IB Economics

 

A very interesting book recently came to my attention while I was visiting the US.  Its title is "Maxims for Thinking Analytically: The Wisdom of Legendary Harvard Professor Richard Zeckhauser".  It is exactly what the title suggests.  I managed to read only about half of it as I bought it only a couple of days before my return flight so I had to mail it back home together with quite a few other books I had purchased (max 23 kilos allowed...).  Still, not here...

I can't wait to get it and finish reading it.  Easy to read but forces you to reflect and to often re-evaluate decisions made without deeper thinking.

This is from a post in Jeffrey Frankel's blog Views on the Economy and the World (Frankel, a renowned macroeconomist, is a colleague of Zeckhauser at Harvard) on this book:

I recommend it highly. This is not a collection of tangential papers published together in someone’s honor.  Rather each chapter consists of an immortal maxim of Richard’s together with applications to real-world decision-making, whether at the personal or public-policy level. There are 19 such pithy insights, such as “Think probabilistically about the world,” or “Good decisions sometimes have poor outcomes,” or “Eliminate regret.”  Dan skillfully weaves into each of his chapters concise contributions from a big set of Zeckhauser-admirers, including Max Bazerman, Jason Furman, Hsien Loong Lee, Jennifer Lerner, Barry Nalebuff, Larry Summers, among many others. My own contribution is to Chapter 10.  Richard’s 10th maxim is: “Errors of commission should be weighted the same as errors of omission.”

 

The national debt expressed as a proportion of GDP - and the Furman & Summers point (among lots of other interesting points for IB Economics students)

From my experience (not though from last year as all my classes were online) incorporating podcasts in teaching IB economics can be very effective. The podcast must of course be at an appropriate level for students taking IB HL (or, SL) economics.

In addition, at least in my opinion, the teacher must only focus on specific bits of the podcast, either to start a classroom discussion on a specific issue of interest or to assign homework that expects students to explain or evaluate a position expressed in the podcast.  Focusing on bits is absolutely necessary if the podcast is long and/or if segments of it become too involved for their level.

David Beckworth, a senior fellow at the Mercatus Center at George Mason University,  hosts the Macro Musings Podcasts which are always excellent (for teachers) and sometimes appropriate (at least bits of them) for IB Economics students.

One recent very interesting podcast was an interview of Jason Furman titled Jason Furman on Overheating, Inflation, and Fiscal Policy in an Era of Low-Interest Rates.  

Jason Furman is a senior fellow at the Peterson Institute for International Economics and a professor of the practice of economic policy jointly at the Kennedy School of Government and at the department of economics at Harvard University.

In this interview Furman, prompted by Beckworth, starts by explaining the two things that are a concern to him if inflation accelerates (namely that real wages decrease exacerbating inequality and the risk of recession if the central bank raises interest rates too quickly); he continues explaining the importance of anchored inflationary expectations (and there’s lots of discussion with Beckworth on the debate about whether inflation in the US is now transitory/temporary or persistent - in which case the central bank must start worrying); he also makes the case why a higher than 2% inflation target (perhaps even 4% even though Furman likes 3%) may be preferable – it gives policymakers more flexibility plus, given sticky nominal wages, the resulting decrease in the real wage will permit employment levels to be maintained; and then gets into some more esoteric issues (that are not accessible to IB Economics students in my opinion).

What is though most interesting for IB economics students (higher level only) is found later on in their conversation when Furman presents the paper he co-authored with Larry Summers “A Reconsideration of Fiscal Policy in the Era of Low-Interest Rates". 

This is the paragraph that is worth some discussion is given that the new IB Economics syllabus has now included a discussion of what a sustainable level of the national debt is and explicitly expects students to know that the size of the national debt should be expressed as a percentage of GDP (“Measurement of government (national) debt as a percentage of GDP”).  

So we (F&S) argue that the right way to look at it is from a flow-flow perspective. What's the flow you need to pay each year, and what's the flow of income you have each year. We go a little bit further into a place that I don't haven't noticed others do, but maybe they have. I'm sure somebody has. Which is that the relevant way to think about interest is the real interest payments. If you're in a world of higher inflation, you're inflating away more of your debt. You don't mind the portion of the interest that's just covering inflation. What your mind is the portion above and beyond that. And so, our preferred metric for fiscal sustainability is looking at real debt service as a share of GDP.

This Furman & Summers point about the right metric to judge the sustainability of a country’s debt can be explained I think to IB HL economics students.  If explained and if understood then (strong) candidates could incorporate the discussion in a debt-related paper 1 question related to debt sustainability.  I think that could push their response easily towards a Level 5. 

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