Cartoon Macro page notes

Additions or edits welcome! For information about PPTs for use in class, please email me using your school email address. For more information on this book please visit the Volume Two: Cartoon Macro homepage. For more on the companion volume, visit the Volume One: Cartoon Micro homepage, or go direct to the page notes website for that book.

Chapter 1: Introduction (pages 3-16)

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Page 4, micro versus macro: The division between micro and macro is not always clear, e.g., you can study international trade from a micro perspective (treating two countries just like two individuals) or from as macro perspective (for example, dealing with exchange rate issues or distributional issues). Nonetheless, there is a rough dividing line between micro and macro, perhaps best described (to paraphrase P.J. O’Rourke) as being that microeconomists are wrong as specific things and macroeconomists are wrong about things in general.

Page 6, microfoundations: Providing “microfoundations” for macroeconomics has been a major goal of the past few decades of economics research. It’s easy to say that there’s unemployment during a recession, but how do you get that to match up with what microeconomists say about prices adjusting to balance supply and demand? We’ll return to this in Chapter 2.

Page 8, “increase living standards”: A good read to compare life today with life a century ago is the section on “life in the bad old days” from Gordon 2000 (“Does the ‘new economy’ measure up to the great inventions of the past?” Journal of Economic Perspectives 4:49-74):

The urban streets of the 1870s and 1880s were full not just of horses but pigs, which were tolerated because they ate garbage… Added to putrid air was the danger of spoiled food—imagine meat and poultry hung unrefrigerated for days, spoiled fruit, bacteria-infected milk, and so on. Epidemics included yellow fever, scarlet fever, and smallpox… In 1882, only 2 percent of New York City’s houses had water connections… Rural life was marked by isolation, loneliness, and the drudgery of fireplace cooking and laundry done by musclepower… Coal miners, steel workers, and many others worked 60-hour weeks in dirty and dangerous conditions, exposed to suffocating gas and smoke… Sewing in a sweatshop might have been the most oppressive occupation for women, but was not as dangerous as soap-packing plants or the manual stripping of tobacco leaves.

Another good and very accessible read here is the OECD website devoted to Angus Maddison’s 2006 book The World Economy: Volume 1: A Millenial Perspective. Another excellent read (with a modern slant) is Sections 3-6 of Robert Gordon’s “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds” (NBER Working Paper 18315, 2012).

Page 8, “10% of kids died before their first birthday”: Read the CDC’s “Achievements in Public Health, 1900-1999: Healthier Mothers and Babies” (MMWR, Oct 1999). PS. Yes, the wheel does apparently date back to about 5,000 BCE.

Page 8, “wealth of nations”: The full title of Adam Smith’s surprisingly readable Wealth of Nations (1776, full text here) is An Inquiry into the Nature and Causes of the Wealth of Nations.

Page 10, the Great Depression: The term “macroeconomics” apparently did not come into being until 1933, so one could say that macroeconomics literally started during the Great Depression, which started in 1929 and lasted for about ten years.

Page 10, “In the long run we are all dead”: John Maynard Keynes (1883-1946, last name rhymes with “trains”) was a British economist and is arguably the father of modern macroeconomics. Keynes’s main book, The General Theory of Employment, Interest and Money (1936), came out in the midst of the Great Depression; it is notoriously difficult to understand. The quip in the cartoon book comes from chapter 3 of A Tract on Monetary Reform (1923): “But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.” (See the stormy seas in the panel at the top of p11.)

Page 11, dentists: The dentist quote is a paraphrase of Keynes: “If economists could manage to get themselves thought of as humble, competent people, on a level with dentists, that would be splendid!” I haven’t confirmed this quote directly, but apparently it comes from a fascinating essay called “Economic Possibilities for our Grandchildren” that appears in Essays in Persuasion (1931). The quote appears in many places, including in a thoughtful essay by Greg Mankiw on teaching and practicing macroeconomics: “The macroeconomist as scientist and engineer” (2006).

Page 12, “moving like a tremendous machine”: This line is adapted from the famous quote about Secretariat, who won the Triple Crown in 1973 with a stunning 31-length victory at the Belmont Stakes. (Watch the race here; the call by Chic Anderson includes the line that “Secretariat is moving like a tremendous machine!”)

Page 12, “the best of all possible worlds”: The reference is to Pangloss from Voltaire’s Candide (1759).

Chapter 2: Unemployment (pages 17-30)

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Page 17, “Nuttin’, honey”: This is a reference to the “busy as bees” line on page 7, and also to a 1980s TV ads for Kellogg’s Nut & Honey Crunch cereal.

Page 18, unemployment in the Great Depression: The estimate of 25% unemployment in 1933 comes from the Bureau of Labor Statistics, but data sets before 1940 are sketchy. A nice graphical estimate of historic U.S. unemployment rates (back to 1890) is here.

Page 20, farm jobs: Here’s some amazing stats from USDA’s The 20th Century Transformation of U.S. Agriculture and Farm Policy (Electronic Information Bulletin Number 3, June 2005, by Carolyn Dimitri, Anne Effland, and Neilson Conklin):farming

Also, Angus Maddison’s Contours of the World Economy 1-2030 AD (2007, pp76-77) notes that “British farm employment fell from 56 per cent of the work force in 1700 to 1 per cent in 2003…. In the seventeenth century a majority of the population produced their own food, milked their own cows, made their own butter and cheese, and baked their own bread.”

Page 21, “creative destruction”: Joseph Schumpeter (1883-1950, last name apparently pronounced “SHOOM-payter”) was a Harvard economist who popularized the phrase “creative destruction”; he also argued (as quote by Brad DeLong) that “depressions are not simply evils, which we might attempt to suppress, but… forms of something which has to be done, namely, adjustment to… change.” (See also this passage, which Paul Krugman frequently cites.) PS. The “life really is a beach” quote at the bottom of this page is a reference to chapter 10 of Cartoon Micro.

Page 21, “Yes, ma’am, what a tragedy”: The joke about the robot driver was in part inspired by an article about robot chefs (“Just like Mombot used to make”, NY Times, Feb 23 2010; see hilarious videos of the Snackbot, the Japanese savory-pancake-making robot, and—to see how hard this is—the ham-and-cheese-omelete-making robot). Of course, it now turns out that Google is working on a self-driving car. You can also play Trivial Pursuit against IBM’s Watson or (even more infuriating) play Rock-Paper-Scissors against a computer. PS. The joke about robot drivers is of course not entirely a joke: companies can go bankrupt if they cannot add value to the economy, and the same is (at least in theory) true about human beings if there is no social safety net.

Page 22, “Hey, at least I’m not unemployed”: I stole this joke from some high school students via their teacher, who gave a presentation at a California Association of School Economics Teachers conference about having students do skits about economics terms. If I find the students (or, more likely, the teacher) I definitely owe them a free copy of the book.

Page 24, efficiency wages: More here. One of the economists who worked on this theory was Joseph Stiglitz, who appears in Cartoon Micro as saying that “Sometimes the invisible hand is invisible because it’s not there.” (This is actually a classic line that Stiglitz often delivers in his talks.)

Page 27, “government policies to preserve jobs”: This is one of the criticisms often targeted at European countries, many of which struggle with high structural unemployment.

Page 26, natural rate of unemployment: For one view of the “natural rate of unemployment”, see Christina Romer’s “Jobless Rate Is Not the New Normal” (NY Times, April 9 2011).

Page 29, “get real”: This is a reference to real business cycle theory. The line about whether the Great Depression was really a Great Vacation is frequently used to mock real business cycle theory, for example in Paul Krugman’s “How did economists get it so wrong?” (NY Times, Sept 2 2009).

Page 30, Nobel Prize: Peter A. Diamond, Dale T. Mortensen, and Christopher A. Pissarides won the 2010 Nobel Prize in Economics “for their analysis of markets with search frictions”.

Page 30, sticky wages: See also the related “menu cost” theory.

Chapter 3: Money (pages 31-44)

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Page 32, “something that facilitates trade”: Textbooks often add two other properties of money: that it is a unit of account and a store of value. But it seems to me that anything that facilities trade (the textbooks call this the “medium of exchange” property of money) will necessarily be a unit of account and a store of value.

Page 32, “imagine how complicated life would be without [money]“: The idea in this panel is formally known as the “[double] coincidence of wants”.

Page 33, cigarettes: In P.O.W. (Prisoner of War) camps, cigarettes were often used as money.

Page 33, giant stones: The reference is to the stone money used on the island of Yap.

Page 34, neutral and super-neutral: “Super-neutral” is a technical term that doesn’t mean the same thing as “neutral” and so its use here is moderately misleading, but the joke was too great to pass up on; if you’re planning to go to econ grad school then you can read up on the gory details.

Page 35, “money is a veil”: David Hume (1711-1776), a friend of Adam Smith, wrote “Of money” in 1752: “Money is… only the instrument which men have agreed upon to facilitate the exchange of one commodity for another. It is none of the wheels of trade: It is the oil which renders the motion of the wheels more smooth and easy. If we consider any one kingdom by itself, it is evident, that the greater or less plenty of money is of no consequence; since the prices of commodities are always proportioned to the plenty of money…” However, Ed Dolan writes in his book (Introduction to Microeconomics, 4th edition; BVT Publishing; $39.99) that Hume’s view was actually more nuanced:

Eighteenth-century economists widely agreed that an increase in the money stock—chiefly gold and silver coins at the time—would raise the price level. Price increases had been Spanish began bringing gold back to Europe from the New World. A less settled question was whether an increase in the money stock would also “stimulate industry”—that is, cause real output to increase. Today we would say that the issue concerns whether or not money is “neutral.”

On that subject, Hume says that although an increase in the price of goods is a “necessary consequence” of an increase in the stock of gold and silver, “it follows not immediately.” The change in the money stock does not affect all markets at once: “At first, no alteration is perceived; by degrees the price rises, first of one commodity, then of another; till the whole at last reaches a just proportion with the new quantity of [money].” Agreeing with the modern theory that the stimulus to real output during this phase is only temporary, Hume continues: “In my opinion, it is only in this interval or intermediate situation, between the acquisition of money and the rise of prices, that the increasing quantity of gold and silver is favorable to industry.” In Hume’s view, there is no long-run effect on real output. In the long run, unlike the short run, money is neutral. A one-time change in the quantity of money has a lasting proportional effect on the price level but on nothing else.

Page 36, nominal variables and real variables: Nominal variables are things like the price of bread, which is denominated in dollars (or some other currency). Real variables are things like the unemployment rate or the number of loaves of bread produced each day. So the wage rate in dollars is a nominal variable; but the wage rate in terms of how much stuff you can buy (e.g., the McWage, which estimates how many Big Macs a McDonald’s worker can buy with one hour’s labor) is a real variable.

Page 39, “Our job is to take away the punch bowl…”: This line is usually attributed to mid-1900s Fed chairman William McChesney Martin, Jr, but in fact he simply popularized the idea; the journalist who originally came up with the idea remains unknown.

Page 40, non-cash assets: Central banks generally use government bonds but this “Ask Dr Econ” column from the San Francisco Fed addresses the question of “What will happen to the Fed if the national debt is paid off? Could the Fed buy precious paintings in the open market, instead of using Treasury debt to implement monetary policy?” That’s from 2001, when—yes!—people worried that the federal government might pay off the national debt!

Page 40, helicopters: The reference is to Milton Friedman’s “helicopter drop” thought experiment. Fed Chairman Ben Bernanke is sometimes called “Helicopter Ben” by critics.

Page 41, the demand for money: This is sometimes called the liquidity preference theory.

Chapter 4: Inflation (pages 45-58)

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Page 45, Zimbabwe/Japan: These lyrics are from Merle Hazard’s YouTube song “Inflation or Deflation?

Page 46, inflation: The Bureau of Labor Statistics has a handy CPI Inflation Calculator. And here’s a graph of the CPI since 1913 (based on BLS data).

Page 47, calculating inflation: On the challenges of actually calculating inflation, see this BLS FAQ: “When the cost of food rises, does the CPI assume that consumers switch to less desired foods, such as substituting hamburger for steak?” A more detailed analysis is in the Boskin Commission Report of 1996.

Page 48, Milton Friedman: Milton Friedman won the 1976 Nobel Prize in Economics “for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy”.

Page 48, “Whip Inflation Now”: “Whip Inflation Now” was a real campaign by President Ford in 1974.

Page 49, money illusion: David Abraham notes that the shrink is playing a bit fast-and-loose with the worker’s wage increase: “the proper comparison is between different workers with the same experience (and everything else), not one worker with a year’s more or less experience”. He’s absolutely right that the ideal comparison should be between different workers with the same experience &c, and in fact the ideal comparison should be averaged across the whole economy (e.g., in a PPI or unit-labor-cost kind of measure). But for the sake of telling the story in 100 words or less (!) we took some liberties, and this was one of them.

Page 54, Zimbabwe: On hyperinflation in Zimbabwe, see “How bad is inflation in Zimbabwe?” (NY Times, May 2 2006), “As Inflation Soars, Zimbabwe Economy Plunges” (NY Times, Feb 7 2007), “Life in Zimbabwe: Wait for Useless Money” (NY Times, Oct 1 2008), and “Zimbabwean Inflation Reaches 531 Billion Percent” (NY Times Economix blog, Oct 3 2008). Here is a picture of a 100 trillion Zimbabwean dollar bill!

Page 55, deflation: The concerns about deflation go back at least as far as Irving Fisher’s 1933 paper “The debt-deflation theory of Great Depressions“. Fisher was one of the most famous economists of the early 20th century and is remembered for the Quantity Theory of Money (and also for noting, shortly before the stock market crash of 1929, that “Stock prices have reached what looks like a permanently high plateau.”)

Page 56, inflation target: On what the appropriate inflation target should be, see Blanchard et al. 2010 (“Rethinking Macroeconomic Policy“, IMF Staff Position Note): “Should policymakers therefore aim for a higher target inflation rate in normal times, in order to increase the room for monetary policy to react to such shocks? To be concrete, are the net costs of inflation much higher at, say, 4 percent than at 2 percent, the current target range? Is it more difficult to anchor expectations at 4 percent than at 2 percent?” (I’m not sure I got it right here by writing “2-4%”; probably “1-3%” would have been better. See Corrections.)

Page 58, “irrational exuberance”: The “irrational exuberance” warning on the wine bottle is a reference to a phrase made famous by Fed Chairman Alan Greenspan in 1996; it was also the title of a book by economist Robert Schiller.

Page 58, alcohol: On the apparently positive benefits of small amounts of alcohol consumption by adults, see the citations on this Wikipedia page, especially O’Keefe et al, 2007 (“Alcohol and cardiovascular health: The razor-sharp double-edged sword”, Journal of the American College of Cardiology, 50:1009-1014). The abstract notes that “light to moderate alcohol consumption (up to 1 drink daily for women and 1 or 2 drinks daily for men) is associated with cardioprotective benefits, whereas increasingly excessive consumption results in proportional worsening of outcomes… The ethanol itself, rather than specific components of various alcoholic beverages, appears to be the major factor in conferring health benefits.” Why is this called a “razor-sharp double-edged sword”? Because drinking alcohol can be addictive and, for example, over 10,000 people die each year in crashes involving drunk driving; drinking too much is bad for your liver too.

Chapter 5: Gross Domestic Product (GDP) (pages 59-72)

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Page 62, value-added: Value-added is also the basis of the value-added tax that is a major source of government revenue in many countries (but not in the USA).

Page 63, Nobel Prize: Simon Kuznets won the 1971 Nobel Prize in Economics “for his empirically founded interpretation of economic growth which has led to new and deepened insight into the economic and social structure and process of development”. Richard Stone won the 1984 Nobel Prize in Economics “for having made fundamental contributions to the development of systems of national accounts and hence greatly improved the basis for empirical economic analysis”.

Page 64, % of GDP: Health care spending as a percentage of GDP comes from the OECD; size of government spending (federal, state, and local) as a percentage of GDP also comes from the OECD (choose “United States” on the left hand side, then search the page for “general government expenditures”; click on the icon at the far right to download a table comparing various countries; we’ll come back to this in the next chapter); federal debt as a percentage of GDP comes from the OMB, Table 7.1.

Page 67, “just resting”: The “just resting” line is a reference to Monty Python’s hilarious “dead parrot” routine.

Page 67, recessions: Here’s the NBER list of U.S. recessions; scroll down for the formal definition of a recession.

Page 68, Japan: The “story of Japan” can be found, for example, in the data from the Penn World Table. (You have to hunt around for it, sorry.)

Page 69, China: Angus Maddison’s Contours of the World Economy 1-2030 AD (2007, pp157-164) provides a good overview on China:

In 1300, it [China] was the world’s leading economy in terms of per capita income… By 1500, western Europe had overtaken China in per capita real income, technological [sic], and scientific capacity. [From p164: "In 1792-3, Lord Macartney spent a year carting 600 cases of presents from George III. They included a planetarium, globes, mathematical instruments, chronometers, telescopes, measuring instruments, plate glass, copperware, and other miscellaneous items. After he presented them to the Ch’ien-lung emperor, the official respond was 'there is nothing we lack… We have never set much store on strange or ingenious objects, nor do we need any more of your country’s manufactures.'"] From the 1840s to the middle of the 20th century, China’s performance actually declined in a world where economic progress elsewhere was very substantial. In the past half-century, China has been transformed in a catch-up process which seems likely to continue in the next quarter century.

Page 69, “handful of stones”: On the dismissal of Britain as a “handful of stones in the Western Ocean”, see “Percy Cradock“, The Economist, Feb 11 2010, or this page view from Simon Winchester’s Outposts: Journeys to the Surviving Relics of the British Empire (1985), which attributes the quote to “Xu Ji Yu, a scholar of the nineteenth century”.

Page 69, “Socialism with Chinese characteristics”: This refers to China’s self-described economic system (see also here); the famous quote from Deng Xiaoping about capitalism versus communism is that “I don’t care if it’s a white cat or a black cat. It’s a good cat as long as it catches mice.”

Page 69, real GDP per capita in China:Finally, data on growth in China’s real GDP per capita is not as clear as it could be, but the historical figures come from Penn World Table. For somewhat different numbers and projections, see Angus Maddison’s Contours of the World Economy 1-2030 AD (2007) and Chinese Economic Performance in the Long Run, 2nd Ed. (2007). PS. As noted in Corrections, my guess that China will reach 50% of U.S. per capita GDP (in terms of PPP) in 2040 may be optimistic if I remember correctly what I read in Angus Maddison’s Contours of the World Economy, 1-2030 AD, but here’s an estimate from Andrew Mold that suggests it will be more like 2030… I guess time will tell :)

Page 70, “you’re telling it wrong”: This is a reference to a terrific piece of economics humor (“The conference handbook”, Journal of Political Economy 85:441-43, 1977) by George Stigler, winner of the 1982 Nobel Prize in Economics “for his seminal studies of industrial structures, functioning of markets and causes and effects of public regulation”. “The conference handbook” is an economics version of a joke that Stigler describes in his article:

There is an ancient joke about the two traveling salesmen in the age of the train. The younger drummer was being initiated into the social life of the traveler by the older. They proceeded to the smoking parlor on the train, where a group of drummers were congregated. One said, “87,” and a wave of laughter went through the group. The older drummer explained to the younger that they traveled together so often that they had numbered their jokes. The younger drummer wished to participate in the event and diffidently ventured to say, “36.” He was greeted by cool silence. The older drummer took him aside and explained that they had already heard that joke. (In another version, the younger drummer was told that he had told the joke badly.)

Page 70, $2 a day: The percentage of China’s population living on less than $2 a day in 2005 comes from the World Bank.

Page 71, GDP’s limitations: The quote at the top of the page is from Simon Kuznets. (Original source here.)

Page 71, Human Development Index: More about this here and here.

Page 71, Real GDP growth in the USA: Real GDP growth in the U.S., going back to 1929, is available from the Bureau of Economic Analysis. Questions about the value of GDP in rich countries can be found in, e.g., “The great GDP swindle” by Nobel-winning economist Joseph Stiglitz, who (along with fellow Nobel-winner Amartya Sen) headed up a Commission on the Measurement of Economic Performance and Social Progress (report here, see also “Emphasis on Growth Is Called Misguided“, NY Times, Sept 22 2009). Another view comes from “Is GDP a satisfactory measure of growth?” by the OECD’s François Lequiller. (PS. I want to say that the story about being able to double GDP by having everybody work 80 hours a week comes from Paul Samuelson, but I’m not sure that it does…)

Page 72, per capita GDP: Per capita GDP figures come mostly from 2007 figures from Penn World Table. Another good source (with slightly different numbers) is the “economy” section of the CIA World Factbook country profiles. See also more on Purchasing Power Parity (PPP), which is often used to compare GDP in different countries.

Chapter 6: The Role of Government (pages 73-86)

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Page 79, “20 pounds overweight”: This joke comes (if I remember correctly) from a routine by Abbott and Costello; the weight joke isn’t included in most excerpts, which only include the famous “Who’s on First” part of the routine. But see here for a reference.

Page 82, Robin Hood: See more from Wikipedia, or watch one of the many movies (including the 1993 parody Robin Hood: Men in Tights).

Page 82, Nobel Prize: James Buchanan won the 1986 Nobel Prize in economics “for his development of the contractual and constitutional bases for the theory of economic and political decision-making”. More about public choice theory is here; I also recommend Mancur Olson’s book The Logic of Collective Action (1971).

Page 83, supply-side economics:Supply-side economics” is often used in a narrow sense to refer to the Laffer Curve idea that taxes are so burdensome that lower tax rates will increase revenue by stimulating economic activity, but we’re using it in a general sense to refer to the focus on the supply side of the economy (as opposed to the Keynesian focus on the demand side). A good read is Bruce Bartlett’s “How Supply-Side Economics Trickled Down” (NY Times, April 6 2007).

Page 83, “don’t do something, just stand there”: This line is adapted from Julian Simon, who uses it in the context of environmental issues; we’ll come back to these (and to Simon) in Chapter 14.

Page 84, “12 to 1 I’ll never make it”: This joke once again (if I remember correctly) comes from a routine by Abbott and Costello; the joke isn’t included in most excerpts, which only include the famous “Who’s on First” part of the routine.

Page 84, % of GDP: The figures on size of government spending (federal, state, and local) as a percentage of GDP comes from the OECD (choose “United States” on the left hand side, then search the page for “general government expenditures”; click on the icon at the far right to download a table comparing various countries).

Page 85, jungle or zoo: The “jungle or zoo” metaphor comes (I think?) from Alan Blinder. In any case I didn’t come up with it :)

Page 86, “how old are your children”: The joke about “the doctor is five, the lawyer is three” is an old Jewish joke.

Chapter 7: Trade and Technology (pages 89-98)

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Page 92, shipping containers: See Marc Levinson’s The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger (2006).

Page 93, Pareto: Pareto improvements are discussed in more detail in Chapter 7 of Cartoon Micro.

Page 94, Luddites and candles: More here about the Luddites. Regarding electricity and the candle industry, see Frédéric Bastiat’s famous 1845 “candlemakers’ petition“.

Page 96, Fact #3: The inspiration here comes from a story credited to James Ingram’s International Economic Problems (1970).

Chapter 8: The Classical View of Trade (pages 99-110)

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Page 100, classical economists: The quotes on this page are from Adam Smith’s Wealth of Nations (1776); both appear in Alan Blinder’s essay on free trade on econlib.org.

Page 101, comparative advantage: Mog and Ooga discuss comparative advantage in more detail in Chapter 5 of Cartoon Micro; the idea originates with David Ricardo (1772-1823).

Page 101, trade with aliens: Paul Krugman won the 2008 Nobel Prize in economics “for his analysis of trade patterns and location of economic activity”; the “trading with aliens” idea in this chapter are an allusion to one of the funniest pieces of economics humor ever, Krugman’s “The theory of interstellar trade” (Economic Inquiry, 48: 1119-1123, 2010). Krugman’s basic idea of how countries can gain from trade even if they’re similar can be thought of in terms of family cooks: You and I might be equally good at making soup, but if each of us can make two gallons of chicken soup (or two gallons of potato soup) with less effort than it takes to make one gallon of each then we can gain from trading by having one of us make chicken soup and the other one make potato soup.

Page 106, outsourcing: A fascinating episode dealing with outsourcing comes from a media firestorm that erupted in early 2004; see “Bush Econ Advisor: Outsourcing OK” (CBS News, Feb 13 2004) as well as this blog post (“Outsourcing Redux”) by Greg Mankiw, the econ advisor in question.

Page 106, “families named everything”: At least one reader thinks that this line is the best one in the whole book :)

Page 106, “creative destruction”: See the discussion of this and Schumpeter in Chapter 2.

Page 110, “the third hand”: This is in part a reference to Caroline Postelle Clotfelter’s pioneering collection of economics humor, On the Third Hand: Wit and Humor in the Dismal Science (1997). There is also an (apparently apocryphal) story about President Truman asking for a one-armed economist so that he wouldn’t have to hear “on the one hand, on the other hand” advice. (This joke is on page 203 of the micro book.)

Page 110, Adam Smith: The quote at the end (and repeated in full at the start of the next chapter) is from Adam Smith’s Wealth of Nations (1776). Here’s a link to the quote via Google Books.

Chapter 9: Complications (pages 111-124)

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Page 111, Adam Smith: As noted above, the quote here is from Adam Smith’s Wealth of Nations (1776). Here’s a link to the quote via Google Books.

Page 112, the environment: Regarding environmental issues, a terrifically thought-provoking article is the Larry Summer memo from 1991.

Page 113, complications: A thought-provoking read is this op-ed by Princeton economist Alan Blinder: “Free Trade’s Great, but Offshoring Rattles Me” (Washington Post, May 6 2007). The reference to the Hatfields and the McCoys concerns a famous feud in the late 1800s. An opposing view about natural security is Allen Sanderson’s amusing “Declaration of independence” [from coffee] (Chicago Tribune, Mar 30 2011).

Page 115, “trade could make everyone worse off”: This line is a reference to my own “ten principles of economics” YouTube routine. It’s a real example, at least in theory; see the example in footnote #3 of the ten principles text version.

Page 118, unsafe workplaces: Triangle Fire: A Half-Hour of Horror is a thought-provoking story about sweatshops in the U.S. last century. The Economist (“The birth of the New Deal”, March 19 2011) notes that “400,000 attended the memorial service for those who died, in part, because they could not unionize.” For a modern equivalent, see “Anger Rolls Across Pakistani City in Aftermath of Factory Fire” (NY Times, Sept 13 2012) and “Horrific Fire Revealed a Gap in Safety for Global Brands” (NY Times, Dec 6 2012). On a positive note, see “Signs of Changes Taking Hold in Electronics Factories in China” (NY Times, Dec 26 2012).

Page 119, kidneys: On the possibility of buying and selling kidneys, see Michael Finkel’s fascinating “This Little Kidney Went to Market” (NY Times, May 27 2001).

Page 120, exploitation: The quote at the top is a paraphrase of Joan Robinson (Economic Philosophy, 1962, p45): “[T]he misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all.” (Direct quote here via Google Books.)

Page 121, “some anti-poverty activists defend sweatshops”: See “Where Sweatshops Are a Dream” (NY Times, Jan 14 2009) by the Times’s left-wing columnist Nicholas Kristof. (On his blog he posts this follow-up.)

Chapter 10: Foreign Aid (pages 125-138)

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Page 127, the Opium Wars: The Opium Wars between China and Great Britain in the middle of the 1800s were not a high point of Western Civilization. In the words of The Economist: “European demand for Chinese silk, tea and porcelain was insatiable. To save their silver, the British began to pay for these luxuries with opium from India, and many Chinese were soon addicted. The Chinese emperor tried to stop the trade, and hoped to slam the door completely on the outside world. Between 1839 and 1842, the British manufactured a nasty little war in which they smashed the Chinese military, and justified it all in the name of free trade.”

Page 129, Nobel Prize: Elinor Ostrom shared the 2009 Nobel Prize in economics “for her analysis of economic governance, especially the commons”. She is a political scientist (not an economist) and is the first woman to be awarded the economics Nobel. (Some argue that Joan Robinson should have been the first, decades earlier.)

Page 130, “happy economies are all alike”: The reference is to the opening line of Tolstoy’s Anna Karenina: “Happy families are all alike; every unhappy family is unhappy in its own way.”

Page 132, Nobel Peace Prize: Muhammad Yunus and his Grameen Bank won the 2006 Nobel Peace Prize “for their efforts to create economic and social development from below”. The joke about “no collateral, no credit, no problem” is just a joke, but it’s also a reference to payday loans or TV ads like this one for Frankie and Johnny’s Furniture. Interesting articles about microcredit include “India Microcredit Faces Collapse From Defaults” (NY Times, Nov 17 2010), “Microfinance’s Success Sets Off a Debate in Mexico” (NY Times, April 5 2008), and “Microfinance Under Fire” (NY Times blog, Mar 21 2011)

Page 134, Innovations for Poverty Action: More here about Innovations for Poverty Action (also mentioned in a great Nicholas Kristof op-ed (“Getting smart on aid” [NY Times, May 18 2011]) and M.I.T.’s Poverty Action Lab, which was co-founded by economist Ester Duflo, likely future winner of the Nobel Prize and subject of a New Yorker profile (subscription required) on May 17 2010. Mexico’s Oportunidades program is one of the most famous “conditional cash transfer” programs that give money to poor families as long as they keep their kids in school, get vaccinated, etc.

Page 135, vaccines: More on using cash prizes to promote vaccine development can be found from http://www.vaccineamc.org, e.g., this 2009 post about pneumococcal disease. Michael Kremer, the economist behind this idea, is touted as being worthy of a Nobel Prize for this work.

Page 138, farm subsidies: On foreign aid and farm subsidies, OECD 2010 says that farm support programs in OECD (i.e., rich) countries in 2009 totaled $253 billion “or 22 percent of total farm receipts”; the Highlights document (linked from here) says that “total support to the agricultural sector… was estimated at USD 375 billion (EUR 267 billion)… equivalent to 0.9% of OECD GDP.” By comparison, the UN Human Development Report 2005 (linked from here) says that “rich countries collectively now spend 0.25% of their gross national income (GNI) on aid” (they note that this is “lower than in 1990 but on an upward trend since 1997″) and that “Agriculture is a special concern. Two-thirds of all people surviving on less than $1 a day live and work in rural areas.”

Chapter 11: Foreign Currencies (pages 139-150)

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Page 145: More here on currency crises.

Page 148, Nobel Prize: Robert Mundell won the 1999 Nobel Prize in economics “for his analysis of monetary and fiscal policy under different exchange rate regimes and his analysis of optimum currency areas”. Mundell has also appeared multiple times on the Late Show with David Letterman, including an appearance on Oct 17 2002 to read the “Top Ten Ways My Life Has Changed Since Winning The Nobel Prize”. (No. 10: Can end almost any argument by asking, “And did you ever win a Nobel Prize?”)

Page 150, “4 minutes Canadian”: The joke about 5 minutes left being only 4 minutes Canadian is a classic stand-up line, but as of this writing (2011) the U.S. and Canadian dollars are about equal. To see if the joke works now, check out recent US/Can exchange rates.

Chapter 12: The End of the Business Cycle? (pages 153-166)

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Page 154, recessions: The full definition is: “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” A rule-of-thumb is a reduction in real GDP for two consecutive quarters (i.e., 6 months) but the formal definition is above.

Page 155, Nobel Prize: Robert Lucas won the 1995 Nobel Prize in economics “”for having developed and applied the hypothesis of rational expectations, and thereby having transformed macroeconomic analysis and deepened our understanding of economic policy”. The quote comes from his Presidential Address to the American Economic Association (“Macroeconomic Priorities”, Jan 10 2003):

Macroeconomics was born as a distinct field in the 1940s, as a part of the
intellectual response to the Great Depression. The term then referred to the body of
knowledge and expertise that we hoped would prevent the recurrence of that economic
disaster. My thesis in this lecture is that macroeconomics in this original sense
has succeeded: Its central problem of depression-prevention has been solved, for all
practical purposes, and has in fact been solved for many decades. There remain
important gains in welfare from better fiscal policies, but I argue that these are
gains from providing people with better incentives to work and to save, not from
better fine tuning of spending flows. Taking U.S. performance over the past 50 years
as a benchmark, the potential for welfare gains from better long-run, supply side
policies exceeds by far the potential from further improvements in short-run demand
management.

Page 155, “Great Moderation” and “Goldilocks economy”: These terms were used to describe the U.S. economy from about 1985 to 2007.

Page 155, “financial crisis of 2008″: An interesting read is Rewriting the Macroeconomists’ Playbook in the Wake of the Crisis, by Olivier Blanchard.

Page 158, “the Fed, which had been created only a few years earlier”: The Fed was created in 1913. The classic book on the Fed’s role in exacerbating the Great Depression is Milton Friedman and Anna Schwartz, A Monetary History of the United States, 1867–1960 (1963).

Page 159, “unconventional approaches”: The classic example is “quantitative easing“.

Page 160, “balanced budgets”: See for example President Hoover’s Revenue Act of 1932, which “raised income tax on the highest incomes from 25% to 63%”. Even more surprising, see the views of President Franklin Roosevelt (FDR), who took over from Hoover in 1932. (Here’s a recent article on the 1932 election.) The Boston Fed has a more nuanced view: “During the presidential campaign of 1932, [FDR] had chastised Hoover for tolerating deficits, and had pledged to balance the federal budget at a lower level of spending. Roosevelt qualified his commitment with a significant rider: The budget to be balanced included only “ordinary” government expenditures. “Extraordinary” outlays, needed to cope with fallouts from the economic emergency, could be treated separately.”

Page 161, “paying people to dig holes in the ground”: This is based on Keynes’ idea of burying banknotes and then letting people dig them up. In the General Theory he writes: “If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”

Page 161, foxholes: Our joke about macroeconomists in foxholes turns out to have an earlier version: “I guess everyone is a Keynesian in a foxhole,” jokes Robert Lucas, a University of Chicago economist who won a Nobel Prize in 1995 for theories that criticized Keynes.

Page 162, Smoot-Hawley: Officially called the Tariff Act of 1930 but usually known by the names of its Congressional sponsors: “In May 1930, a petition was signed by 1,028 economists in the U.S. asking President Hoover to veto the legislation.” He didn’t.

Page 164, bank runs: See the 1946 film classic “It’s a Wonderful Life”. Or, if you’d rather read economics papers, try the 1983 classic on the Diamond-Dybvig model.

Page 165, moral hazard: Moral hazard occurs when (for example) having car insurance makes it more likely that someone will go driving in ice and snow. Economists compare and contrast moral hazard with adverse selection (discussed in Chapter 4 of Cartoon Micro) by noting that both of them are about asymmetric information, but that adverse selection is about hidden type (you don’t know if the car is a peach or a lemon, or if the person seeking health insurance is a healthy person or a sick person) while moral hazard is about hidden action (you don’t know if the person is going to drive safely or not, or invest safely or not, or work hard or not).

Page 165, “this time is different”: The reference is to This Time Is Different: Eight Centuries of Financial Folly (2009), by Carmen Reinhart and Ken Rogoff (also IMHO possible future Nobel Prize winners).

Page 165, “ironing out all the kinks may be impossible”: This is a reference to the work of economist Hyman Minsky (1919-1996).

Page 165, “We’re sorry. It won’t happen again”: This is a reference to a famous quote from a speech that Fed chairman Ben Bernanke gave at a birthday party for Milton Friedman in 2002: “I would like to say to Milton and Anna. Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” (As noted above, Friedman and Anna Schwartz argued that the Fed contributed to the Great Depression.)

Chapter 13: The End of Poverty? (pages 167-178)

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Page 168, rich, middle-income, and low-income countries: This was my estimate. It comes partly from the World Bank’s Atlas of Global Development, p8, which uses market exchange rates (not PPP) and says that in 2007 the 1 billion people in rich countries averaged $37,566; the 4.3 billion in middle-income countries averaged $2,872; and the 1.3 billion in low-income countries averaged $578. That same page lists per capita GDP using PPP of about $35,000 for rich countries and $5,000 for low- and middle-income countries, meaning that PPP for low- and middle-income countries is about double what you’d get using market rates. Support comes from this World Bank GNIPC document, which says that in 2009 PPP is about 2.38 times market exchange rates for low-income countries and about 1.88 times market exchange rates for middle-income countries. So I took $2,872 x 1.88 = $5,400 for middle-income countries and $578 x 2.38 = $1378 for low-income countries. And then I averaged very roughly, and for high-income countries I used US per-capita GDP of $48,200 (in $2009) from the CIA World Factbook.

Page 170, Asian tigers: More here on Hong Kong, Singapore, South Korea, and Taiwan.

Page 170, marginal analysis: This is related to the Solow Growth Model. (For more on Robert Solow, see his Nobel Prize joke in Ch 15.)

Page 172, poverty trap: The poverty trap idea is often associated with economist Jeffrey Sachs, author of the 2005 book The End of Poverty: Economic Possibilities for Our Time (with a forward by Bono!). For an opposing view, read William Easterly’s books.

Page 175, the bottom billion: See Paul Collier’s The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It (2008).

Page 177, poverty in rich countries: An interesting read is “Bleak Portrait of Poverty Is Off the Mark, Experts Say” (NY Times, Nov 3 2011). The report the article refers to is the Supplemental Poverty Measure described on the confusing Census Bureau site. Another good read is “Defining poverty: Measure by measure” (The Economist, Jan 20 2011). For the connections between relative poverty and health, check out the Whitehall Studies, or Michael Marmot, “The Influence Of Income On Health: Views Of An Epidemiologist” (Health Affairs, 2002).

Page 177, education: On the value of education in rich countries, an alternative perspective comes from Nobel winner Paul Krugman’s op-ed “Degrees and Dollars” (NY Times, March 6 2011). More on this from this fascinating blog post (“Falling Demand for Brains?“, March 5 2011), which links to a “hypothetical retrospective” that Krugman wrote in 1996 from the perspective of 2096; that piece is “White Collars Turn Blue” (NY Times, Sept 29 1996).

Page 178, “toward a richer and more prosperous world”: See Hans Rosling’s amazing video on “200 countries, 200 years, 4 minutes”. More info at gapminder.org, and in particular their graphics of “200 years that changed the world”.

Chapter 14: The End of Planet Earth? (pages 179-192)

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Page 180, world population: A neat graphic is Population Action International’s What’s Your Number?

Page 180, coming out of poverty: On coming out of poverty, see “The Chinese Eco-Disaster” (Slate, Jan 10 2011), a review of When A Billion Chinese Jump: How China Will Save Mankind — Or Destroy It. (I haven’t read this book but it’s on my list :) On air conditioners, see “Relief in Every Window, but Global Worry Too” (NY Times, June 20 2012).

Page 182, pessimists and optimists: The first of the pessimist quotes is a paraphrase of climate scientist David Rind in Field Notes from a Catastrophe: “I wouldn’t be shocked to find out that by 2100 most things were destroyed.” The second quote is from Stanford ecologist Paul Ehrlich’s 1968 book The Population Bomb. The first of the optimist quotes is a tag line from Matt Ridley’s 2010 book The Rational Optimist. (See also “Doomsayers Beware, a Bright Future Beckons”, NY Times, May 15 2010.) The second quote is from economist Julian Simon; more on him in “The Doomslayer” (Wired, 2002?) and “Economic Optimism? Yes, I’ll Take That Bet”(NY Times, Dec 27 2010). The third quote is from “Recycling Is Garbage” (NY Times, June 30 1996), by John Tierney, who also authored the other NY Times articles cited above. A focal point of the optimist-pessimist debate (at least from the optimists’ perspective!) is the Simon-Ehrlich bet from the 1980s.

Page 184, Malthus: The quotes come from “An Essay on the Principle of Population” by Thomas Malthus (1766-1834). Little known fact: Malthus’s work influenced Charles Darwin’s thinking on evolution and natural selection. PS. Many people think that Malthus’s writings on population led to economics being called “the dismal science”, but in fact that phrase was coined in a different context by Thomas Carlyle. (Believe it or not, Carlyle used the phrase to disparage Malthus’s argument against slavery.)

Page 184, peak oil: A skeptical view of “peak oil” is “Drilling for an Oil Crisis” (NY Times, Feb 24 2011).

Page 184, global warming: The quote is from Julian Simon (from a book called Scarcity or Abundance? A Debate on the Environment). In 2010 or so George Will came to a class I was teaching at Lakeside High School and I asked him about Simon’s quote; he said he was confident that Simon was only off by 10 or 15 years. Possible, but not bloody likely.

Page 188, global warming: More on this in 2014 from my next cartoon book, which will be about climate change! (Like the econ books, it will be coauthored by Grady Klein; unlike the econ books, which were published by FSG, the climate change book will be published by Island Press.)

Page 190, dragons: The “poking a beast” metaphor is a paraphrase of a famous line by climatologist Wally Broeker. (The earliest version of this quotation I could find comes from “Antarctica” [Time, April 14 1997]: “Climate is an angry beast,” says Lamont’s Wallace Broeker, “and we are poking it with sticks.”)

Page 191, carbon pricing: On carbon pricing, see “The Carbon Tax Miracle Cure” (Wall Street Journal, Jan 31 2011, by Alan Blinder).

Page 192, “the greatest market failure the world has ever seen”: This quote comes from the Stern Review, a report commissioned by the UK government from a group led by economist Nicholas Stern. See also “Stern: Climate change a ‘market failure’” (The Guardian, Nov 29 2007).

Chapter 15: The End of Youth? (pages 193-206)

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Page 199, health care: A thought-provoking read about health care costs is “When Ailments Pile Up, Asking Patients to Rethink Free Dialysis” (NY Times, March 31 2011).

Page 200, “borrow the money”: See When It Comes to the Deficit, Resolve Is Weak (NY Times, March 13 2011). See also “Peter G. Peterson’s Last Anti-Debt Crusade” (NY Times, April 8 2011).

Page 204, Nobel Prize: For a more recent take on the Solow quote, see “Freaks, Geeks, and GDP” (Slate, March 8 2011), a review of Tyler Cowen’s The Great Stagnation.

Chapter 16: The End (pages 207-218)

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