Should we ditch macroeconomics or perhaps reduce it to two weeks?  In a recent blog post, Noah Smith argues that most of the material in a Principles of Macroeconomics class isn’t really necessary.  After teaching macro principles to more than 1,000 students per year since 2003, it is easy for me to find the blind spots in Noah’s view.  More than anything, it is pretty clear that Noah doesn’t spend much time with college students. 

Let me start with what Noah gets right: students should learn the Solow model for long-run growth, and the AD-AS model for business cycle analysis.  He also includes “the standard Milton Friedman, New Keynesian, AD-AS, accelerationist Phillips Curve theory of monetary policy.”

Now we come to Noah’s first howler: he believes that this material should take “about two weeks.”  Two?  What students is he teaching?  I teach at the University of Virginia, a really great university with super students.  But this takes six weeks, not two. When my students show up for macro principles, very few even know that interest rates are market prices.  I do teach the Solow model but most Macro principles instructors believe it is just too hard for the intro level. 

More than that, Noah leaves out a host of other macro topics that students need to learn at the intro level, whether they continue in economics or not.  This list includes:

1. Key macroeconomic variables.  These need to be defined, explained, and put in their proper historical perspective.  These include real GDP growth, unemployment, inflation, and interest rates.  And not just for the United States.

First off, the way we measure these variables actually matters.  Consider that unemployment rates do not include underemployed or out-of-labor force workers.  Or that GDP only includes market goods.  Both of these are relevant for policy and have been discussed in the media recently.  And historical perspective is really key here – it can be one of the best gifts you can give your students. What is a big number or a small number?  When unemployment is 7%, is that high or low?  How about in the U.S. versus Spain?  Or when real GDP grows by 4%, is that high or low?  How about the U.S. versus Mainland China?  Most college students won’t know this without a macro principles course.

2. The loanable funds market. You can’t understand financial collapse/contagion without a good understanding of the loanable funds market.  A big part of this discussion is also forming an intuitive understanding of interest rates, which is not natural for most students.  In my principles course (and textbook) I even cover mortgage-backed securities, securitization and moral hazard now so that the students understand the Great Recession.

3. Fiscal and monetary policy. In many universities, this is the one place where real economic policy is taught - Intermediate Macroeconomics typically focuses on theoretical models.  I view these policy discussions as voter education curriculum.  Students need to know what deficits mean and something about historical perspective here too.  They also need to know where government revenue comes from and how it is spent.  Hint: it’s not all spent on foreign aid and welfare!  And what about the Fed? This is the course where students learn about Fed policy and both actual and perceived effects on the economy. 

If time permits, it is great to also throw in international trade and finance, like the balance of payments (many misconceptions arise from a misunderstanding of how capital inflows are related to merchandise trade). 

Basically, to cover all of this takes about a semester.  It is foolish to think that two weeks is enough.

By the way, my favorite macro textbook covers all of these topics clearly in a great one-semester format.

Last Friday, the Fed released the detailed transcripts of FOMC meetings during 2008, the year they realized the gravity of the financial crisis.  It's a big job, but if you are so inclined, you can read the transcripts in their entirety here. 

The NY Times has done us all a service by splicing key statements by Ben Bernanke, Janet Yellen, Timothy Geithner and others, along with the key graphics that chronologically show how the Fed has responded to the crisis.  One graphic tracks the evolution of the Fed Funds target rate (shown below) during 2008, as it dropped the target from 4% to almost zero. 

Janet Yellen was one of the first to sense the potential danger.  Here is a quote from January 21, 2008, in which she supports a historically large cut in the Federal Funds target rate:

I strongly support your proposal for a 75 basis point funds rate cut today... The outlook has deteriorated, not only since December but since our conference call.  The downside risks have clearly increased.  I think the risk of a severe recession and credit crisis is unacceptably high...

In hindsight, it is clear that Yellen was right on.

Ben Bernanke is serving his last week as the Chair of the Federal Reserve and will be replaced by Janet Yellen on February 1st, which makes this a good time to consider his track record.

I agree with Kevin Grier (aka Angus), who praises Bernanke for avoiding both financial catastrophe and inflation.  Ben considers the monetary authority to be limited in its ability to manage the macroeconomy.  He sees the Fed's power as limited to two functions:

1. Controlling inflation
2. Providing ample money in times of crisis

The data shows that Bernanke was successful in both endeavors. 

First, inflation averaged just 2.2% during Bernanke's tenure (see figure below), lower than any of his predecessors since the 1970s.  Ben is probably not unhappy with this result. 

Second, Bernanke made sure there was plenty of liquidity in markets during the darkest days of the Great Recession and the recovery, even when this involved creating a new tool (quantitative easing) and figuring out how to use it, all without causing inflation.  Tough job.

The Dow Jones Industrial Average (Dow) is changing its composition of stocks today, both adding and deleting some well-known U.S. firms.  The table below lists the changes to the Dow.

Who's in:

• Goldman Sachs
• Nike
• Visa

Who's out:

• Bank of America
• Alcoa
• Hewlett-Packard

The goal of the Dow is to provide an indicator of conditions in the overall equity market by looking at just thirty representative stock prices.  Since they only use thirty companies and look strictly at average share prices, rather than the 500 equity-weghted stocks in the S&P 500, the Dow selection committee has to be very careful when choosing which stocks to include.