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Chapter 7

Chapter 7 readings notes


Department
Economics
Course Code
ECO105Y1
Professor
Prof.Hare
Chapter
7

Page:
of 5
7.1 PROSPERITY
We dont know the reason for the downfall of the magic economy in US in 1970s
Real political success comes from appealing to the interests that people currently perceive and from
finding ways to redefine their perceived interests
1980s concervatives defined vision of what was wrong with US Big government, expensive taxes
Politics o n the g rand sc ale is n ot ab o u t interests b u t ide a s
profes s ors: a c a demic e c onomists
Policy entrepreneurs writ e and spe a k o nly for broader au dienc e
Offer u n ambiguous diag n o ses and e a sy answers
Sell b o o k s to the p u blic, ap p e a r o n televisio n
Policy entrepreneurs c a n transform voters p erc e ptio n of their interests
They are u seful to p oliticians
They look for su p p o rt from profes s ors
te c h n ology p u shin g u s into an age of ever gre a ter d o minanc e by giant corp oratio n s
Role of giant corporatio n s in US e c o n o my shrinking NOT risin g for p ast 2 d e c a des
Kenn ed y u sed e c o n o mics profes s ors o n his co u n cil an d as ad visors
In the 1 9 7 0 s p oliticians relied more o n p olicy entrepreneurs wi t h the n e e d to offer the p u blic m
solutio n s
Pro d u ctivity slowd own first blamed o n rise in oil pric e s
3 main ex planatio n s of pro d u ctivity slowd own: p olitic al, te c h n olo gic al, social
Technolo gy: lo n g-r u n e c o n o mic g rowth affe c ted by co n ti n u o u s te c h n ologic al pro g res s
This progres s u sually main so urc e of p ro d u ctivity incre a se
Technolo g y at the ti me h ad re a c hed its limi t s
Pro d u ctivity gre rapidly after WWII
Most p o s sibilities in existing scienc e an d te c hnolo gies were fully ex plored , pro d u ctivity growth
off: ex h austio n of ide a s
Takes lo n g ti me b efore n ew te c hnolo g y makes major impa c t o n pro d u ctivity and living stan d ard
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Long lags: technology has full impact when it is broadly applied and interacts with other techno
New technology will only only achieves full effects when it reaches critical mass
Economic progress in 1920s came from improvements not innovations
By early 1970s set of technologies driving postwar boom were fully exploited, the technologies
power another boom not yet ready
Sociological explanation: late 1960s early 1970s saw large scale entry of baby boomers to la
market
Social trends like educational standards
Problems of education system linked to motivation of teachers, students, parents
Social collapse in segments of population
Underclass expanded in 1960s
This expansion had drag effect on US growth
Social problems -> the loss of economic drive in students of middle class, declining standards o
education, rise of underclass played significant role in productivity slowdown
Political explanation: distortions and reduced incentives caused by taxes and regulations: dr
economic growth
7.2 STAGNATION OF 1970s
Export price of oil quadrupled in 19 74
Recession; all major industrial nations suffered inflations
Crop failures drove up food prices
Inflation rate in OECD countries rose, productivity growth rate fell
Oil crisis had major impact on western countries
Inflation was major problem before quadrupling of oil prices
Growth of industrial production slowing down before 1973
In US growth recession underway before the oil crisis
Profit rates declining since mid 1960s, outlook was not good for firms product de mands
Stock markets signaled slowdown well before 73
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Structural unemployment increasing since mid 1960s
Post war growth in manufacturing sector exceeded that of total output
Manufacturing sector engine of postwar growth
Manufacturing is sector that propels rest of the economy (esp post war years in industrialize
countries: technological innovations key to growth)
Manufacturing growth rates dropped postwar
Innovation responsible for creation of jobs, does not displace them
Results of over expansion becomes most visible in basic sectors: steel, basic chemicals, oil
refining, shipbuilding, construction
Years of unintererrupted growth changes attiteuds towards work
A long wave expansion is self destructive, the success becomes the crisis
Govt sectors grown so large because of excessive growth in welfare expenditure that this
depression fought by curtailing size of govt to make room for private sector
Govt sector encouraged increased intervention in causing downturn by growing at too rapid
during long wave recession phase
This expansions t wo negative effects: reduced manoevuring room for private sector (giving
large underground economy), and it eliminated Keynesian expenditures policy during ensuin
depression
Govt. growth gained momentum, could not be stopped
Redusing size now that countries are trying to get out of recession
Over expansion of capital goods and maturation and saturation of growth markets t wo prime
factors in 1973 downturn
The length of postwar growth era adnd changed in attitudes the growth caused made expan
victim of its own success
Politicians could not handle the distribution of growth
Depression was already in the making, oil crisis proved postwar expansion was over
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