borrowing costs rise, and the government itself even without the IMF, the Troika or whoever, may have to follow an austere policy, a restrictive policy at a moment of recessionary gap, because of past fiscal mistakes. [BLANK_AUDIO] Finally, there's an interesting question that has lead to quite long voluminous threads under the title of aggregates applying government policy, there also were some questions about aggregate supply here Pete Sabias, Antonio, Mikael. Giuseppe, Jose, Stanik, Bill from Greece were all very active. And so, I thought this might be interesting to address here, because the questions that they're raising are so relevant. In general, what they're asking is what, could governments use aggregate supply to stimulate the economy? Could governments use aggregate supply measures to stimulate the economy? And, then moving on from that is it fair to use this aggregate supply measures when they fall so heavily, on workers for example? So it's a big question. Let me try to address it in two parts. The first part of the question is, why would you use aggregate supply measures? We know that aggregate supply measures that involved deregulation. Okay, for all of the negative connotations that that now has.

Would shift aggregate supply out to the right, and this is expansive for the economy. It would cause GDP to go up, inflation to go down. So, you know, looking at the model this could be a good thing. And sometimes governments don't have a lot of other options. Imagine that you are a country in the Eurozone. And, your fiscal policy freedom is being restricted by austerity, right? By what we just talked about. And you don't have a monetary policy, and you don't have an exchange rate, because you share a currency with other countries. What policies do you have? What can you use? Well aggregate supply becomes really important. So, if Spain in the midst of austerity and in the midst of this crisis wants to stimulate its economy,or Italy,or Greece. Maybe the only option they have Is to try to shift out aggregate supply. Or going to the emerging markets. What if you're a Latvia and you had, before, the recent changes, you had your currency pegged to the Euro? And you had to respect that exchange rate, commitment. Then you can't use exchange rate policy and you can't use monetary policy 'because if you move interest rates your currency will move. You may just have to use aggregate supply. Or Brazil, right? Concerned about the value of it's currency. Not wanting it to fall too much, not wanting it to rise too much. It's, trying to, control the value. Aggregate supply may be a better way to stimulate growth.

Okay, so the second part of the question is well what happens when you use aggregate supply measures? Normally we know that these rules are in place. These rules that maybe restrict the entry of, of big shops into a country where you have mainly small small retail, units like in India. Or restrict the freedom to fire workers, or create a lot of bureaucracy to start a new company, a lot of times these rules have a lobby behind them, they have people who support them, so they are hard to change. In the specific case of labor markets, which the people I mentioned have had quite a long discussion on. There are rules throughout Southern Europe and in some emerging countries which protect certain workers, or all workers by making it expensive to fire them. Okay. And the idea of these rules is that in Italy, for example. Women weren't working. You basically had the husband, who's taking care of the whole family. And, so, you need to make sure that your family is safe. And, so, you protect his job. And, the concept, a little bit, is, I've got this little worker, who has no power in the market. And there's a big corporation out there. And I want to make him safe. It's the same reason we have unions. But, actually, if you look at the reality in a country like Italy, or Greece, or Spain The typical company is very small. So you have a small worker and a small company, right? And you're making it hard for this small company to adjust their labor force. Now, all of us who've lived in Southern Europe know that there are situations where workers are too protected. Where, they can't lose their job no matter, how badly they do it. In fact, sometimes they're almost wishing they could get fired. Because the severance payment would be so high and so generous. And so it did make sense to make this model a little bit more rational, to make it somewhat easier to fire workers, even though, and I'm aware of this, I live in southern Europe, the casualty rate, if you want Of, of workers losing their job. It's been very high, and of course that's painful. The idea though is to move towards a system where you help the small firm as well as the small worker to have a more flexible labor force. And to be able to pressure people somewhat to become more productive, or to restrict their wage increases in a time of crisis. So in Spain, and in some of Southern Europe, there's been a relaxing of these rules, that protected the workers so so excessively in labor markets. Now, I don't want to say that we don't need any protection for workers, I think we do. I think firms benefit from workers spending time on the job, gaining experience, accumulating what we call human capital. And then performing better in the future. The trick is to find that middle ground where the worker is protected enough that he feels committed to the firm, the firm knows that he's there, and and you know, socially people have a salary and a job that they can count on. To find the balance between that And the flexibility the firm needs and so here I think we're, it's very much a work in progress in Southern Europe as we try to work towards a different label market model. Move away from when it didn't really work. These markets were very, very rigid and move towards one that gives a reasonable amount of security, which is what workers in these countries are, are looking for. I don't think we're there yet. But I'm hoping that these reforms are moving us toward the right direction.

I hope these answers respond to what you're thinking about. I'm really happy to see some really relevant discussions happening on the forum. I would encourage you to continue bringing your questions to the forum. So that we can deal with them there in a place where everyone sees them, i hope you are enjoying the course, enjoy your holy week break after this week, catch up and we will see you again in week four.

Office Hours Modules 1 to 3

Understanding economic policymaking

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