ECO LECTURE TWENTY-THREE 1 OKAY. WE'RE GETTING TO GO ON AND TALK ABOUT THE LONG-RUN

ECO 155 750 LECTURE TWENTY-THREE 1 OKAY. WE'RE GETTING TO GO ON AND TALK ABOUT THE LONG-RUN EQUILIBRIUM FOR THE ECONOMY. BUT BEFORE WE DO, I WANT TO FINISH UP ON SOMETHING I WAS TALKING ABOUT LAST TIME. I SAID THERE WERE THREE AGGREGATE SUPPLY CURVES -- LET ME WRITE DOWN SHORT-RUN AGGREGATE SUPPLY CURVES. THE FIRST ONE OF THESE CURVES YOU'LL REMEMBER, AND WE TALKED ABOUT THAT ALREADY A LITTLE BIT, WAS A HORIZONTAL AGGREGATE SUPPLY CURVE. THE AGGREGATE SUPPLY CURVE THAT'S HORIZONTAL LOOKS LIKE THIS, SRAS. IF YOU'LL REMEMBER, I TOLD YOU THAT'S THE AGGREGATE SUPPLY CURVE THAT WE NORMALLY WOULD THINK ABOUT IN A DEPRESSION TYPE OF ECONOMY SUCH AS THE UNITED STATES IN THE 1930S. OTHER COUNTRIES HAVE BEEN IN SERIOUS DEPRESSIONS OVER TIME, SO THIS WOULD BE A GOOD EXAMPLE. AND IT DOESN'T HAVE TO BE AS SERIOUS AS THE DEPRESSION IN THE 1930S, BUT STILL A VERY HIGH UNEMPLOYMENT RATE, A VERY SERIOUS DOWNTURN IN THE ECONOMY. THEN WE WOULD THINK ABOUT AN AGGREGATE SUPPLY CURVE THAT LOOKS THIS WAY. AND SO WHAT HAPPENS IS, IF AGGREGATE DEMAND INCREASES FROM AD1 TO AD2, IF THERE'S AN INCREASE IN AGGREGATE DEMAND, THAT WOULD NOT BE INFLATIONARY. WE WOULD HAVE SO MANY UNEMPLOYED RESOURCES, INCLUDING WORKERS, THAT TO HIRE SOME MORE WORKERS, IT MIGHT REDUCE THE UNEMPLOYMENT RATE FROM, LET'S SAY, TWENTY

ECO 155 750 LECTURE TWENTY-THREE 2 PERCENT TO FIFTEEN. BUT STILL, THAT WOULD NOT INTRODUCE INFLATIONARY FORCES INTO THE ECONOMY. SO THAT BEING THE CASE, WE SEE NO CHANGE IN THE PRICE LEVEL. AND I'M NOT TELLING YOU THE PRICE LEVEL IS FIXED BECAUSE WE MADE IT FIXED; I'M SAYING IT'S FIXED IN THIS PARTICULAR CASE BECAUSE THE ECONOMY IS DEEPLY DEPRESSED. AND SOME MODEST INCREASE IN SPENDING IN THE ECONOMY DOESN'T MAKE RETAILERS SAY, "OH, BOY. NOW I GET TO RAISE PRICES." THEY'RE STILL SAYING, "BOY, BUSINESS IS STILL LOUSY, JUST NOT AS BAD AS IT WAS LAST WEEK OR LAST MONTH." SO ANYWAY, THIS IS THIS SITUATION. THE SECOND ONE, IF YOU'LL REMEMBER, WAS A KINKED AGGREGATE SUPPLY CURVE. THIS AGGREGATE SUPPLY CURVE LOOKS JUST LIKE THE ONE WE TALKED ABOUT A MOMENT AGO. IT'S HORIZONTAL UP TO A CERTAIN POINT. AND ONCE WE GET TO THAT POINT, THEN THE CURVE IS VERTICAL. AND WHAT IS THIS POINT? AND I'VE SORT OF PUT AN ELABORATE LABEL DOWN HERE. I CALL IT Q, BUT I PUT A -- Q FOR REAL GDP. AND I PUT AN N NEXT TO THAT, A SUBSCRIPT N, AND I'M LABELING THAT NATURAL REAL GDP. WE'LL TALK MORE ABOUT THESE TERMS AS WE GO ALONG. THIS IS KIND OF AN IMPORTANT TERM THAT IN THE NEXT BIT OF MATERIAL, WHEN WE START TALKING ABOUT LONG-RUN EQUILIBRIUM, THIS WILL GET A LOT OF EMPHASIS. BUT ANYWAY, THE IDEA FOR RIGHT NOW, WE'LL JUST LABEL IT NATURAL GDP. AND I'M ALSO LABELING THAT FULL EMPLOYMENT REAL GDP.

ECO 155 750 LECTURE TWENTY-THREE 3 THAT IS TO SAY, THIS IS THE AMOUNT OF PRODUCTION THAT WOULD OCCUR WHEN ALL WORKERS ARE FULLY EMPLOYED, IN THE SENSE THAT WE TALKED ABOUT IT EARLIER WHERE THE UNEMPLOYMENT RATE IS EQUAL TO THE FRICTIONAL RATE PLUS THE STRUCTURAL RATE PLUS THE CYCLICAL RATE -- OH, BOY. WHICH JUST PROVES THAT I CANNOT WRITE AND TALK AT THE SAME TIME. CYCLICAL RATE. AND WHAT I'M SAYING IS, WHEN WE HAVE FULL EMPLOYMENT, THEN THERE'S NO CYCLICAL UNEMPLOYMENT BUT THERE'S STILL FRICTIONAL AND STRUCTURAL UNEMPLOYMENT. IF YOU'LL REMEMBER, THIS IS THE NATURAL UNEMPLOYMENT RATE. AND THE NATURAL UNEMPLOYMENT RATE JUST INCLUDES THOSE FRICTIONAL AND STRUCTURAL PROBLEMS IN THE ECONOMY, NO MACROECONOMIC UNEMPLOYMENT. SO THAT'S REALLY WHAT I MEAN HERE, IS THAT WHEN THE UNEMPLOYMENT RATE IS JUST THE NATURAL UNEMPLOYMENT RATE AND THERE IS NO CYCLICAL, NO MACROECONOMIC UNEMPLOYMENT, THEN WE CALL THAT FULL EMPLOYMENT AND THAT'S THE AMOUNT OF GDP THAT WE WOULD PRODUCE, THIS NATURAL REAL GDP. THAT'S THE AMOUNT OF GDP WE WOULD PRODUCE WHEN THE UNEMPLOYMENT RATE IS EQUAL TO THE NATURAL RATE OR WHEN WE HAVE FULL EMPLOYMENT. AND I'M SAYING IF WE REACH THAT POINT, THEN ACCORDING TO THIS KINKED SUPPLY CURVE, AGGREGATE SUPPLY CURVE, BEYOND THAT POINT ANY INCREASE IN SPENDING, IT ONLY CAUSES INFLATION. WE'VE REACHED THE FULL CAPACITY OF THE ECONOMY AT THIS POINT. WE CAN'T PRODUCE

ECO 155 750 LECTURE TWENTY-THREE 4 ANY MORE. AND SO IF PEOPLE WANT TO BUY MORE, THEN IT JUST DRIVES UP PRICES. AND SO LET ME DRAW AN AGGREGATE DEMAND CURVE. HERE WE ARE IN THIS SORT OF DEPRESSED SITUATION, AD1 TO AD2. AGGREGATE DEMAND INCREASES; WE'RE IN A DEPRESSED TYPE OF ECONOMY; THERE IS GROWTH AND OUTPUT BUT IT'S MODEST; THERE'S NO INFLATIONARY FORCES. IF AGGREGATE DEMAND CONTINUES TO INCREASE, IT'LL GET UP TO WHERE WE HAVE AD3, I'LL SAY, WHERE WE HAVE THE EQUILIBRIUM FOR THE ECONOMY IS AT NATURAL REAL GDP. THE UNEMPLOYMENT RATE IS THE NATURAL RATE OF UNEMPLOYMENT. AND NOW ANY GROWTH IN SPENDING BEYOND THAT POINT, AGGREGATE DEMAND INCREASES ONE MORE TIME AND THERE'S NO INCREASE IN REAL PRODUCTION IN THE ECONOMY. ALL WE SEE IS INFLATIONARY FORCES COMING TO BEAR. WE'LL SAY WE HAD A P1 AS OUR ORIGINAL PRICE LEVEL; NOW PRICES START GOING UP. SO THERE'S INFLATION IN THE ECONOMY. QUESTIONS ABOUT THIS? OKAY. THIS IS KIND OF AN EXTREME CASE AND WHAT WE WOULD -- I MEAN, IT'S PRETTY UNLIKELY THAT WE JUST GET TO A CERTAIN POINT -- THERE'S BEEN ZERO INFLATION UP TO THAT POINT -- AND ALL OF A SUDDEN, JUST A LITTLE BIT MORE SPENDING, ALL THAT WE GET IS INFLATION. WE GET NO EXPANSION IN OUTPUT OR PRODUCTION. THAT SEEMS KIND OF UNLIKELY. THOSE ARE REALLY JUST KIND OF TWO EXTREME CASES THAT WE'RE ILLUSTRATING.

ECO 155 750 LECTURE TWENTY-THREE 5 THE THIRD POSSIBILITY IS THE THREE-STAGE AGGREGATE SUPPLY CURVE. I'LL PUT SOME LABELS HERE, A AND B, SOME POINTS ON MY THREE- STAGE CURVE. SO NOW WHAT WE HAVE IS -- IT LOOKS A LOT LIKE THE KINKED AGGREGATE SUPPLY CURVE. BUT INSTEAD OF A KINK RIGHT DOWN THERE AT NATURAL REAL GDP, WE'VE GOT A REGION WHERE THERE'S AN UPWARD SLOPING AGGREGATE SUPPLY CURVE. AND TO TELL YOU THE TRUTH, IF YOU LOOK BACK IN YOUR NOTES, THIS UPWARD SLOPING PART OF THE CURVE, THIS IS MORE OF A NORMAL SHAPE OF IT. AND I'M JUST -- I'M NOT USING THAT TERM LIKE NORMAL GOODS, LIKE THAT'S A KEY TERM. I'M JUST SAYING THAT NORMALLY WHEN I'VE BEEN DRAWING THE SHORT-RUN AGGREGATE SUPPLY CURVE, UP UNTIL NOW YOU'VE SEEN A SERIES OF UPWARD SLOPING CURVES. THAT'S THIS -- I'M SAYING THAT'S NORMAL, THAT'S TYPICAL, THAT'S WHAT YOU WOULD EXPECT THE AGGREGATE SUPPLY CURVE TO LOOK LIKE PERHAPS. SO ANYWAY, WE'VE GOT THE HORIZONTAL STAGE, THE DEPRESSION CASE. WE'VE GOT THIS CASE WHERE THE CURVE IS VERTICAL AND THAT MEANS THAT WE ARE PRETTY MUCH AT FULL CAPACITY FOR THE ECONOMY. AND SINCE WE'RE AT FULL CAPACITY AND NOT MUCH UNEMPLOYMENT, THEN SPENDING INCREASES. AGGREGATE SPENDING INCREASES RESULTING IN INFLATION. AND THEN IN-BETWEEN THOSE TWO EXTREMES, WE HAVE AN UPWARD SLOPING AGGREGATE SUPPLY CURVE. AND THEN IF THERE'S AN INCREASE IN SPENDING -- AND YOU CAN SEE THIS OCCURRING AS I SHIFT THE

ECO 155 750 LECTURE TWENTY-THREE 6 CURVE HERE. IF THERE'S AN INCREASE IN AGGREGATE DEMAND OR AGGREGATE SPENDING, THEN WHAT WE NOTICE IS -- I'LL LABEL THIS. THEN WHAT WE NOTICE IS THAT WE GET AN INCREASE IN PRODUCTION BUT WE ALSO GET A LITTLE BIT OF INFLATION. SO THAT SPENDING GETS DISTRIBUTED IN TWO DIFFERENT WAYS. ONE IS, WE'RE HIRING MORE WORKERS AND PRODUCING SOME MORE OUTPUT, BUT ALSO WE'RE PAYING EACH WORKER AND EACH RETAILER, AND SO FORTH, A LITTLE BIT MORE PER UNIT. AND THAT IS WHAT I'M TELLING YOU WE WOULD EXPECT IF THE UNEMPLOYMENT RATE WAS, LET'S SAY -- OH, I DON'T KNOW -- SIX AND A HALF PERCENT. THIS IS A -- OH, I DON'T WANT TO PUT THAT DOWN THERE LIKE A LABEL. BUT AT POINT A, WHERE THE CURVE IS UPWARD SLOPING, MAYBE THE UNEMPLOYMENT RATE IS -- I DON'T KNOW -- SIX AND A HALF TO SEVEN PERCENT. THAT'S THE UNEMPLOYMENT RATE. AND AT THIS POINT MAYBE THE UNEMPLOYMENT RATE IS, OH, FOUR AND A HALF PERCENT TO FIVE PERCENT. AND SO I'M SAYING THAT IN-BETWEEN HERE THERE'S ABOUT A TWO AND A HALF, THREE PERCENT DIFFERENCE IN THE UNEMPLOYMENT RATE. THIS IS FROM, YOU KNOW, FOUR AND A HALF, FIVE PERCENT. BOY, WE ARE REALLY FULLY EMPLOYED, PRODUCING ABOUT AS MUCH AS WE CAN. WHEN THE UNEMPLOYMENT RATE GETS TO ABOUT SEVEN PERCENT, WE START THINKING ABOUT, "MAN, THINGS ARE KIND OF TOUGH RIGHT NOW, YOU KNOW?" AND IF WE START THINKING THAT -- "OH, UNEMPLOYMENT RATE'S LIKE SEVEN PERCENT. THINGS ARE KIND OF TOUGH"

ECO 155 750 LECTURE TWENTY-THREE 7 -- THEN THAT'S WHEN WE, AT EVEN HIGHER UNEMPLOYMENT RATES AND LESS PRODUCTION, WOULD EXPECT THAT AGGREGATE SUPPLY CURVE TO MAYBE BE A LITTLE BIT MORE OF A HORIZONTAL CASE, THE DEPRESSION CASE. MAYBE -- I DON'T KNOW. LET ME GO BACK AND LABEL THAT. MAYBE THIS WOULD BE LIKE EIGHT PERCENT OR SOMETHING LIKE THAT. IT'S HARD -- YOU KNOW, THERE'S NOT ANY MAGIC NUMBER WHERE YOU JUST WRITE IT DOWN AND THAT'S IT, ONCE AND FOR ALL. BUT ANYWAY, SOMEPLACE IN THAT RANGE. OKAY. AND I'M TALKING ABOUT THE UNEMPLOYMENT RATE DOWN HERE WITH THESE NUMBERS. THERE IS NO LEVEL OF GDP THAT ALWAYS MATCHES UP WITH THESE BECAUSE GDP INCREASES OVER TIME, SO WE CAN'T JUST WRITE THAT DOWN. BUT THE UNEMPLOYMENT RATE KEEPS COMING BACK TO THESE OLD LEVELS, AND SO I'M SAYING THAT THERE'S A REGION HERE OF ABOUT -- I DON'T KNOW -- THREE PERCENT, SOMETHING LIKE THAT, THREE AND A HALF PERCENT, WHERE WE'VE GOT WHAT WE WOULD CALL THE NORMAL AGGREGATE SUPPLY CURVE THAT'S UPWARD SLOPING. OKAY. ANY QUESTIONS ABOUT THAT? IF THERE ARE NO QUESTIONS, LET ME ERASE A LITTLE BIT. WE WANT TO GO ON AND TALK ABOUT LONG-RUN EQUILIBRIUM FOR THE ECONOMY. THAT'S OUR NEXT UNIT OF MATERIAL, IS TO TALK ABOUT THE LONG-RUN EQUILIBRIUM FOR THE ECONOMY. WHAT WE'VE BEEN DOING UP UNTIL NOW

ECO 155 750 LECTURE TWENTY-THREE 8 IS WE'VE TALKED ABOUT SHORT-RUN ECONOMIC EQUILIBRIUM OR MACROECONOMIC EQUILIBRIUM. THIS TERM "EQUILIBRIUM," IT'S INTERPRETED IN DIFFERENT WAYS BUT A NICE WAY OF THINKING ABOUT IT: WHEN THE ECONOMY REACHES AN EQUILIBRIUM, IT'S AT REST. MEANING THERE'S NO TENDENCY FOR IT TO CHANGE IN ONE DIRECTION OR ANOTHER. OKAY. AND SO THE QUESTION IS, IF WE GET TO THE POINT WHERE THERE IS A SHORT-RUN EQUILIBRIUM, WHICH WE'VE JUST DRAWN -- LET ME PUT IT UP HERE AGAIN -- SHORT-RUN AGGREGATE SUPPLY AND AGGREGATE DEMAND. I AM SAYING THAT WHERE THOSE TWO CURVES CROSS, WE ARE FINDING THE EQUILIBRIUM, PE AND QE. WE'RE FINDING THE EQUILIBRIUM PRICE LEVEL AND REAL GDP, THESE TWO CURVES. AND WE'RE GONNA DRAW MORE CURVES, BUT JUST TO BE CLEAR ABOUT IT: THESE TWO CURVES AT A POINT IN TIME, THOSE ESTABLISH EQUILIBRIUM P AND Q FOR TODAY. THERE ARE OTHER THINGS OUT THERE THAT ARE GONNA INFLUENCE THAT, WHAT IT'LL CHANGE TO. BUT I'M JUST SAYING IF SOMEBODY SAYS TO YOU, "HEY, DEPICT THE SITUATION THAT WE FACE TODAY," YOU'D DRAW THE AGGREGATE SUPPLY AND AGGREGATE DEMAND CURVE. AND WHERE THEY INTERSECT, THAT DETERMINES TODAY'S MACROECONOMIC CONDITIONS. PE, QE. OKAY. NOW, THE QUESTION IS, IS TODAY A LONG-RUN EQUILIBRIUM? THAT IS, THIS SITUATION THAT WE'VE DESCRIBED HERE -- I'LL PUT A POINT A NEXT TO

ECO 155 750 LECTURE TWENTY-THREE 9 THAT EQUILIBRIUM -- IS THIS SITUATION ONE WHERE THAT THE ECONOMY IS AT REST? THERE'S NO REASON FOR REAL GDP TO GO UP OR DOWN. THERE'S NO REASON FOR THE PRICE LEVEL TO GO UP AND DOWN, INFLATION OR DEFLATION. IS THAT THE CASE? AND THE ANSWER IS NO, NOT NECESSARILY. OKAY. AND I'LL GIVE YOU A HINT WHY THAT IS AND THEN WE'LL COME BACK AND BE A LITTLE MORE FORMAL ABOUT IT IN A SECOND. BUT WE TALKED ABOUT THIS LAST TIME JUST A LITTLE BIT. I'LL PUT QE RIGHT HERE AND THEN ANOTHER HORIZONTAL AXIS. IF YOU'LL REMEMBER, WE TALKED ABOUT THIS LAST TIME. WE'VE GOT EMPLOYMENT AND THEN WE'VE GOT UNEMPLOYMENT GOING IN THE OTHER DIRECTION. LIKE THE UNEMPLOYMENT RATE WAY OUT HERE MIGHT BE ZERO PERCENT. AND I MEAN ZERO PERCENT WAY OUT THERE, THAT WOULD MEAN THERE'S NO FRICTIONAL UNEMPLOYMENT, NO STRUCTURAL UNEMPLOYMENT. THAT'S VERY UNLIKELY. SO IT'S WAY OUT THERE. BUT THE POINT IS, AS WE START GOING TO THE LEFT NOW, SMALLER LEVELS OF REAL GDP, SMALLER LEVELS OF EMPLOYMENT, THEN UNEMPLOYMENT IS INCREASING. MAYBE OVER HERE IT'S TWENTY-FIVE PERCENT, WAY TO THE LEFT. THAT'S THE DEPRESSION CASE. OKAY. ANYWAY, WHAT I WAS SAYING TO YOU A MOMENT AGO OR ASKING THE QUESTION, IS THIS SITUATION WHERE THE ECONOMY IS AT POINT A, IS THAT A LONG-RUN EQUILIBRIUM FOR THE ECONOMY? LET'S COME DOWN HERE AND WE WOULD SAY, "WELL, GEE. WHAT'S THE UNEMPLOYMENT RATE?" AND

ECO 155 750 LECTURE TWENTY-THREE 10 LET ME JUST WRITE A NUMBER DOWN. SEVEN PERCENT. THAT'S HYPOTHETICAL, OF COURSE. IF THAT'S THE CASE, THEN WHAT I WOULD SAY IS, "GEE, I DON'T THINK THIS IS A LONG-RUN EQUILIBRIUM FOR THE ECONOMY. AND THE REASON I THINK IT'S NOT IS, I THINK THAT WITH SEVEN PERCENT UNEMPLOYMENT THERE'S A LOT OF PEOPLE GOING OUT HERE, LOOKING FOR JOBS. I DON'T THINK THEY CONSIDER IT AN EQUILIBRIUM SITUATION. THEY FEEL LIKE, 'HEY, THIS IS PRETTY ROTTEN. I WANT A JOB AND I CAN'T FIND ONE.'" UNEMPLOYMENT LINE, YOU KNOW, OFFICE -- YOU CAN GO DOWNTOWN ON, WHAT IS IT, WALNUT STREET HERE IN SPRINGFIELD. YOU GO DOWNTOWN AND THERE'S AN OFFICE THERE WHERE THEY HAVE UNEMPLOYMENT. YOU CAN GO DOWN THERE, YOU REGISTER FOR UNEMPLOYMENT BENEFITS AND MAYBE THERE ARE JOBS THAT ARE POSTED DOWN THERE AND SO FORTH. AND I'M SAYING THERE'D BE A LOT OF PEOPLE DOWN THERE THAT DAY SAYING, "GOSH, I WANT A JOB." AND SO CAN THIS BE A LONG-RUN EQUILIBRIUM? CAN THIS PERSIST JUST YEAR AFTER YEAR AFTER YEAR? AND THE ANSWER IS: I DON'T THINK SO. AND THAT IS WHERE WE GO ON TO THE LONG-RUN SITUATION. WE FIND OUR SHORT-RUN EQUILIBRIUM FOR THE ECONOMY AND THEN WE START ASKING, "IS THIS A SUSTAINABLE SITUATION, THIS UNEMPLOYMENT RATE THAT WE OBSERVE?" AND I'M SAYING THAT IF THIS IS HIGH -- WHAT IS SUSTAINABLE? I WOULD SAY IT WOULD BE SUSTAINABLE -- THAT IS TO SAY,

ECO 155 750 LECTURE TWENTY-THREE 11 EQUILIBRIUM, UNEMPLOYMENT RATE -- I'LL SAY LONG-TERM. EQUILIBRIUM UNEMPLOYMENT RATE EQUALS -- OH, THE NATURAL RATE OF UNEMPLOYMENT WHICH IS -- I SAID, OH, FOUR AND A HALF TO FIVE AND A HALF PERCENT, SOMEPLACE IN THAT RANGE. MAYBE I SAID FOUR AND A HALF TO SIX PERCENT EARLIER. I CAN'T REMEMBER EXACTLY WHAT I DID SAY. BUT ANYWAY, SOMEPLACE IN THE RANGE OF FOUR AND A HALF TO FIVE PERCENT, I'M SAYING THAT'S SUSTAINABLE. WHERE PEOPLE SAY, "YEAH, I'M OUT OF WORK" -- FOUR AND A HALF PERCENT, FIVE PERCENT OF THE POPULATION. THEY SAY, "YEAH, I'M OUT OF WORK BUT IT'S 'CAUSE I QUIT MY JOB. AND I DIDN'T WANT TO WORK THERE AND I'M JUST GOING TO ANOTHER JOB." OR IT'S BECAUSE "THE COMPANY I WORKED FOR SHUT DOWN AND I'M GETTING RETRAINED RIGHT NOW TO GO FIND ANOTHER KIND OF A JOB." AND IF THAT'S THE ONLY KIND OF UNEMPLOYMENT THERE IS, THEN THAT UNEMPLOYMENT IS GONNA SOLVE ITSELF. THE GUY WHO QUIT HIS JOB IS GONNA FIND A JOB. THE LADY WHO LOST HER JOB BECAUSE THE COMPANY SHUT DOWN AND SHE DIDN'T HAVE THE SKILLS TO GO TO THE NEXT JOB, SHE'S GONNA FINALLY GET RETRAINED AND SHE'S GONNA GO TO ANOTHER JOB. SO THAT'S NOT THE KIND OF UNEMPLOYMENT THAT CREATES REALLY A DISEQUILIBRIUM SITUATION. THE KIND OF UNEMPLOYMENT THAT CREATES A DISEQUILIBRIUM SITUATION IS THAT CYCLICAL UNEMPLOYMENT. AND I'M SAYING WHEN THERE IS NO CYCLICAL UNEMPLOYMENT, HERE THERE'D BE A COUPLE PERCENT

ECO 155 750 LECTURE TWENTY-THREE 12 CYCLICAL UNEMPLOYMENT. IF THE UNEMPLOYMENT RATE IS SEVEN PERCENT AND FOUR AND A HALF TO FIVE TO FIVE AND A HALF, IF THAT'S THE NATURAL RATE OF UNEMPLOYMENT, THEN I'M SAYING THERE'S ABOUT TWO PERCENT OF THE POPULATION THAT ARE SAYING, "I WANT TO WORK. I'M WILLING TO WORK AT TODAY'S WAGE RATE. I'VE GOT THE SKILLS THAT ARE REQUIRED. I JUST CAN'T FIND WORK." THAT'S NOT AN EQUILIBRIUM SITUATION. SO ANYWAY, THAT'S BASICALLY -- IT'S WHAT'S GOING ON WITH THE UNEMPLOYMENT RATE. THAT IS WHAT IS GONNA CREATE A DISEQUILIBRIUM IN THE LONG-RUN AND WHAT WILL CAUSE FURTHER ADJUSTMENTS TO OCCUR IN THE ECONOMY. SO LET ME DRAW THIS PICTURE AGAIN -- I'LL LEAVE THAT STUFF OVER THERE. WE'LL PUT REAL GDP HERE, THE PRICE LEVEL, SHORT-RUN AGGREGATE SUPPLY, AGGREGATE DEMAND. I'LL PUT LABELS ON THESE. P1, Q1. I'M NOT PUTTING E'S ON THERE ANYMORE BECAUSE WE'RE GONNA DO SOME CHANGING, SOME MOVING AROUND, AND I WANT TO KEEP TRACK OF THESE. WE'RE STARTING OFF AT POINT ONE. THE PRICE LEVEL IS P1, THE AGGREGATE PRICE LEVEL. THE REAL GDP, Q1. LET'S SAY THAT I TELL YOU THIS -- AND I'M JUST ASSUMING THIS FOR NOW, BUT LET'S SAY I TELL YOU HERE'S REAL -- OR I SHOULD SAY NATURAL REAL GDP. WELL, LET'S JUST SAY IT'S OVER THERE TO THE RIGHT OF THE SHORT-RUN EQUILIBRIUM, THE Q1.

ECO 155 750 LECTURE TWENTY-THREE 13 Q1 FALLS SHORT OF NATURAL REAL GDP. Q1, LESS THAN QN. WE'VE GOT A TERM THAT WE GIVE TO THIS. WE SAY IF THE REAL GDP IS LESS THAN NATURAL REAL GDP, THEN WE SAY THAT WE HAVE A RECESSIONARY GAP. IT'S A RECESSIONARY GAP. WHY DO WE CALL IT THAT? AND THE ANSWER IS: WELL, THE ECONOMY IS DEPRESSED BELOW THE NATURAL LEVEL THAT WILL OCCUR, YOU KNOW, IF EVERYBODY'S WORKING THAT'S TRYING TO FIND A JOB, EXCEPT FOR THOSE THAT ARE FRICTIONALLY AND STRUCTURALLY UNEMPLOYED. ANYWAY, IF EVERYBODY'S WORKING AND WE JUST HAVE -- AND THIS IS ANOTHER PART OF THIS -- THE UNEMPLOYMENT RATE IS EQUAL TO THE NATURAL RATE OF UNEMPLOYMENT -- WHICH IS, IF YOU'LL REMEMBER, THE FRICTIONAL PLUS THE STRUCTURAL UNEMPLOYMENT RATE. SO AT THIS POINT -- AND, BY THE WAY, I'LL JUST DRAW ME A VERTICAL LINE, JUST SO THERE'S NO DOUBT ABOUT IT. IF NATURAL REAL GDP IS SHOWN RIGHT THERE WHERE I'VE DRAWN THIS BLUE VERTICAL LINE, BUT TODAY'S GDP, THE EQUILIBRIUM FOR TODAY, IS AT Q1, THEN WHAT WE HAVE IS -- OH, I LABELED THAT WRONG UP THERE. THE UNEMPLOYMENT RATE IS -- THERE WE GO -- GREATER THAN THE NATURAL UNEMPLOYMENT RATE AT THIS POINT. SORRY. I GOT SO WRAPPED UP IN TELLING YOU ABOUT NATURAL REAL GDP AND NATURAL UNEMPLOYMENT RATE THAT I FORGOT. THE UNEMPLOYMENT -- I'LL PUT A ONE DOWN THERE. THE UNEMPLOYMENT RATE TODAY, THE ONE IT CORRESPONDS WITH -- HERE'S UNEMPLOYMENT.

ECO 155 750 LECTURE TWENTY-THREE 14 AND WHAT WE HAVE RIGHT HERE IS U1. THE UNEMPLOYMENT RATE IS U1 AND THE UNEMPLOYMENT RATE AT U1 IS GREATER THAN IT WOULD BE IF WE HAD NATURAL REAL GDP. LET ME PUT IN HERE'S UN. LET ME SLOW DOWN FOR JUST A SECOND 'CAUSE I WANT YOU TO FOR SURE GET THIS IN YOUR NOTES. I FOR SURE WANT YOU TO ABSORB WHAT I'M SAYING. THIS STUFF THAT ISN'T BLUE, FORGET IT FOR JUST A MOMENT. I'M SAYING THAT WE KNOW TODAY'S AGGREGATE DEMAND CURVE. WE SEE TODAY'S SHORT-RUN AGGREGATE SUPPLY CURVE. THOSE TWO THINGS DETERMINE TODAY'S EQUILIBRIUM IN THE ECONOMY, THE PRICE LEVEL AND THE LEVEL OF REAL GDP. BUT I'M SAYING THAT EQUILIBRIUM THAT'S BEEN ESTABLISHED FOR TODAY, IT HAPPENS TO BE AT A LOWER REAL GDP THAN WE WOULD PRODUCE IF WE HAD FULL EMPLOYMENT. IF WE HAD FULL EMPLOYMENT, THE UNEMPLOYMENT RATE WOULD JUST BE THE NATURAL RATE. BUT INSTEAD, WE HAVE A HIGHER UNEMPLOYMENT RATE, AN UNEMPLOYMENT RATE THAT EXCEEDS THE NATURAL RATE OF UNEMPLOYMENT. WE HAVE SOME CYCLICAL UNEMPLOYMENT. EVERYBODY WITH ME? NOW, WHAT WILL HAPPEN? AND THAT'S THE NEXT LITTLE BULLET I WANT TO PUT RIGHT HERE. THIS JUST DESCRIBES THE SITUATION. LET ME NOT SAY "THE" SITUATION. LET'S SAY TODAY'S SITUATION. THAT IS, TODAY IS -- HERE IS TODAY. AT THAT EQUILIBRIUM POINT. TODAY'S SITUATION, WE HAVE A RECESSIONARY GAP. REAL GDP FALLS SHORT OF THE NATURAL

ECO 155 750 LECTURE TWENTY-THREE 15 LEVEL. UNEMPLOYMENT IS GREATER THAN THE NATURAL RATE OF UNEMPLOYMENT. SO TODAY'S SITUATION. NOW, WHAT WILL HAPPEN AS A RESULT OF THIS? RESULT. HOW ABOUT THIS: WAGES WILL FALL. DO YOU AGREE WITH THAT? THERE'S A LOT OF PEOPLE UNEMPLOYED, DOWN THERE AT THE UNEMPLOYMENT OFFICE, REGISTERING FOR BENEFITS, GOING OUT AND KNOCKING ON DOORS AT BUSINESSES, FILLING OUT APPLICATIONS "I WANT A JOB." THEN OVER TIME -- AND I DO NOT MEAN TO SAY THAT TOMORROW THIS PROBLEM WILL BE SOLVED. JUST BY SAYING "TODAY" I DON'T MEAN THAT THE LONG-RUN EQUILIBRIUM IS REACHED TOMORROW. BUT I'M SAYING OVER TIME WAGES WILL FALL. THAT'S NUMBER ONE. WHY? WELL, 'CAUSE THERE'S A SURPLUS OF LABOR. SURPLUS OF LABOR. THAT'S WHY. THERE'S A BIG UNEMPLOYMENT RATE. BIG UNEMPLOYMENT RATE? SURPLUS OF LABOR. IF THE WAGES FALL, SRAS SHIFTS TO THE RIGHT, OR THERE'S AN INCREASE IN THE SHORT-RUN AGGREGATE SUPPLY. NOW, LET ME COME BACK TO MY GRAPH. THE SHORT-RUN AGGREGATE SUPPLY CURVE SHIFTS TO THE RIGHT, SRAS TO -- YOU'VE GOT THIS IN YOUR NOTES. WHAT SHIFTS THE SHORT-RUN AGGREGATE SUPPLY CURVE? AND ONE OF THE THINGS IN YOUR NOTES SAYS, "IF WAGES WOULD FALL, THE SHORT-RUN AGGREGATE SUPPLY CURVE WOULD SHIFT TO THE RIGHT. THERE'D BE AN INCREASE IN AGGREGATE SUPPLY." WHY WAS THAT? 'CAUSE LOWER WAGES MEAN GREATER PROFITS FOR MANUFACTURERS, COMPANIES IN GENERAL. AND

ECO 155 750 LECTURE TWENTY-THREE 16 SINCE THERE'S GREATER PROFITS, THEY INCREASE THEIR PRODUCTION. OKAY. SO ANYWAY, BUT NOW WE HAVE A NEW EQUILIBRIUM. I'LL PUT A POINT TWO NEXT TO THAT. AND I'M NOT GONNA GO AHEAD AND -- 'CAUSE THIS IS NOT THE FINAL EQUILIBRIUM. BUT WHAT I WANT YOU TO SEE IS, THIS CURVE SHIFTED TO THE RIGHT. THE SHORT-RUN AGGREGATE SUPPLY CURVE SHIFTED TO THE RIGHT DUE TO THE FACT THAT WAGES WERE FALLING -- LET ME SHIFT THAT OVER THERE. AND NOW DUE TO THE FACT THAT THE SHORT-RUN AGGREGATE SUPPLY CURVE SHIFTED TO THE RIGHT, WE HAVE A LITTLE LOWER PRICE LEVEL AND WE HAVE A LITTLE MORE REAL GDP. BUT STILL, WE HAVE REAL GDP Q2 NOW FALLS SHORT OF REAL GDP -- NATURAL REAL GDP, I SHOULD SAY. Q2, REAL GDP, FALLS SHORT OF THE NATURAL LEVEL. THE UNEMPLOYMENT RATE AT U2 IS STILL ABOVE THE NATURAL UNEMPLOYMENT RATE. SO WHAT'S NEXT? TIME FOR WAGES TO FALL AGAIN. SO, I MEAN, WE'RE JUST NOT DONE YET. WE'RE MOVING IN THAT DIRECTION. HERE'S THE AGGREGATE SUPPLY CURVE SHIFTING TO THE RIGHT AGAIN. WHY? WAGES FELL AGAIN. WHY? WELL, BECAUSE THE UNEMPLOYMENT RATE WAS STILL TOO HIGH. FINALLY, WHAT WILL HAPPEN IS WAGES WILL FALL, SRAS -- I'LL PUT A FOUR NEXT TO THERE. FINALLY WAGES WILL FALL BY ENOUGH THAT REAL GDP IS EQUAL TO NATURAL REAL GDP. THE UNEMPLOYMENT RATE IS EQUAL TO THE NATURAL RATE OF UNEMPLOYMENT AND THEN THERE IS NO MORE

ECO 155 750 LECTURE TWENTY-THREE 17 SURPLUS OF LABOR AND THERE IS NO MORE WAGES GOING DOWN. AND THIS POINT THAT WE'VE ARRIVED AT HERE -- I'LL SAY POINT FOUR -- THIS IS OUR LONG-RUN EQUILIBRIUM. AND, BY THE WAY, THERE'S ALSO A PRICE LEVEL, BUT WE'RE NOT ALL THAT INTERESTED IN A PRICE LEVEL RIGHT NOW. AT THE LONG-RUN EQUILIBRIUM POINT, THE SHORT-RUN AGGREGATE SUPPLY CURVE -- AND, IF YOU'LL REMEMBER, THAT'S WHAT DETERMINES THE SHORT-RUN EQUILIBRIUM, TODAY'S EQUILIBRIUM OR WHATEVER. SHORT-RUN AGGREGATE SUPPLY EQUALS AGGREGATE DEMAND AT THAT POINT. AND WE SEE THAT AT POINT FOUR, SHORT-RUN AGGREGATE SUPPLY AND AGGREGATE DEMAND INTERSECT. SO THAT SAYS TODAY'S EQUILIBRIUM, ONCE WE'RE DOWN ON DAY FOUR, TODAY'S EQUILIBRIUM IS AT QN. OH, SO WE HAVE NATURAL REAL GDP. THAT DETERMINES THE UNEMPLOYMENT RATE AT UN. IT'S PRETTY LOW. IT'S ABOUT WHATEVER I SAID, FOUR AND A HALF, FIVE PERCENT, FIVE AND A HALF, SOMEPLACE IN THAT RANGE. AND THEN WE SAY, "HEY, IF WE GO DOWN TO OUR UNEMPLOYMENT OFFICE AND LOOK, THERE'S NOT LONG LINES. THERE ARE A FEW PEOPLE COMING IN, BUT NOT A HUGE PROBLEM. MOST OF THE PEOPLE -- ALL THE PEOPLE WHO ARE LOOKING FOR WORK AND WILLING TO WORK AT TODAY'S WAGE, AND WHO HAVE THE SKILLS AND SO FORTH, THEY CAN FIND JOBS." YES, SIR? [STUDENT SPEAKING INAUDIBLE] I'M NOT SAYING WHAT'S GOOD AND BAD. ALL I'M SAYING FOR YOU IS, IF WE FIND OURSELF IN A SITUATION WHERE THERE IS THIS RECESSIONARY GAP AND WE FIND

ECO 155 750 LECTURE TWENTY-THREE 18 OURSELF FALLING SHORT ON PRODUCTION OR HAVING A LOT OF UNEMPLOYED PEOPLE, IF WE FIND OURSELVES IN THAT SPOT, WHAT I'M SHOWING YOU RIGHT HERE IS THE ECONOMY -- WE DON'T JUST SIT HERE AND GO, "OH, WHAT A SHAME." THE ECONOMY GOES TO WORK ON ITS OWN. THIS IS NOT WHERE GOVERNMENT COMES IN AND FIXES A PROBLEM. I'M SAYING THERE ARE FORCES AT WORK IN LABOR MARKETS WHERE THAT PEOPLE START GOING, "WOW, I DON'T LIKE BEING UNEMPLOYED." WAGES START TO GO DOWN AND I'M SAYING THIS PROBLEM STARTS TO SOLVE ITSELF. AND FINALLY, WHEN WE REACH THIS POINT FOUR, THE PROBLEM IS SOLVED. NO, WE WOULD BE BETTER OFF -- AND NOW I'M SPEAKING NORMATIVE IN TERMS OF WHAT I LIKE VERSUS DISLIKE. WE WOULD BE BETTER OFF IF WE NEVER GOT TO THIS POINT. BUT IF WE GET TO THAT POINT, WHAT I'M SAYING IS WE'RE NOT JUST STUCK THERE WHERE WE JUST GO, "WELL, WHAT A SHAME. I HATE THIS. AND NOW FOR THE REST OF MY LIFE I'M GONNA BE UNEMPLOYED." I'M SAYING THE ECONOMY CAN HEAL ITSELF, IN A SENSE. NOW, WE'LL COME BACK LATER ON WHEN WE TALK ABOUT POLICY. WE DON'T HAVE TO WAIT FOR THIS TO HAPPEN. 'CAUSE WE DON'T MOVE FROM POINT ONE TO POINT FOUR, LIKE, IN THREE DAYS OR EVEN THREE MONTHS. IT MAY BE THREE YEARS. SO THIS TAKES TIME. I'M JUST SAYING IF NOBODY COMES ALONG FROM THE GOVERNMENT AND HAS A POLICY TO ADDRESS THIS, THEN THE THINGS TAKING PLACE ON THE SUPPLY SIDE OF THE ECONOMY, WHICH IS THE WORKERS AND THE EMPLOYERS AND SO FORTH,

ECO 155 750 LECTURE TWENTY-THREE 19 THEY WILL SOLVE THAT PROBLEM. [STUDENT SPEAKING INAUDIBLE] WHAT HAPPENED WITH THE DEPRESSION? HEH, HEH, GOOD QUESTION. BOY, THAT'S A HARD QUESTION, TOO. LET ME TELL YOU WHAT SOME PEOPLE THINK. BUT WE'RE GONNA HAVE A LATER CHAPTER WHERE WE COME BACK AND TALK ABOUT THIS DEPRESSION CASE 'CAUSE THERE WAS A SPECIAL SORT OF BRAND OF ECONOMICS THAT WAS DEVELOPED FOR THAT PERIOD. BUT THE STORY THAT MOST PEOPLE THINK ABOUT THE DEPRESSION, WHY DIDN'T THAT PROBLEM GET CLEARED UP, WHAT MOST PEOPLE WOULD TELL YOU IS WAGES DIDN'T FALL. WE DID HAVE A LOT OF UNEMPLOYMENT. WE HAD A LOT OF UNEMPLOYMENT AND WAGES DIDN'T FALL. THAT'S WHAT REALLY HAS TO GO -- YOU KNOW, IF WE HAD THIS SITUATION WITH THE RECESSION AREA, YEAH. IF THE ONLY WAY WE WOULD GET TO THE LONG-RUN EQUILIBRIUM, WAGES FALL. WHAT IF THEY WON'T FALL? AND SO THAT'S WHAT I THINK SOME PEOPLE WOULD TELL YOU HAPPENED DURING THE DEPRESSION. WAGES DID NOT FALL. AND THERE ARE REASONS WHY THEY MIGHT NOT HAVE. PERSONALLY, I'M ONLY HALFWAY SOLD ON THAT STORY. AND I DON'T WANT TO SPEND A LOT OF TIME TALKING ABOUT THE DEPRESSION PERIOD, BUT WHAT HAPPENED DURING THE DEPRESSION IS THIS: ECONOMISTS DID NOT KNOW A LOT OF THINGS THAT WE DO KNOW TODAY ABOUT THE ECONOMY AND WE DIDN'T HAVE THE DATA THAT WE'VE ALREADY TALKED

ECO 155 750 LECTURE TWENTY-THREE 20 ABOUT -- CPI AND REAL GDP AND UNEMPLOYMENT RATE AND THINGS LIKE THAT. IT'S ONLY BEEN SINCE THE DEPRESSION THAT WE WENT BACK AND SAID, "HEY, THE UNEMPLOYMENT RATE WAS TWENTY-FIVE PERCENT DURING 1933." WE DIDN'T KNOW THAT IN 1933. SO THERE WAS A LOT OF INFORMATION NOT AVAILABLE THEN. THE THEORIES WEREN'T ALL THAT WELL DEVELOPED. AND SO WHAT HAPPENED WAS, SOME ECONOMISTS THOUGHT THEY KNEW WHAT TO DO BUT OTHERS SAID THEY DIDN'T KNOW, AND SO THERE WAS NO CLEAR MESSAGE FROM THE ECONOMICS PROFESSION OF THE GOVERNMENT. AND SO THE GOVERNMENT DIDN'T HAVE ANY CLEAR UNDERSTANDING OF WHAT TO DO. AND SO FRANKLIN ROOSEVELT GOT ELECTED PRESIDENT IN 1932; HE TOOK OFFICE IN '33. IN 1933, IN MARCH, THAT WAS THE VERY BOTTOM OF THE DEPRESSION. THAT WAS THE WORST. AND HE DIDN'T KNOW WHAT TO DO 'CAUSE HE WASN'T AN ECONOMIST AND THE ECONOMISTS HE WAS TALKING TO, SOME OF 'EM -- THEY WERE ALL CONFUSED. THEY DIDN'T KNOW WHAT TO DO. SO FRANKLIN ROOSEVELT SAID, "ELECT ME AND I WILL EXPERIMENT." AND THE REASON I WOULD TELL YOU THAT THE DEPRESSION WENT ON FROM 1933 -- I MEAN, IT STARTED EARLIER, BUT WHEN HE TOOK OFFICE IN '33 IT CONTINUED ALL THE WAY UNTIL 1941 -- WAS BASICALLY, THOSE EXPERIMENTS THAT HE UNDERTOOK WERE BAD IDEAS AND HURT THE ECONOMY RATHER THAN HELP IT. HE DID THINGS LIKE THIS. WHAT THEY DID IS THEY SAID, "OH, A

ECO 155 750 LECTURE TWENTY-THREE 21 DEPRESSION. THAT'S A SIGN THAT PRICES ARE TOO LOW." NOW, I'M NOT GONNA TELL YOU I BELIEVE THAT. I'M SAYING THAT WAS HIS INTERPRETATION. HIS INTERPRETATION WAS, "PRICES ARE TOO LOW. SO IF WE COULD CAUSE PRICES TO GO UP, THAT'D BE THE END OF THE DEPRESSION." SO THEN HE BROUGHT MANUFACTURERS INTO A ROOM TOGETHER, LIKE CAR MANUFACTURERS, AND HE'D SAY, "COME ON IN THIS ROOM. I WANT TO HAVE A MEETING." AND HE DIDN'T DO IT. HE HAD LIKE CABINET OFFICIALS. SO THEY BRING ALL THE CAR MAKERS IN THE ROOM AND THEY'D SAY, "OKAY. WE WANT YOU GUYS TO GET TOGETHER HERE AND SEE WHAT YOU CAN DO TO RAISE THE PRICE OF CARS." NOW, BY THE WAY, TODAY, IF ALL THE CAR MAKERS GOT TOGETHER AND SAID, "WHAT CAN WE DO TO RAISE THE PRICE OF CARS?", WHAT WE WOULD DO IS WE WOULD HAVE AN ANTI-TRUST LAWSUIT GOING ON WHERE THE GOVERNMENT WOULD GET THESE GUYS AND SAY, "YOU CAN'T DO THAT. YOU'RE RIGGING THE MARKET TO RAISE THE PRICES. THIS IS ILLEGAL." THEY'D ALL BE SUED AND MAYBE ALL OF 'EM GO TO JAIL. FOR SURE THERE'D BE HUGE FINES TO PAY. BUT MAYBE THEY'D ALL GO TO JAIL. OKAY. BUT ANYWAY, DURING THE DEPRESSION THE IDEA WAS, "HEY, WE'VE GOT A DEPRESSION 'CAUSE PRICES ARE GOING DOWN. IF WE CAN GET PRICES UP, THAT WILL BE A WONDERFUL THING." SO THEY'D BRING THESE MANUFACTURERS TOGETHER AND SAY, "YOU GUYS, WE WANT YOU TO MEET AND SEE WHAT YOU CAN DO TO RAISE PRICES." SO WHAT DID THEY

ECO 155 750 LECTURE TWENTY-THREE 22 SAY? "HEY, LET'S RIG THE MARKET AND RAISE PRICES." HOW DO YOU DO THAT? HOW DO YOU RAISE PRICES? NOW WE'RE BACK TO MICROECONOMICS AND LET ME GIVE YOU A QUICK LITTLE PICTURE HERE. HERE'S SUPPLY AND DEMAND FOR CARS. AND IF YOU WANT THE PRICES TO GO UP, WHAT CAN YOU DO? HOW ABOUT THIS: RESTRICT THE SUPPLY. JUST ALL -- EACH ONE OF YOU SAY, "I'LL CUT MY PRODUCTION TWENTY PERCENT IF YOU'LL CUT PRODUCTION TWENTY PERCENT. IF YOU CUT PRODUCTION, AND SO WE ALL CUT PRODUCTION TWENTY PERCENT." AND PRICES THEN -- DUE TO THE REDUCED PRODUCTION, PRICES GO UP. [STUDENT SPEAKING INAUDIBLE] EXACTLY. IF YOU CUT PRODUCTION, THEN YOU'D GO BACK TO THE FACTORY AND SAY, "HEY, WE ONLY NEED EIGHTY PERCENT OF YOU. TWENTY PERCENT OF YOU GO HOME." SO YOU'RE ABSOLUTELY RIGHT. WHAT HAPPENS IS, YOU START RIGGING THESE MARKETS SO THERE'S LESS PRODUCED TO RAISE THE PRICES, THERE'S FEWER JOBS. AND LET ME TELL YOU SOMETHING. IT WASN'T LIKE CAR MAKERS AND THAT'S IT. IT WAS PRACTICALLY EVERY INDUSTRY OF ANY SIZE WHATSOEVER. AND AGRICULTURE? THEY KILLED ANIMALS. MY FATHER LIVED DOWN IN OKLAHOMA DURING THE DEPRESSION AND WHAT HAPPENED WAS GOVERNMENT GUYS CAME IN WITH LIKE A BULLDOZER AND THEY DUG A BIG TRENCH, AND THEY WENT OUT TO FARMERS AROUND THAT NEIGHBORHOOD, THAT AREA, AND THEY SAID, "HEY, BRING YOUR COWS UP

ECO 155 750 LECTURE TWENTY-THREE 23 HERE." AND THE FARMERS BROUGHT THEIR COWS UP THERE AND THEN THE GOVERNMENT PAID THEM FOR THE COWS, AND THEY PUT THE COWS DOWN IN THE HOLE AND THEY SHOT 'EM DEAD. AND THEN THEY PUSHED DIRT ON TOP OF THEM AND THEN EVERYBODY WENT AWAY. AND THEY WERE THINKING, "HEY, IF WE COULD GET THE PRICE OF CATTLE UP -- YOU KNOW, BEEF AND MILK AND SO FORTH -- IF WE COULD DO THAT, THIS WOULD HELP ELIMINATE THE DEPRESSION." WELL, YEAH. THIS IS A PERIOD WHEN PEOPLE ARE STANDING IN SOUP LINES WANTING TO BE FED AND ALL OF A SUDDEN FOOD IS BEING, LIKE, BURIED. IT CAUSED THE PRICE TO GO UP BUT NOW THE FARMERS SAY, "HEY, I DON'T HAVE AS MANY CATTLE. I DON'T HAVE TO DO AS MUCH MILKING AND THE BUTCHERS DON'T HAVE TO DO AS MUCH SLAUGHTERING. THE GROCERY STORES DON'T HAVE AS MUCH MEAT IN THE MEAT DEPARTMENT TO SELL." AND THE POINT IS, IN ORDER TO RAISE THOSE PRICES BY DESTROYING SUPPLIES, WE DO PUSH PRICES UP BUT WE DON'T SOLVE THE DEPRESSION. WE MAKE IT WORSE. AND THAT IS REALLY WHAT HAPPENED, IN MY OPINION, AND WHY WE DID NOT GET OUT OF THE DEPRESSION FOR SUCH A LONG PERIOD. THERE WERE OTHER MACROECONOMIC PROBLEMS, BUT I'M SAYING THESE PROBLEMS -- AND YOU CAN GO BACK AND READ. IN THE FIRST ONE HUNDRED DAYS THEY PASSED ONE LAW AFTER ANOTHER IN 1933. THIS WAS F.D.R.'S HUNDRED DAYS. AND, I MEAN, THERE WERE ALL THESE THINGS: THE WPA

ECO 155 750 LECTURE TWENTY-THREE 24 AND THE CCC AND THE -- WHATEVER. ALL THESE DIFFERENT LAWS WERE PASSED. AND A LOT OF 'EM THAT AFFECTED THE ECONOMY, THEY HAD THE EFFECT I'M DESCRIBING HERE. IT WAS NOT UNTIL LATER ON THAT -- AND I CAN'T TELL YOU. IN 1936, MAYBE, THERE WAS A GUY IN NEW YORK CITY AND HE WAS A CHICKEN PLUCKER. HIS JOB -- PEOPLE WOULD BRING CHICKENS IN AND HE WOULD PLUCK ALL THEIR FEATHERS OUT AND GET 'EM READY TO -- YOU KNOW, LIKE, ROAST OR WHATEVER YOU DO TO CHICKEN -- COOK 'EM. OKAY. SO HIS JOB -- HE WAS A CHICKEN PLUCKER. AND SO THEN THE GOVERNMENT CAME TO NEW YORK CITY AND SAID, "I WANT ALL YOU CHICKEN PLUCKERS TO GET TOGETHER, YOU KNOW, AND DO WHATEVER YOU GOT TO DO." THEY PROBABLY HAD SOME OTHER FANCIER NAME FOR HIM, BUT CHICKEN PLUCKER. THEY SAID, "WE WANT ALL YOU CHICKEN PLUCKERS TO GET TOGETHER" -- I JUST LIKE TO SAY CHICKEN PLUCKER AND THAT'S WHY I BROUGHT THIS UP. THEY SAID, "WE WANT ALL YOU CHICKEN PLUCKERS TO GET TOGETHER AND RAISE THE PRICE OF YOUR PRODUCT." AND THIS GUY SAID, "I'M NOT DOING IT." AND THEY SAID, "YEAH, YOU'VE GOTTA DO IT. WE'RE THE GOVERNMENT." AND HE SAID, "I'M NOT DOING IT. THIS IS WRONG. IT'S AGAINST THE LAW FOR YOU TO FORCE ME TO DO THIS. WE GET FREE ENTERPRISE HERE. I GET TO PLUCK ALL THE CHICKENS I WANT TO PLUCK, CHARGE WHATEVER PRICE I WANT TO CHARGE." AND THEY SAID, "NO, YOU DON'T." AND HE SAID, "YES, I DO." AND SO HE GOT A LAWYER AND HE

ECO 155 750 LECTURE TWENTY-THREE 25 STARTED SUING THE GOVERNMENT. AND DO YOU KNOW HE BEAT THE GOVERNMENT? AND I MEAN BEAT THE GOVERNMENT ALL THE WAY INTO THE SUPREME COURT, AND BEAT 'EM IN THE SUPREME COURT. AND SO THEN THESE POLICIES -- AND NOW WE'RE LATE IN THE 1930S BY THE TIME IT GETS TO THE SUPREME COURT. THESE POLICIES THAT THE GOVERNMENT HAD BEEN PURSUING SINCE 1933, THAT HAD BEEN ILLEGAL, ALL OF A SUDDEN BY THE END OF THE 1930S WE GO, "UH, THOSE ARE ILLEGAL" -- AND HARMFUL TO THE ECONOMY. BUT THE ILLEGAL PART MEANT THE GOVERNMENT WAS TAKING AWAY FREEDOMS FROM AMERICANS THAT THEY HAD, AND IT WAS JUST TAKEN AWAY. SO WHAT HAPPENED AT THAT POINT WAS THE SUPREME COURT SAID, "HEY, THE NEW DEAL, LARGE SEGMENTS OF IT, ARE JUST ILLEGAL. THEY MUST BE TAKEN AWAY." AND BY THAT TIME EVERYBODY KNEW IT WASN'T WORKING ANYWAY BECAUSE IT'S BEEN LIKE SEVEN YEARS UNDERWAY, OR WHATEVER, AND WE STILL HAVEN'T RECOVERED. SO EVERYBODY KIND OF HAD THE IDEA IT WASN'T WORKING. BUT THE POINT IS THAT THE SUPREME COURT SAID THE NEW DEAL -- LARGE SEGMENTS OF IT; NOT EVERY ASPECT, BUT A LARGE PART -- WAS ILLEGAL. AND SO THEN IT CREATED A DISAGREEMENT BETWEEN THE ROOSEVELT ADMINISTRATION AND THE SUPREME COURT. AND WHAT HAPPENED AS A RESULT OF THAT -- AND THIS IS NOT ECONOMICS SO MUCH, BUT A LITTLE BIT OF POLITICS, A LITTLE BIT OF THE LAW. WHAT HAPPENED

ECO 155 750 LECTURE TWENTY-THREE 26 OVER THIS ARGUMENT, THE CHICKEN PLUCKER BEATING THE GOVERNMENT, IS THAT THE ROOSEVELT ADMINISTRATION -- FRANKLIN ROOSEVELT WAS ANGRY WITH THE SUPREME COURT AND HE SAYS -- BOY, WE'VE JUST GOT A BUNCH OF ANGRY OLD MEN HERE, YOU KNOW, THAT ARE -- THE ANGRY ONE WAS F.D.R. BUT A BUNCH OF OLD MEN THAT ARE LIKE OUTLAWING WHAT THE GOVERNMENT'S TRYING TO DO TO SOLVE THE NATION'S PROBLEMS. AND SO THEN HE SAID, "YOU KNOW WHAT WE NEED? WE NEED A NEW LAW FROM THE CONGRESS WHERE I GET TO APPOINT NEW PEOPLE TO THE SUPREME COURT." THERE WERE ALREADY NINE PEOPLE ON THE SUPREME COURT AND HE SAID, "BOY, IF I COULD PUT FOUR OR FIVE MORE ON THERE, THEN I'D HAVE A MAJORITY THAT SEES THINGS MY WAY." AND SO THE TERM THAT'S BEEN GIVEN TO THIS PERIOD IS -- THIS IS THE PROPOSAL OF F.D.R. -- I'LL SAY F.D.R. PACKING, STACKING -- WHAT THE HELL WAS IT? PACKING, STACKING? [STUDENT SPEAKING INAUDIBLE] STACKING, PACKING, STACKING -- I DON'T KNOW. THE SUPREME COURT. I THINK IT'S PACKING. HEY, EITHER ONE WILL WORK FOR ME. ANYWAY, THIS TRULY CREATED A CRISIS IN OUR GOVERNMENT AT THE TIME BECAUSE THE CONGRESS SAID, "LOOK, WE CAN'T BE HAVING PRESIDENTS COMING ALONG AND JUST LIKE CHANGING THE SUPREME COURT. IT'S BEEN THIS WAY" -- YOU KNOW, THE SUPREME COURT -- "FOR JUST LIKE CENTURIES. WE CAN'T BE HAVING SOME PRESIDENT WHO DOESN'T LIKE A SUPREME COURT CASE COME ALONG AND SAY, 'WE'VE GOTTA CHANGE THE WHOLE -- THE

ECO 155 750 LECTURE TWENTY-THREE 27 MEMBERSHIP OF THE SUPREME COURT,' AND THINGS LIKE THAT. WE JUST CAN'T HAVE IT." SO IT CREATED A CONFLICT BETWEEN -- REALLY, IT INVOLVED THE SUPREME COURT, IT INCLUDED THE PRESIDENT, AND INCLUDED THE CONGRESS. AND SO THERE WERE SOME VERY HARD FEELINGS AT THAT POINT. A LONGER-TERM EFFECT OF THIS -- AND I'M SAYING OVER THE YEARS. OH, BY THE WAY, THE END OF THIS WAS F.D.R. HAD THIS PROPOSAL STRUCK DOWN AND THERE WERE NO MORE PEOPLE ADDED TO THE SUPREME COURT. THE NEW DEAL, THOSE ASPECTS OF IT WE'VE TALKED ABOUT, WERE JUST OUTLAWED. TOO BAD FOR YOU. BUT THERE WERE ULTIMATE RESULTS. THE SUPREME COURT WAS INTIMIDATED BY F.D.R.'S PROPOSAL. YOU'VE DISPLEASED THE PRESIDENT; NOW THE PRESIDENT WANTS TO COME ALONG TRYING TO FORCE SOME OF THE OLDER MEMBERS OFF THE SUPREME COURT. "TIME FOR YOU TO RETIRE, OLD-TIMER." BUT TRYING TO FORCE SOME OF 'EM OFF, TRYING TO ADD MORE PEOPLE TO THE SUPREME COURT. THEY WERE INTIMIDATED. AND SO WHAT HAPPENED WAS, THE SUPREME COURT AFTERWARDS SAID ALMOST ANYTHING THE GOVERNMENT DOES IS LEGAL. I'M SAYING TO YOU THAT IT IS AT THIS POINT IN TIME, LATE 1930S -- AND I CAN'T TELL YOU AGAIN WHAT THE YEAR WAS. 1936, MAYBE '37, SOME TIME ALONG IN THERE. BUT SINCE 1936 OR 1937, WE HAD THIS CASE OF PACKING THE SUPREME COURT AND THE FIGHTING AND THE CONSTITUTIONAL CRISIS AND ALL THAT TOOK PLACE. I'M

ECO 155 750 LECTURE TWENTY-THREE 28 SAYING SINCE THAT DAY AND CONTINUING UNTIL TODAY, THE SUPREME COURT'S GENERAL ATTITUDE -- THERE ARE EXCEPTIONS, BUT THE GENERAL ATTITUDE THE SUPREME COURT HAS IS THIS: WHATEVER THE GOVERNMENT DOES, THAT'S LEGAL. THE GOVERNMENT WOULDN'T BE DOING IT IF IT WASN'T GOOD. AND SO WHAT I'M SAYING TO YOU IS, THIS IS IN A SENSE -- AND I'M REALLY TALKING ABOUT ECONOMIC LAWS MORE THAN OTHERS. BUT IN A SENSE, THIS IS KIND OF THE END OF THE CONSTITUTIONAL PERIOD WHERE THAT WE'D JUST SAY, "WELL, YOU KNOW, THESE CONSTITUTIONAL RULES. THOSE DETERMINE WHAT'S LEGAL AND WHAT'S ILLEGAL." ALL OF A SUDDEN IT'S NO, NOW THE GOVERNMENT IS DECIDING WHAT'S LEGAL AND ILLEGAL. AND THE GOVERNMENT ALMOST CAN'T BREAK THE LAW. AND SO THIS IS REALLY AN IMPORTANT TURNING POINT IN AMERICAN HISTORY. I'VE ALREADY TOLD YOU ABOUT A CASE -- WHEN WE WERE TALKING EARLIER ABOUT SUPPLY AND DEMAND, I TOLD YOU ABOUT A CASE, ONE ON THE EAST COAST AND ONE ON THE WEST COAST, ABOUT SOME PROPERTY OWNERS. AND THE GOVERNMENT CAME ALONG AND SAID, "JOE, YOU CAN'T BUILD ON YOUR PROPERTY," IF YOU REMEMBER THAT. AND THEN THIS GUY SUES THE STATE OF SOUTH CAROLINA AND THEN THE STATE OF SOUTH CAROLINA APPEALS, THEN THERE'S ANOTHER APPEAL, AND IT WORKED ITS WAY TO THE SUPREME COURT. AND THE SUPREME COURT SAID TO THE STATE OF SOUTH CAROLINA, "YOU CANNOT TAKE THIS PERSON'S

ECO 155 750 LECTURE TWENTY-THREE 29 PROPERTY." IF YOU REMEMBER, THAT WAS THE FIFTH AMENDMENT, THE TAKINGS CLAUSE. THE SUPREME COURT SAID, "YOU MAY NOT TAKE THIS MAN'S PROPERTY WITHOUT COMPENSATING HIM." THAT WAS SEEN TO BE -- AND THAT WAS IN 19, WHAT, 93 OR SO. NOT UNTIL ABOUT 1993 DID THE GOVERNMENT -- OR THE SUPREME COURT COME BACK AND SAY TO THE GOVERNMENT, "JUST BECAUSE YOU WANT TO DO THAT DOESN'T MEAN IT'S OKAY." AND SO I'M SAYING THAT HERE OUR ECONOMIC CONSTITUTION SORT OF WAS OUT THE WINDOW IN THE '30S, AND NOT UNTIL THE 1990S DID THE GOVERNMENT START MAKING LAWS THAT THEN THE SUPREME COURT SAID, "THAT'S ILLEGAL. YOU'VE BROKEN THE LAW. YOU'VE BROKEN THE CONSTITUTION. YOU MUST NOT DO THAT." AND SO THAT WAS A LONG PERIOD OF ALMOST SIXTY YEARS WHEN -- AND I DON'T MEAN TO SAY THIS PERIOD IS OVER. THESE CASES ARE STILL FAR AND FEW BETWEEN THE ONES LIKE IN THE 19, WHAT'D I SAY, '93 -- WHERE THE SUPREME COURT STRIKES DOWN THESE ECONOMIC LAWS. AND SO WE ARE AT A PERIOD RIGHT NOW WHERE WE STILL HAVE -- I MEAN, ALWAYS HAVE THE RIGHT TO VOTE, THE RIGHT TO FREE SPEECH. SO OUR POLITICAL RIGHTS I DO NOT MEAN WERE ENDANGERED BY THIS SITUATION. BUT I'M SAYING OUR ECONOMIC RIGHTS THAT ARE WRITTEN INTO THE CONSTITUTION -- YOU'VE GOT THE RIGHT TO LIFE, LIBERTY, PROPERTY -- IT SAYS THOSE THINGS. BUT OUR ECONOMIC RIGHTS, I'M SAYING, WERE --

ECO 155 750 LECTURE TWENTY-THREE 30 HAVE BEEN SORT OF, MMMM, NOT VERY STRONG IN THE CONSTITUTION. THE CONSTITUTION'S WORDS HAVEN'T CHANGED BUT THE INTERPRETATION HAS BEEN WEAK EVER SINCE THE 1930S. AND STILL IS WEAK. AND OUR ECONOMIC RIGHTS ARE NOT AS STRONG AS OUR POLITICAL RIGHTS. LET'S TAKE JUST ONE MORE MINUTE AND THEN WE'LL QUIT FOR THE DAY. WE'LL FINISH THIS UP NEXT TIME. I WANT TO MAKE THE POINT WHICH, ANSWERING YOUR QUESTION, I SORT OF DID. SOME ECONOMISTS BELIEVE THAT WAGES WILL NOT DECLINE. SOME ECONOMISTS THINK THAT, YOU KNOW, WE'RE JUST NEVER GONNA GET TO THAT POINT OF LONG-RUN EQUILIBRIUM THROUGH THIS PROCESS I JUST DESCRIBED. WE'LL NEVER GET THERE BECAUSE WAGES WON'T GO DOWN. IF THERE'S A HIGH UNEMPLOYMENT RATE -- THIS IS THE THEORY. I DO NOT PERSONALLY HOLD TO THIS THEORY. BUT THE THEORY IS THAT IF THERE'S A HIGH UNEMPLOYMENT RATE AT OUR ORIGINAL EQUILIBRIUM, AND THERE'S A LOT OF PEOPLE STANDING DOWN THERE, TRYING TO GET UNEMPLOYMENT BENEFITS, THAT EMPLOYERS WON'T LOWER WAGES AND EMPLOYEES WON'T BARGAIN WAGES DOWN AND THEY JUST WON'T FALL. AND SO WE'RE JUST STUCK RIGHT THERE UNLESS SOMEBODY COMES ALONG AND DOES SOMETHING. THERE'S THE GOVERNMENT. BUT UNLESS GOVERNMENT HAS A POLICY, WE'RE STUCK RIGHT HERE AT UNEMPLOYMENT. PERSONALLY, I DO THINK WAGES ARE FLEXIBLE DOWNWARDS, BUT -- AND THIS IS MY PART OF THE STORY HERE -- I THINK THAT THIS MOVEMENT

ECO 155 750 LECTURE TWENTY-THREE 31 FOR WAGES TO FALL BY ENOUGH FOR US TO GET TO THAT EQUILIBRIUM, I THINK THAT THIS CAN TAKE ANYWHERE FROM ONE TO THREE YEARS. SO IT CAN BE A SLOW PROCESS. THAT'S WHERE WE'LL STOP FOR THE DAY. FRIDAY WE'LL TAKE THE OTHER CASE OF AN INFLATIONARY GAP. SO LONG.