The Economist Articles — Week of 20 Feb 2016

Every week I read through The Economist to pick out articles that may be useful for teaching in the classroom. I’ll be sharing some of my notes and the discussion prompts I’ve come up with in these weekly posts. For students, they can serve as guide-rails for your reading. For teachers, I hope they will be helpful for your teaching.

1. Fighting the next recession — Unfamiliar ways forward

“If (China’s) growth falters, it stokes worries about the prospects for other emerging markets; if activity holds up, though, concerns shift to the ever rising debt that makes such feats possible, but not necessarily sustainable.”

The 4 Suggestions

“first… ensure that central bank actions give their economies a bigger jolt.”

“second… well targeted and flexible fiscal measures.”

“Carefully chosen structural reforms can both complement such stimuli in the short term and sustain their good effects in the longer term by helping the recovery sustain itself.”

“All these measures can be given more oomph if they are co-ordinated with similar efforts in other countries.”

How does policy coordination between different countries give “these measures more oomph”?

Monetary Policy

“negative rates are not good for banks, deposit rates cannot be pushed down as hard as lending rates for fear that small savers might switch to cash”

Explain the likely impact on the economy of a negative interest rate policy like Japan’s. What are some limitations of such a policy?

Incomes policy

“state would mandate an across-the-board 5-10% increase in salaries in order to jump-start a spiral in which high wages drive up prices that drive up wages, thus soon leaving deflation behind.”

Do you think this policy is likely to be effective? Why?

Fiscal Policy

“Fiscal policy is… less fleet-footed than monetary policy… tax policies is a lot less flexible (than monetary policy)… spending plans are less easily changed… wages are cut hard to cut; capital spending… requires planning, so is difficult to mobilise quickly.”

Explain what is the limitation of Fiscal policy identified here.

“Income-tax cuts or increases in tax credits should be skewed towards those (typically the low-paid) who are more likely to spend them.”

Is this a positive or normative statement? Explain.

“a temporary cut in the taxes on durable goods — cars, kitchens, televisions, and so on — can be expected to have a greater impact on overall spending than a smaller cut in taxes on all goods, including necessities such as clothing and utilities.”

Why might this be the case?

2. Free Exchange — Slight of hand

“Economists have long acknowledged the role of mass psychology in business cycles. In 1936 John Maynard Keynes described the “animal spirits” that could drive swings in spending or investment.”

“The longer that knob-turning fails to get an economy out of the zero-rate rut, the less credible markets are likely to find subsequent attempts at regime change.”

What do you understand by the above statements? How does “animal spirits” diverge from the rational economic agent we learnt in Microeconomics?

3. Greek businesses — An actual Grexit

“Sharp increases in business taxes…”

“Greece has raised its corporation-tax rate from 20% in 2012 to 29% in 2015.”

“Between 2009 and 2014 the taxable profits declared by the country’s businesses fell by more than 5 billion euros to 10 billion euros.”

“In recent years Greek governments desperate for cash have sought to squeeze it from companies, despite evidence that this is driving them away to places like Bulgaria, Cyprus and Albania.”

Does higher taxes always lead to higher government tax revenue? Why?

I hope to hear your thoughts and contributions in the comments section below.

Till next time, dream economics.