Can the coming recession - or any recession - be avoided? I keep reading about all these warning signs of a coming recession, and I have a very silly question: If we can see it coming, why can't we do something about it now, instead of after we are deep in it and fighting about stimulus packages like last time?

Now, I said it was a silly question, so I know the reason we don't is because of a lack of political will as well as a lack of political and economic consensus as to what that action should be. But I never hear anyone talking about what can be done to prevent a recession before it hits when all the signs tell you it is coming. Why not? Thanks.

(p.s.- Wow, you don't even have a tag for recession? What a bunch of optimists! LOL)

So here is the unpleasant truth about recessions.
"The economy" as a whole consists is a broad term that in all forms, will always be comprised of so many moving parts, so many transactions, that it is hard to not only describe what is happening to it, but why those things are happening. In order to answer your question on why we "can't/don't" do anything about recessions, you have to understand that recessions are harder to predict that whatever the news makes it out to be. We can maybe see the signs that they are just about to come, when the whole snowball is already rolling down the hill, but trying to predict recessions from the long term is basically impossible.
That said, there are two points I'd like put into focus.

We do have some tools for trying to blunt the force of recessions, and we do try to use them!

The warning signs you are reading about, what I imagine most notably being the yield curve inverting, is only a warning sign for certain reasons that don't necessarily have to hold in our current economy.

To the first point, I say "blunt" because trying to completely avoid recessions would probably mean making some big systematic changes, but also probably getting rid of a lot of uncertainty in the world. And our world is unfortunately full of it. We can argue over what causes boom and bust cycles and whether we would prefer to live in a world where growth is slow, but we can consumption smooth and prevent all dips in economic activity. Those are separate issues.
What tools do we have to blunt recessions? There is fiscal policy and monetary policy. With fiscal policy, you can change taxes to try to encourage economic activity (for consumers, business, depends on where you cut the taxes), and with monetary policy you can lower the federal funds interest rate to encourage more lending and thus more investment. But of course these tools may not work as directly as we'd like. Cutting taxes may have to come with cutting spending on government programs that also encourage economic activity. During the 2008 recession, the federal funds late got floored down to 0%, leading the Federal Reserve to have to think of more creative measures of using monetary policy to help boost the economy.

The second point I think is more interesting to talk about. The financial news these days probably talks a lot about the yield curve inverting. What is this exactly?
Imagine you are the government borrowing money through bonds. People value having money as accessible as they can, so a short term bond usually doesn't have a high interest rate. Investors don't get a high rate of return because they are getting compensated with more liquidity. If the government wants to borrow money for a longer time though, then the government will put a higher interest rate on it. This compensates investors who have to sit there and wait for their money longer, money that could have been used to invest in a more lucrative project that could have popped up in the meantime. There is uncertainty in the path of future interest rates, so you take on risk by holding onto a debt contract longer.
So if you were to graph "length of time of a bond or other debt contract" (time to maturity) and "interest rate" (yield), you would normally get an upward sloping curve that tapers off. Why this particular shape? Again, holding shorter term debt is pretty preferred among investors, so there is a steep upwards slope initially. The relative difference between a 3 month contract and a 6 month contract is a lot bigger than the relative difference between a 40 year and 40.25 year contract.
So now we can ask why the yield curve would invert. This usually happens if investors expect a cut in future short term rates. The Federal Reserve is known as the "lender of last resort" and will more or less set the price of liquidity using the federal funds rate. If people expect the Fed to cut it, then the yield curve will invert. And the Fed often only makes big cuts to the federal funds rate to try and prevent or blunt a recession. So that's why the yield curve inverting is usually associated with a nearby recession.
But suppose the yield curve inverts, the Fed cuts the rate and...there is no recession. And maybe the Federal Reserve never anticipated one. This could feasibly be the case too. The idea is that when setting the federal funds interest rate, usually unemployment and inflation tend to be tradeoffs, but they aren't always. Lowering the rate in recent years doesn't seem to have increased inflation expectations very much (a lot of that probably due to the aforementioned 0% bound that was around from the 2008 recession). Since the 1970s reforms to the Federal Reserve, the institution has gotten a reputation for being more committed to fighting inflation in the long run, which also helps with their ability to cut rates and not immediately see inflation boost up. So ultimately it's possible that the Fed may want to cut the rate for other reasons, like simply maintaining a healthy economy.

All that said, you might still be concerned about the yield curve inverting or other indicators that you read in the news. I think it is not unreasonable. But I think the important thing to realize is that people in the news industry frankly do not really understand or even care to explain the nuance behind these signals. They may not understand or explain what is being done about these signals at the policy level. A lot of mainstream news competition is just trying to get people's attention, and honestly who is going to watch a segment on monetary policy. Snore. So the reason you do not see anyone talking about how to respond to a recession is probably just because you don't listen to anyone who really knows much about them.
Really, at the core of your question, you are basically asking why don't economists just predict all the bad stuff that can cause a recession and then stop it. The answer is because we just can't observe all of that, and it's goofy for anyone to think we can. We can only see some things, respond using some limited tools, and give our best policy suggestions. It is wishful thinking to believe we can stop all or even most of hardship in this uncertain world.

If you would like to read more about some recent research on recessions and macroeconomic policy, here are just a small number of papers you could try reading. Even if you don't read beyond the abstract, perhaps it will give you an idea of what sort of research economists are trying to do related to recessions and business cycles.

Aikman, David, Jonathan Bridges, Anil Kashyap, and Caspar Siegert. "Would macroprudential regulation have prevented the last crisis?." Journal of Economic Perspectives 33, no. 1 (2019): 107-30.

Vassolo, Roberto, Javier Garcia-Sanchez, and Luiz Mesquita. "Competitive dynamics and early mover advantages under economic recessions." Revista de Administração de Empresas 57, no. 1 (2017): 22-36.

Martin, Philippe, and Thomas Philippon. "Inspecting the mechanism: Leverage and the great recession in the eurozone." American Economic Review 107, no. 7 (2017): 1904-37.

Koijen, Ralph SJ, Francois Koulischer, Benoit Nguyen, and Motohiro Yogo. Quantitative easing in the euro area: The dynamics of risk exposures and the impact on asset prices. No. 601. 2016.

If we can see it coming, why can't we do something about it now, instead of after we are deep in it and fighting about stimulus packages like last time?

The short answer is we can. However, in order for the coming recession to be avoided, the Fed would need to reverse the effects of its recent 'quantitive tightening' and resume a stimulus policy.

The problem is that the Fed is an autonomous entity and how it implements its goals are decided internally and in secrecy. If it should decide that the long term goal of improving US employment is to stop a Trump administration from engaging in a trade war with China by influencing domestic politics through a synthetic economic downturn, that is within its remit.

EDIT> The above answer is not US-specific. The Fed central bank activity will primarily determine the global economic situation. On the other hand, if China were to decide that the world was too hostile to it, it would simply stop propping up global industry as it currently does (domestic automotive demand and low price manufacturing for export demand), which would also cause global chaos.


How does everyone not become poor over time? Look at the whole world --the union of all goods and services and workers and customers. Everyone who is a customer is a worker somewhere (they had to get the money to be a customer somehow). But not all revenue goes toward worker wages--some goes to cost of goods--production, not just labor. And considering the whole world--it's a closed system...so if everyone pays Z in as a customer--they lose X to cost of goods and are paid out up to Z-X as workers -- then, when they are next customers, next round of purchasing, Z-X goes back in as rev and Z-2X comes back to everyone... keeps going. You lose cost of goods each round of purchasing.  you need X more from customers to sustain this--which means you need  to keep injecting X from outside or have more customers than workers. But where do these injections come from if we are accounting for all goods and services? Or where is this larger set of customers who are not also workers? Where does their money come from if not from work? Elderly, children and those who do not work also derive their money from this cycle--they were workers, will be workers or live off a % of workers' wages from taxes or friends and family.
The answer is presumably wealth or value creation but how is this integrated into the cycle of workers and customers so that Z grows instead of shrinks?
Economic novice--thanks!

In short because economy is not a zero-sum game and because economic production does not need to decline but  can grow over time.
First of all, forget about money. Money in economics is just extra tool that solves issue of double coincidence of wants, allows you to store value over time and to do accounting. In fact, traditionally money consisted of commodities such as stone, or precious metals or even products, coffee, cigarettes or even alcohol etc at some point in time and place served as money.
As a non-economist this might come as a surprise to you but most microeconomic models do not even have money in them. Money can play an important role in macroeconomic perspective because in the short-run it can affect the real economy, but from micro perspective and even long-term macro perspective money is neutral and not important.
Next, as you pointed out a world's economy, taken as whole, is a closed system but that does not mean people should get poorer over time. This is not an equivalent of thermodynamically closed system where entropy has to dissipate energy overt time. A closed economy can be described as:
$$Y  = C + I + G$$
which says that output/income (they are economically equivalent) $Y$ has to be equal to consumption $C$, investment $I$ and government spending $G$. In turn, $Y$ is a result of production. A common specification for production process would be to use Cobb-Douglas production function, so I will do that here as well, although in principle there could be multiple functional forms that production process could have. Moreover, for simplicity I will restrict myself to two factors of production (labor and capital) even though in principle you could put into Cobb-Douglas also human capital (education), land and other factors, but I omit them for sake of brevity. Given these assumptions the production process would be given by:
$$Y = A K^{\alpha} L^{\beta}$$
where $A$ is the available technology (broadly defined - in economics better production strategies count as a technology as opposed to just 'gadgets' such as PC), $K$ is the stock of capital and $L$ is the stock of labor. Alpha and beta are parameters of the production function that determine other characteristics of production such as what sort of economies of scale production exhibits (e.g. increasing, decreasing or constant).
Thus, we can say that the consumption, investment and government spending is equal to this production process:
$$ A K^{\alpha} L^{\beta} = Y  = C + I + G$$
So as long as technology $A$ or capital $K$ or labor grows, output $Y$ will grow as well and even completely closed of economy can consume more, invest more or have more government spending.
Furthermore, what we really care about is usually output/income (in economics output and income are equivalent and interchangeable) per head. So if we for simplicity assume constant returns to scale ($\beta = 1-\alpha; 0 <  \alpha < 1$)  we can divide the last expression by $L$ to get whole expression per capita as:
$$A \left(\frac{K}{L}\right)^{\alpha} = \frac{Y}{L} = \frac{C}{L} + \frac{I}{L} + \frac{G}{L} $$
Here, if we keep the population growth constant then we can see that per capita incomes/output and consequently per capita consumption, investment and government spending will grow when our capital stock and technology stock grows. You get growth in capital stock from investment (investment is part of production that is not consumed but saved for future, possibly for further production), and growth in technology from human ingenuity or also depending on which economic growth theory you buy to also investment.
In addition, all the above is up till now just manipulation of definitional expressions. We could further continue by adding on some growth theory which could yield further insights. For example, the most popular growth model presently is the Solow-Swan growth model where it can be shown that what really matters is growth in $A$ because increase in investment and capital stock can only increase level of output not growth. If you buy into endogenous growth theories investment can even increase the growth rate further beyond that (you can read more on this in Barro & Sala-i-Martin: Economic Growth 2nd ed).
In order for people to get poorer over time (in per capita terms) an economy would have to experience either destruction of technology (for example ancient Romans, Greeks, Carthaginians etc had plumbing but this knowledge was lost in many parts of World - but not all - during dark ages, or another example would be concrete) or by destruction of capital (e.g. war, violence, natural disasters etc. but also just wear and tear i.e. depreciation). Empirically, and let me add thankfully, people historically turned out to be better at producing new technologies and adding new capital through investment, than at destroying either of them.
Consequently, to sum up people do not get poorer over time and in fact get richer because of growth in economic production (which in turn determines people's income), and economic growth occurs primarily thanks to growth in technology and investment. In fact note because the economic growth is to large extent driven by technology, it is possible for economic production to grow indefinitely (assuming technology has no limit - e.g. in real life it is possible you can't get at an end of technology tree like in some strategy game as it might have no end). In addition, more rich models would also include other important factors such as human capital (education) but the explanation above would not conceptually change (education macroeconomically functions in same way as capital - hence why economists call it human capital).

A very straightforward answer is that, under the free market system, the vast majority of people do become impoverished over time.
They especially become impoverished in terms of their share of the economy.
There are several processes that have been concealing or countering this. Firstly is productivity improvements - most people don't tend to have a good idea of what their current share of the economy is, but whether they have more or fewer things or facilities than at an earlier stage in their life. Most economic products have been becoming dramatically less labour-intensive to produce, and therefore people often feel richer than yesterday, even though they are becoming increasingly poor in terms of their share of the overall economy today.
Secondly, globalisation has increasingly yoked more of the world's population into capitalist relations. The roles in which market wages are falling dramatically are increasingly distributed to developing economies, whilst Western workers have reoriented more towards roles involving economic administration that attract disproportionately high pay.
Thirdly, inheritance and parental subsidy help to redistribute concentrations of wealth allocated by the market, and whilst this doesn't fully reset the distribution to initial conditions, it does help the market system limp on for longer before the whole set of workers become obviously and wretchedly poor.
A final point to make about workers in developing countries. They too are accepting an increasingly smaller share of their economies, firstly because they too are benefitting from productivity improvements as their economy develops (i.e. the same thing that pacifies Western workers into accepting smaller slices of the economy over time), but also because the leveling up of skill and experience that comes from serving the Western economies, will convey them a long-term military advantage and will in future prevent non-market forms of exploitation or disruption of their societies based on Western military power (itself based on Western economic development and productivity), so part of the perceived benefit from accepting a smaller slice of the economic pie for workers in developing economies, is an increased ability to stop their pie being smashed or stolen by force.


Does quantitative easing favour banks? The reserve bank recently announced it would print $100B over 6 months, and spend this buying back gov bonds.

Will this policy advantage the financial sector over other parts of the economy?
Why doesn't the reserve bank give this \$100B to treasury directly, so that fewer bonds need be issued to support gov spending?
Alternatively, why doesn't the reserve bank distribute this \$100B directly to ordinary households (e.g. \$4k per resident)?

Will this policy advantage the financial sector over other parts of the economy?

I do not see how this would a priori advantage the financial sector over other parts of the economy. This policy is done to stimulate economic activity by putting pressure on lowering the long-term interest rates and to push pressure on inflation and lower exchange rate. Such expansionary monetary policy is conventionally considered to stimulate real economic activity in the short-run (see any undergraduate macro textbook for example Blanchard et al. Macroeconomics: a European Perspective). There is no reason to a priori think this specially advantages banks over other sectors, as this is macroeconomic policy with aim to stimulate the whole economy, although banks will likely benefit as well.

Why doesn't the reserve bank give this $100B to treasury directly, so that fewer bonds need be issued to support gov spending?

This is for several reasons. First, giving money directly to government would mean that money supply is permanently being increased by that new money (technically that money could be still destroyed in some ways but not unliterary just by central bank). When central bank buys government bonds the money supply is expanded only as long as the government bonds are not repaid. Central banks still have option of scrapping the bonds and hence making the money supply expansion permanent, but they also have other options. Central banks will usually want to expand money supply in recession but in expansions they might want to contract it. They could contract it also with other ways (like increasing reserve rations), but open market operations are usually one of the preferred tools of central banks.
However, this does not affect government budget negatively. Any interest that government pays to central bank is then returned to the government. So from the perspective of government this debt has no cost. In fact such extra demand on government bonds will likely make it cheaper for government to issue bonds on primary market so if anything it might indirectly help it.
Also, the reason why it is done on secondary market rather than primary market, is that central bank is supposed to be independent from government. Hence they try to always keep arms length relationship with it.

Alternatively, why doesn't the reserve bank distribute this $100B directly to ordinary households (e.g. \$4k per resident)?

This is what is called 'helicopter money'. Some economists are in favor of such policy, however arguments are being made that it threatens central bank independence. Helicopter money is very close to fiscal policy and if people learn they could get 'free money' from central bank they might put political pressures on central banks being involved in such transfers beyond what is warranted by monetary policy. It is argued that any fiscal policy should be done by elected representatives and not by unelected technocrats, and helicopter money is very fiscal-esque.   See more on this in Reichlin; Turner; Woodford (23 September 2019). Central bank independence is in economic profession revered in similar way as in law profession independent judiciary or in journalism independent press so anything that threatens central bank independence is hard sell. Of course, this raises additional question of why the central bank independence is so important - exploring that is beyond the scope of this answer but you can read more about it in this ECB explainer.    In addition in most countries this would not even be legal although laws can be changed.

Edit:
Theory above aside, even when we look empirically at aggregate measures of bank profitability we can see that in the post 2007 they are low, as you can see from the figure below which plots price-to-book ratio for banks, which is a measure of profitability and expected profitability that stock prices capture (see Carletti, Claessens, Fatás, Vives 18 June 2020, and sources cited therein).

QE was not common before 2007 and became quite commonplace after, due to the Great Recession. Hence, there is not much evidence to suspect that banks are somehow 'getting rich' out of QE. Furthermore, of course the above is just raw data so it has to be interpreted with caution. One could argue that maybe there are some other factors that depress  bank profitability inspite of all the QE.
However, when we look at some serious research it actually confirms that QE together with negative interest rates and other recent bank regulation erode bank profitability (e.g. see Florian 2018).  Hence, if anything there is research and evidence supporting the idea that QE, combined with other policies central banks nowadays commonly pursue, makes banks less profitable not more.

Are there viable alternatives to how QE is currently performed?
One goal of the reserve bank's action is to encourage inflation (which has been trending below its targets) and to keep pace with international practice (otherwise domestic producers would be harmed by devaluation of other currencies relative to theirs). But it seems that printing money would still have this effect regardless of where that money is initially spent.
Another goal is to reduce market interest rates, by inflating the price of bonds (reducing the comparative attractiveness of their remaining yield). However it seems like the same effect could be achieved by reducing the supply of bonds rather than augmenting demand (i.e. by cancelling gov debt directly without involving commercial intermediaries). Similarly, the alternative of distributing that money to households ought increase the average level of household net savings and thereby increase bank demand for investments.
Is any sector advantaged by the choice?
In principle some economic stimulus benefit of any spending may trickle throughout the economy, but obviously the most concentrated benefits flow to wherever it is spent first. In other words, the primary beneficiaries appear to be the large financial corporations. This is because (unlike ordinary households) they already own bonds (which will be artificially boosted in value) and their business is trading bonds (which will have a subsidised increase in the volume of profitable transactions). In effect, the convoluted process (of the gov selling bonds and then purchasing them back at a premium) seems to actively concentrate wealth into the financial sector (at the expense of all other holders of net currency).
Presumably this will distort the economy, to prioritise a greater portion of national resources toward the import and production of luxury yachts (for consumption by banking executives). In contrast, I think the social and employment benefits would be larger if the quantitative easing process were modified to directly favour either the public sector (and secondarily the tax base) or all households (and secondarily the broad base of local businesses that supply typical household consumption).


What are the (immediate) effects of changing a good's price on consumer and producer surplus? Basically, I'm trying to understand why the total surplus is maximized at the equilibrium and what happens if the price isn't at the equilibrium.

Say the price of a good is the equilibrium price. Now make it more expensive. I know that after a while the price will adjust to the equilibrium again, but what will happen before that? I'm trying to use an example but there are things I can't fill in:

The equilibrium price of the good is \$20 and the equilibrium quantity is 20. Given a straight demand and supply curve and a maximum buyer's imposed value of \$40, the consumer surplus is $\frac{1}{2}(40-20)\cdot20=200$ and the producer surplus is $\frac{1}{2}(20-0)\cdot20=200$.

Now make the good \$30. The quantity demanded falls to 15 and the quantity supplied rises to 25. Now, the consumer's surplus is the triangle I marked in blue, $\frac{1}{2}(40-30)\cdot15=75$ (because only 15 items will be sold), but what about the producer's surplus? Is this the triangle I marked in red? I think not, because that seems to imply that the price is only \$10. But if not, what is the producer's surplus, and why?

Thanks in advance and my apologies for the possibly confusing phrasing.

What is CS and PS out-of-equilibrium at $P=30$:
I think that answer to this question lies in misunderstanding the definition's of consumer and producer surplus.
The consumer and producer surplus are actually (following Mankiw Principles of Economics, 8th  ed, pp 135 and 140

consumer surplus:
the amount a buyer is
willing to pay for a good
minus the amount the
buyer actually pays for it

producer surplus
the amount a seller is
paid for a good minus the
seller’s cost of providing it [where Mankiw later in chapter explicitly states cost is here to be interpreted broadly as "the value of everything
a seller must give up to
produce a good", including the opportunity cost (or more broadly s wilingness to sell)].

You will note that the definitions above talk about price people pay (i.e. actual market price) not 'equilibrium price'. Some lecture notes or textbooks will include the word equilibrium in the definitions but that is only because virtually all analysis using Supply-Demand is an analysis of some equilibrium.
More rigorously, since the maximum willingness to buy is bounded by the demand curve and willingness to sell by supply curve we can define consumer surplus as the area below the demand curve and above price paid by consumers and
$$CS =  \int^{q_m}_0 D(q) dq − p_mq_m $$
where $D(q)$ is arbitrary demand curve, $p_m$ is price consumers have to pay in the market, and $q_m$ quantity sold at the market.
$$PS =  p_mq_m - \int^{q_m}_0 S(q) dq $$
wher $S(q)$ is some arbitrary supply curve (also if we would want to be even more general we could allow $p$ to be different for suppliers and consumers e.g. situations with taxation where there would be wedge between price consumers pay and price per quantity suppliers get due to the tax wedge).
Yes, in some chapters or lecture notes the above formula will be defined in terms of equilibrium price but that is only because the market price/quantity is the equilibrium price/quantity in any equilibrium analysis (i.e. in equilibrium $p_e = p_m, q_m=q_e$).
However, in an out-of-equilibrium analysis you have to use actual market prices (this would be equivalent of analyzing price floor or price celling (e.g. see Mankiw Principles of Microeconomics, 8th  ed, pp. 116).
Consequently, in your case the consumer and producer surplus can be properly visualized as shown on the tikz graph below I made:

where the area of consumer surplus (out-of-equilibrium) at price $P_m=30$ is the blue shaded region below demand and above market price bounded by market quantity, and the producer surplus (out-of-equilibrium) at price $P_m=30$ is the red trapezoid (area under the market price and above supply bounded by market quantity).
We can also calculate the area of that trapezoid, although to do that we need to know what is the price at which $Q_S=0$ (or explicitly know what the supply and demand equations are). In your question you don't state what the  price at which supply is equals zero is but if you would provide it we could calculate it (also you seem to have made some mistake when copying down the problem as your demand does not lie on a line since it is given by points $(0,40);(15,30);(20,20)$ - which simply mathematically cannot lie on a single line - I originally planned to go all the way deriving the linear demand and supply equations based on the points but this mistake in problem set up makes it impossible ).
Why is total welfare maximized in equilibrium?
Well the reason for this is that under all the background assumptions of the stylized partial equilibrium model (e.g. no market failures and other 'shenanigans' that would affect PS and CS in way not shown in the partial equilibrium analysis here), the total combined area of PS and CS is maximized at the equilibrium price and quantity.
I won't be providing a rigorous proof of this as that would require a lot of calculus and this problem is long as it is, but I encourage you to take a look at proofs provided in MWG, Microeconomic analysis pp 328 or Varian, Microeconomic Analysis pp 224 if interested.
However, the reason why the welfare  be easily seen graphically by the following thought experiment: would the total surplus be larger if $P>P_e$ or if $P<P_e$? The answer is no as you can see visualized in the two figures below. As in both figures below the total surplus area will always fit within the big triangle given by area below demand and above supply clearly the total welfare is in both situations lower than the total welfare in a situation where $P_m=P_e$.

PS: An important caveat to note is that the above applies when you want to analyze what would be the total welfare outside equilibrium vs the welfare in equilibrium. If you want to compare two situations which are both equilibrium e.g. supply shifts to the right due to technological progress, you have to compare the total welfare in the market in the old equilibrium vs the new one. You should not confuse such situations with market not being in equilibrium.

This four page reference shows how producer surplus is defined and calculated using integral calculus:
https://www.math.ubc.ca/~malabika/teaching/ubc/spring11/math105/surplus.pdf
As quantity increases from q = 0 to q = qe (equilibrium quantity) the price rises at each point on the supply curve S(q).
The equilibrium point (pe, qe) is taken independently by finding the intersection supply curve S(q) and demand curve D(q).
The producer surplus is defined as the area in the rectangle pe x qe minus the area under the rising supply curve AS(q) as quantity goes up from q = 0 to q = qe. When you get to qe you stop doing the calculation so there is no meaning associated with data points to the right of the equilibrium point with respect to producer surplus definition.
I don't know why the terms consumer surplus and producer surplus are used in this context. In a counterfactual world the limits of the calculation might be less than or greater than the equilibrium point, and then consumers would spend less or spend more, and producers would sell less or sell more, but in those counterfactual models one must move the supply and demand curves to a different point of intersection to recognize sales at the same supply and demand price.
In reality goods sell at price times quantity. If the producer drives down the price sufficiently consumers tend to buy in greater quantity. Early adopters of high definition TV or electric cars are willing to pay more so sales occur at higher prices and lower quantities. Producers use the learning curve and invest in fixed costs to drive down prices and increases quantities produced, and demand goes up as prices come down over time. All during this process the supply and demand curves are moving around and do not represent a static calculus solution.


Can lower working hours beat unemployment? The common sense reasoning is downright simple: if X hours of works are needed per month, and Y people are available to work, give each person X/Y hours of work each month.

I understand that there are generic frictions that prevent this:

people not being qualified to do some jobs
people not wanting to do some jobs

And also specific frictions:

people not wanting to get a lower salary because of lower working hours.

Without being as extreme as in the introductory example: In a given sector, where there is a surplus of qualified people willing to do a specific job, and whose average salary is higher than the minimal salary necessary to live above the poverty threshold: It makes sense to reduce at the same time salaries and working hours, in order to allow more people to get a salary.

However, except from France which has reduced working time from 39 to 35 hours per months, such measures are not widespread, and seem scarcely considered.

Therefore one wonders whether such measures can actually work. If they do, why are they not more widespread? If they don't, what is the issue preventing them from being effective?

In Germany in crisis times working shorter hours (short-time work, Kurzarbeit) can be used by firms to prevent layoffs. There are legal regulations how labor unions need to be consulted on how this is done. It has been argued that this has helped to overcome the 2008 crisis better than some other countries, e.g.: "What Explains the German Labor Market Miracle in the Great Recession? The Evolution of Inflation Dynamics and the Great Recession", Brookings Papers in Economic Activity, Spring 2011, Michael C. Burda & Jennifer Hunt; "Explaining the German Employment Miracle in the Great Recession – The
Crucial Role of Temporary Working Time Reductions", Alexander Herzog-Stein, Fabian Lindner, Simon Sturn, June 2013

No, it will not works without subsidies in place.

There is no causation-correlation between a lower working hour and unemployment rates.

Employment, as in ideal fundamental economic conditions, is allocated suitable task for a person to produce the output that benefits others, which "rewards" is given accordingly.

in labor intensive economy, employments are created by the supply and demands of the economy.  In such environment, it is possible to "scale down" workforce by cutting work hours and adjust the paycheck accordingly.   However, this will not work to save "employments" if the production replaces by game changing technology advancement/product obsolescence.
Another reason that forbids short work hour is the environments cause.  Let see some example:

a farmer cannot afford to work "shorter hour" on various task. However, automated agriculture equipment might be splinter to shorter work hours to watch out equipment breakdown alert.
Lots of machinery need a dry run before starting the actual production. A frequent restart to accommodate the shorter working hour is not practical and it is costly.

Ironically, lower working hour to prevent immediate layoff works on the bureaucrat,  e.g. many developing countries are using such strategy to prevent immediate cut down of the workforce due to automation task, cutting down of red tapes. However, this comes into expenses of tax payer money. Some countries even resort to printing money to support such policies(i.e. the infamous Zimbabwe).

For developing countries, the "head count" subsidies are done by creating various grants for research and developments. But this depends on the socio-economy-knowledge structure, i.e. you cannot create a grant that one doesn't have enough knowledgeable personnel(with related knowledge on such fields)  to move around.


Why is the Fed worried about short term interest rates going negative? I refer to the following article: https://www.bloomberg.com/opinion/articles/2021-02-25/negative-interest-rates-could-be-trouble-unless-fed-acts, notably the following paragraph:

Market observers worry that this wall of liquidity could push short-term interest rates into negative territory. Although no one can be sure of the ramifications, this could prove disruptive to money-market mutual funds and to the functioning of short-term lending markets more generally. The surge in reserves will also add to banks’ assets, potentially causing them to bump up against regulatory leverage requirements, which limit the ratio of their total assets to equity capital. This, in turn, could cause some banks to pull back from lending against securities, potentially triggering yet another disruption in the “repo” market, a crucial source of financing for hedge funds, investment banks and many other institutions. Banks also might take steps to encourage households and businesses to take their deposits elsewhere.

How does negative short term interest rates disrupt the repo market in any way?

Market observers worry that this wall of liquidity could push short-term interest rates into negative territory.

Fed pays interest on excess reserves (IOER) as a tool of monetary policy since late 2008.
https://www.clevelandfed.org/newsroom-and-events/publications/economic-commentary/2015-economic-commentaries/ec-201502-excess-reserves-oceans-of-cash.aspx
The "wall of liquidity" would increase excess reserves. Fed can pay interest on those reserves so the IOER rate does not have to go negative unless Fed decides to try that experiment as a tool of monetary policy.
Negative interest rates are the same as paying a net fee for keeping deposits or other investments at the bank or central bank. Extra central bank liquidity does not motivate banks or the central bank to charge fees. Banks charge fees to compensate for a loss or lack of net interest income. Central banks might try to make interest rates negative as a tool of monetary policy.
Repurchase Agreements with Negative Interest Rates:
https://www.newyorkfed.org/research/current_issues/ci10-5.html
Negative rates on repo mean the lender will pay interest to obtain the security collateral. This implies that investors would rather hold certain securities, which are under shortage, instead of other financial assets. One needs some case studies and/or theories which demonstrate or predict that a surplus of excess reserves somehow triggers a shortage of securities in repo markets. However if Fed imposes negative interest rates on reserves that is a different analysis.


Elasticity of subsitution: a redundant calculation? Elasticity of subsitution is a measure of the curvature of an isoquant1 and can provide us information regarding the nature of the production functions we are dealing with. this is visualized in Advanced Microeconomic Theory
by Geoffrey A. Jehle (Author), Philip J. Reny  (page 130 in the book) as:

However I wonder, isn't this information regarding the curvature of a isoquant given by the production function? what novel information does the calculation of elasticity of substitution provide us with?

1. I'm aware that elasticity of substitution can also be applied to consumer theory, just that its dominant in producer theory.

Why would one need to graph the function? Isn't any information in the graph already given in the function?

In  a certain sense all calculations are redundant as they are mathematical tautologies. Yet these indices make some things more clear, which is obviously useful.


What is the difference between microeconomics money and macroeconomics money? In microeconomics, \$USD are a store of value.  I can sell a candy bar for \$1, and I can hang onto that \$1 for a year and then buy the same candy bar for that same \$1.  If I print \$1 (and get away with it), I can wait a year and buy a candy bar with it.  My \$1 has some inherent value.

In macroeconomics, \$USD are simply a means to inject liquidity into the market.  If the world sets up a global savings fund, and puts \$1 into it, that money is moot.  There won't be more candy bars next year than there are this year.  The \$1 is just a means to make my exchange of candy bars convenient.  It has no inherent value.

This is something of an over-simplification, and I'm no economist, so probably not entirely correct.  However, I frequently encounter people who apply personal-finance microeconomics-style reasoning to discussions of goverment fiscal policy.  I have found it to be incredibly difficult to introduce the above distinction, and I have no citations or sources.  This is just how it makes sense to me, and my words are apparently insufficient.

So, does this distinction have a name?  Is this distinction studied in any text and/or academic circles?  What are some ways that the microeconomic dollar and the macroeconomic dollar are two different beasts?  What are some simple ways to introduce this distinction to laypeople?

There is no distinction between money in microeconomics or macroeconomics. In both fields money is  medium of exchange, unit of account and store of value.

The misconception you have probably arises from the role money plays in microeconomics and macroeconomics.

In microeconomics money is almost always neutral - that is it has no impact on the real variables like equilibrium output, labor supply, demand etc. Many micro models even assume money away and prices are simply given relative to some numeraire good. There are exceptions of course.

In macroeconomics money is also assumed to be neutral in the long run but not in the short run. Hence in macroeconomics money is analyzed explicitly by including price levels, inflation etc. For example, as you mentioned one of the special effects of money is that it can provide much needed liquidity that can boost aggregate demand.

If you are looking into name for the distinction between cases where money matter and when not, that is when it is not neutral and when it is (both in micro and macro) the name is classical dichotomy although the concept is again mainly used in macro since in micro money is almost always neutral

I can sell a candy bar for $1, and I can hang onto that $1 for a year and then buy the same candy bar for that same $1.

Probably not. You have the inflation of the period, so US$1 today can't buy the same products in a year from now.

BTW, I don't see nor remember any lecture distinguishing the use of currency in both fields of economics.

In Economics, the currency is a representation of value. So, a country has produced thousand of tons of iron ore, for example. This only makes sense when we add a currency to it, so we can understand the value of it.

The use of currency in Microeconomics and Corporate Finances is more related to its value in time. That's why you need to learn about present and future values, etc...

In the scrict context of Macroeconomics, currency can refeer to liquidity and mainly growth. Let's supose that this country had a real GDP of US$ 20 trillions. If the governmet issues more money (currency) without increasing production (gdp), this will cause inflation.


Instrumental Variable Paper for Minimum Wage I am trying to write a paper dealing with minimum wages and employment.  I understand there is simultaneity bias between these two variables so I must come up with an instrument.  Does anyone have any ideas for instruments?  I am also wondering if it is feasible to do a cross-sectional study instead of a time-series one in this scenario.  *Note:  The class requires using IVs and I am open to suggestions for other topics.

Neumark and Wascher did a lot of work on the minimum wage in the 90s and 00s, including their 1992 piece "Employment Effects of Minimum and Subminimum Wages: Panel Data on State Minimum Wage Laws". A non-paywalled version of the article can be found here. It includes use of panel data (cross sectional data that you are interested in can be considered a special case of panel data) to study the effects of the minimum wage on employment.

From page 65:

  "Another possible source of bias arises from the potential endogeneity of state minimum wage levels. If state legislators choose the timing of minimum wage increases to correspond to periods in which minimum wage increases will have the smallest (or perhaps least noticed) disemployment effects, the estimated minimum wage effects in Table 2 will be biased upward..."

They too were concerned with endogeneity between the minimum wage and employment, so their solution was to use a fixed-effects specification and put in state and year effects in the first stage of the regression, with the instrument being "the [adjusted] mean of the minimum wage level in all geographically bordering states" (p. 65). Their data was from US states. So the setup for their study could be a useful starting point for you, or those interested in a similar question to this.

As Tobias mentioned, you can also use political variables as an instrument. In Lemas (2004), Political Variables as Instruments for the Minimum Wage, lags for the endogenous variable (min. wage) can be used with serially uncorrelated errors, but if that does not hold, you can use political measures such as influence-weighted politicians' support for or against the minimum wage, among other measures that can be found in section 4.2. of the paper.

You want something that correlates with minimum wages but not other determinants of employment. It will be difficult to find something that is really convincing. You could try variables related to politics, for instance democratic/republican party state governments or something in that direction.


How do I determine the demand curve of a product through a survey? I'm a student and I want to determine the demand for a product (and consequently determine what will happen if the price of the product increases). I don't have access to any businesses that can provide the data for me (price and demand at that price?

How do I estimate the demand curve or function by surveying people? What I currently have in mind is to ask people what amount of the product they'll demand at a given price and extrapolate this data for a city or a region.

Additionally, what'd be a good sample size for such a survey?

If it is a small project, you may benefit from reading this

At most, you can estimate price elasticity of demand using your survey data to make predictions/forecasts. For this you need to estimate a demand function as @EconJohn suggested, but you need to include additional variables such as income, price of a substitute or complement etc. to hold them constant (i.e. ceteris paribus). Note that the demand function does not allow you to draw the downward sloping demand curve (like the one in textbooks). It is very hard, in practice, to draw actual demand curves using survey data. Even when you have the most complete data, without including the suply function in your estimation, you face so called identification problem. In short, econometric estimation of demand curve does not allow you to draw a downward sloping curve of the type you see in textbooks.

The link above has a good explanation about this point, and it can be used as a guide for your project.

Demand is the maximum of Q if a person has the ability to pay as well as a willingness to pay. it covers the equilibrium of budget constraint and utility function. so, we need to know people's incomes, too. also, we should consider the price of Alternative and complementary goods affecting the studied product.


In the eyes of a normal citizen, what difference does it make if my country has debt or no debt? I got curious about this because I happened to pass by a list of countries with zero debt. Country debt seems like a major thing, but for a non-economics major like me, I don't exactly understand the implications of a country having debt.

More tax? Less progress? Exports are more necessary?

What difference does it make, for a normal citizen, if his/her country has debt or no debt?

1)  Debt matters because it smoothes (or unsmoothes) taxes over time, which matters because the deadweight loss from taxation is (roughly) proportional not to the tax rate, but to the square of the tax rate.

2)  Because family sizes are not homogeneous, government debt (which transfers the tax burden to future generations) can redistribute the tax burden across families.  (Think, for example, about a taxpayer with no kids, or a family that has just immigrated.)

3)  Government debt makes it easier to borrow --- it's better to pay 3% to government bondholders than 18% to your credit card company.  This is possible because the penalty for not paying your taxes is considerably more severe than the penalty for not paying your credit card bill.  (In effect, government debt resurrects the institution of the debtor's prison.)

4)  There are of course issues with misperceptions, where debt can make people feel either richer or poorer than they really are, depending on whether they underestimate or overestimate their future tax burdens, and so can affect consumption paths in either direction.

I've tried to mention
some of the affects of high national debt on normal citizen.I think it would be helpful

When the government doesn't have enough money to meet obligations and doesn't want to—or can't—borrow money, it just prints some. That's called "quantitative easing”. It creates inflation in the economy. It increases the value of goods and services.
Government debt makes it more expensive to borrow. When you want to take out an auto loan or get a mortgage, you're competing with the government to borrow money. It means that rate of interest would be high.
Government debt squeezes business and makes it harder to hire new employees. Government borrowing makes it more difficult for small business to borrow the money they need for expansion. The possibility of higher taxes discourages businesses from growing. The result: Fewer new employees are being hired. It raises unemployment.
Government debt never dies. When you die, your kids do not inherit your debts unless they're on your accounts. That’s not true with government debts. That isn't repaid in your lifetime will be passed on to your children’s.
Government spending for public welfare would be low that affects the living standard of people.


CES preferences intuition I asked this question on math.stackexchange but deleted it from there and brought it here.

I had a question about Constant Elasticity of substitution type preferences of the form: $$U=\int_{0}^{1}(c(\omega)^{\rho}d\omega)^{\frac{1}{\rho}}$$
 where the paramter $\rho$
  governs the degree of substitutability between goods. Here, $c(\omega)$
  represents consumption of good $\omega$
  which exists on the unit interval. As such, this type of preference specification aggregates over consumption of different goods.

My question is as follows. I have always thought of integrals of the form: $$I=\int f(x)dx$$
  as approximating sums of areas of infinitesimally small rectangles (in terms of their base) and heights being determined by $f(x)$
 . In the case of the example above, what really is $c(\omega)$
 ? Is it a function?

It is my impression that the correct expression for "Dixit-Stiglitz" preferences is

$$U=\left(\int_{0}^{1}c(\omega)^{\rho}d\omega\right)^{\frac{1}{\rho}}$$

which then can be seen as a continuous incarnation (in [0,1]) of, say

$$\left (\sum_{i=1}^na_i\omega_i^{\rho}\right)^{\frac{1}{\rho}}$$

with $c(\omega_i) = a_i^{1/\rho}\omega_i$.

In other words, a definite (Riemann) integral is indeed conceived as a sum of infinitesimally small rectangles, but it can also be seen as the continuous incarnation of a sum.

A formal link between an integral and a sum is provided by the Euler-MacLaurin formula.

Yes it is a function, just like you have $f(x)$, read as $f$ of $x$, $c(w)$ is $c$ of $w$ (in layman's words). Simply $c$ is the function of $w$ goods. Depending on the shape of the consumption function, the result is the area under the $c$ curve evaluated at each infinitesimally small intervals on $w$.


Effects of ACA individual mandate vs AHCA surcharge The US Congress is currently considering a new healthcare bill, the AHCA, which would replace the existing healthcare bill, the ACA.

One of the major changes is the way each bill encourages people to maintain health insurance coverage:

ACA existing law: (in general) if you do not have health insurance for part of the year, you pay an additional tax based on how long you were not covered.
AHCA proposed law: (in general) if you have a lapse in coverage for more than 63 days, insurance companies are allowed to charge you up to 30% more for 12 months.

I am not an economist, but IMHO, the goal of these provisions should be to both encourage people to obtain coverage if they don't have it, and also discourage people from ending coverage if they do. It seems to me that the current ACA meets both of those goals, however, the proposed AHCA does not encourage people to obtain coverage once they have lapsed for 63 days. In fact, the AHCA appears to discourage people from obtaining coverage once they have lapsed for over 63 days. Of those in the group that have lapsed, those that need the coverage the most (regardless of price) are still going to purchase insurance, so this would increase the density of high cost people in the overall pool, leading to increased premiums for everyone.

Is the above analysis correct, and if so, why would this change be proposed? (I find it hard to believe that the economists involved in writing the bill would have simply overlooked this.)

Working off of Josh's answer let's do a case study based on a real world example. On Friday, before leaving for a 7 day cruise through the eastern Caribbean, I went to the Dr and got a prescription for Tramadol, a pain reliever to treat an injury. I went to all of the usual suspects, Walgreens, CVS, etc, and found that with my insurance, the cost for 15 50mg pills was 60 dollars. Using the app GoodRX, I was able to reduce this cost to 44 dollars. I decided to pass. Fast forward two days to find me sunning in the Dominican Republic but unable to enjoy myself because of the injury so I found the nearest pharmacy and was able to purchase a blister-pack of 20 50mg pills for 13 US  dollars without a prescription (Tramadol is not regulated like a narcotic as it is in America). These were not knock-offs but the actual meds. How could this be, I wondered. So I asked the pharmacist. He told me that drug manufacturers make all of their profits in America, marking up the same drugs that sell in other countries for reasonable prices to exorbitant prices and then offer modest discounts to insurers, not to mention the profits of the pharmacy. Why can one script be 90 bucks at Walgreens and only 4 bucks at Walmart?  The simple answer is greed and slothfulness. Drug companies and pharmacies rely upon the laziness of Americans and our willingness to get screwed and our eagerness to bitch about problems without the slightest intent on fixing them.

The moral of this story is that when it comes to managing health care costs, one of the major issues is the regulation of pricing. While I am an ardent believer in capitalism, we must limit the margins charged by drug manufacturers and suppliers alike. The government must modify Medicare Part D to include price controls and introduce these same controls into the ACA or we are doomed to ruination.


Measuring demand for banking services - (Maximum) Market Size I am in need of a variable measuring "demand for banking services" in general, on a country level. Specifically the (maximum) size of the market for banking services for a given country. This will be used as a control variable.

Does anyone know any standard proxies or measures used in the literature to measure something like "total demand for banks"? I need something general, not a specific banking service. Something that summarizes the different sources of demand for banking services, such as some kind of constructed index or so. Something that summarizes everything/most services through which banks make profits. If that is not possible, are there maybe two standard measures that each cover demand for deposits and demand for loans?

What variables are generally used? If nobody knows what is standard, does anyone have any plausible suggestions of proxies/measures for "demand for banking services"? Further, any suggestions on data sources I could use to get country level data (preferably a panel starting around the '80s or '90s) for such a variable?

The proxy/measure need not be perfect. The only important thing is that it captures "the size of the market for banking services (in general)" in some way. Especially a measure of demand that would determine the (maximum) number of banks in a given country.

There is no quantifiable answer as the concept is illusory.  Banks operate by mismatching short term debt with long term assets.  This has no benefit to the economy as a whole and in fact creates inflation, risk and volitionality.  Banks operate maturity mismatching because they can and it serves their own interest.  There is no natural demand for banks which is why they are in need of constant artificial support from central banks (much of which happens on a daily basis).  Without central bank support, banks would be accountable for mismatching short term debt with long term assets and they would quickly and rightly so burn up in a liquidity fire.

Perhaps a better premise to start before mathematically quantifying the demand for banks is to ask conceptually the role banks play in an economy first.  Without conceptual and contextual understanding, math is meaningless number juggling designed to impress and confuse those that don't know better.

Now...it can be said it said there is a demand for money of which banks create.  Imagine if we were to switch to the gold standard all of sudden.  Only gold could be exchanged for services.  Because gold is limited, the price for it (to acquire as a means of exchange) would shoot up astronomically.  This profiting (from gold sellers to gold buyers) represents economic loss for the buyers.  If they could acquire another means of exchange (say gold deposits that were not tied 100% to gold) they would not have to pay as much for the gold.  So in a way banks can create competition for money.  But in doing so they create either their own inflation or profiteering.  Then there is of course the matter of fiat currencies competing which never ends well...

Personally, that is why I'm in favor of a national depository that would negate the need for deposit banking.


What does 'one dollar, one vote' mean? Can you tell/ describe me what the phrase 'one dollar, one vote' means? But you have to use basic English or kid's English. :-)

I found the phrase in one economics book (Introduction to Economics by Stephen L. Slavin, page 4, 1989) and I do not know what it means. I am from eastern Europe.

Thanks for help.

It appears to suggest applying the way shareholders vote in a company to the political setting of democracy: each citizen will have as many votes as his/her monetized wealth. So the rich will have officially "more say" in what gets decided or who gets elected in public office.

Certainly, the general consensus is that economic power does play a role in affecting political outcomes anyway. This approach would make that an official, institutional rule.

more literally it should mean that for each dollar given to the group, the giver should receive a corresponding portion of control over how it is spent.  So each dollar I give in tax to my country should correspond to a dollars worth of control over how it is spent.  In this manner someone who pays $10,000 in taxes would receive 10,000 votes, while someone who doesn't pay anything does not get a say in how the tax money is spent.  This would alleviate some of the political entropy that pushes nations into welfare state, but has obvious other possible negative implications.


Do minimum wage laws bring more bad than good? Let me begin by saying I know nothing about economics.

In the past couple of days I've been listening to some lectures by Milton Friedman. They are of non-technical nature. In one of them he makes an argument which I have understood approximately as follows:

  Having a minimum wage law is harmful to workers who compete for low paying jobs and are relatively less skillful because it deprives them of their "only weapon" - working for less.

Do minimum wage laws increase unemployment? Is there any information enabling this comparison?
Are there purely economic arguments, or empirical evidence, favoring minimum wage laws? Have they in any sense improved the economy?

There is ample evidence that increases in the minimum wage in the magnitudes that we've seen in the last 20-30 years have caused no or very small decreases of low-skilled employment. In that sense, the predictions of competitive labor market models like the one Friedman probably had in mind are clearly wrong.

A classic reference here is Card and Kruger 1993 (http://davidcard.berkeley.edu/papers/njmin-aer.pdf). A more recent contribution is Allegretto et. al. (http://ftp.iza.org/dp7638.pdf). There are many more.

Some recent minimum wage increases have been much bigger than the ones discussed in these papers (for example the 15$ minimum wage in California) and the effects of these increases may be more substantial.

The argument for minimum wages is mostly about redistribution, and modest minimum wages probably achieve this goal.


Does brain drain really affect a nation's growth trajectory? Take India as an example. India has been losing most of its bright minds to the west. India also ranks low in development. I would like to get a definitive answer to this cause-effect type question.

If India had somehow ensured that its talented people could not leave the country or If India had prevented its bright and ambitious minds from getting enticed and seduced by the west, would those bright minds have been forced to figure out how to improve India's infrastructure thereby resulting in India's development?

Or is it the other way, i.e., a nation's development is mostly (>80%) decided by the quality of its political leadership? The quality of Indian polity has been really bad since 1947. This is not a judgment but a plain fact. So is it that even if we had retained the bright ones they would have made no difference to India's future?

Could you give a data-intensive answer with stats? Do give intuitive arguments also to back it up.

My thesis is that a nation's polity decides the economic fate of the nation, not its talent pool because talent can be trained by the government of the day whenever it wants to. In India, people are not talented because they are born so talented but because competition forces that in the over-populated society. So my claim is that the fact that Indians have become so successful in the USA where they hold key policy-making positions should not be a cause of alarm. Had they been in India also, they could not have made any difference. And whenever the nation's polity improves, the nation will create any amount of required talent it requires just like monkeys can be trained any time you want them to perform in a circus.

Is my thesis wrong? I hear strong views on both sides and i cannot just make up my mind as to which side to follow. Please don't just give subjective answers/opinions (i know i have!). Provide some rigor and facts.

You have asked a very relevant question, and you must be new to economics or have not got a clue about economics of growth/development. And, you will not be able to get a 'definitive' answer to your question - it is not easy, and there is probably none! Should there be a definitive answer, we would not have to spend years doing PhD in economics.

There are plenty of resources which could give you a better grasp of the issue.
For a start, read https://www.amazon.co.uk/Why-Nations-Fail-Origins-Prosperity/dp/1846684307


How Does Keynesian Theory Address Supply Shocks, Like the California Drought? From what I understand about Keynesian theory, when we're facing deflation, lowering interest rates or increasing government spending/lending (when consumers are cutting back) helps stimulate economic growth through consumption (GDP = C + I + G + NE).  While a few loud voices (Schiff, the ZH guy, Martin Armstrong, etc) have been screaming about hyperinflation, Krugman has been right that we haven't seen it, even with the Federal Reserve's QEs.  It does seem like QE has helped move the economy along, even though I know this depends on a person's point of view; ie: Austrian economists won't agree.

What happens in the case of a major drought causing food prices to rise, as in double, triple or quadruple (See this post by Bill McBride. and now this post)?  Is the Keynesian solution here to raise interest rates => wouldn't that be a double whammy on the poor in that it would be more difficult to get a job and food prices would be rising?  What is the Keynesian solution to supply shock problems, like a major drought, impacting basic necessities, such as food prices?

To be more specific because of the comment, I am looking for the Keynesian solution to a supply shock, or major crises that involve a supply shock - such as a drought that causes food prices to rise?

In what follows, I'm going to be very hand wavy - take with a grain of salt.

If you think about it, a demand shock is like a scenario of multiple equilibria (given the fixed levels of wages and prices):

If everyone is employed, everyone has a lot of income, can spend that on goods, and the demand for goods implies a large demand for labor, making everyone employed
If few people are employed, total spending is smaller, so is demand for goods and labor, corresponding to only fewer people employed

The Keynesian solution can be thought of as forcing the first case to happen rather than the second.

If you really have a supply shock, that is, lack of a factor important to production, there is no indeterminacy here. There just isn't that much (oil) available, increasing its price. The RBC spokesperson of your favor would say

  The high price stems from scarcity; both the high price, the low production and high unemployment are efficient.

In the standard problem, rigidity of wages and prices create inefficiency, they can be dealt with. Here, there is no such inefficiency, and no inherent solution to a supply side shock.

Last analogue in US was Nixon years:  Price Controls first, interest rate changes second.


How much physical currency does the Fed transfer to banks per year? I just wonder since money has to enter the system somehow. Currently the Fed will supply whatever banks ask to meet their capital needs. But how much physical currency does the Fed, treasury, and mint transfer to banks per year? And which banks?

The amount of currency in circulation (bills and coins) is published by the Federal Reserve. (Available at the FRED web site.) The annual change in this time series is the amount created.

This is the amount outstanding, it does not tell us how much currency is being destroyed and replaced. Also, there is seasonal demand for currency, and some cash is shipped back and forth.

The creation of currency is not really a "transfer" (gift). The banks need to buy the currency by exchanging reserves (settlement balance at the Fed) for the notes.

Finally, the Federal Reserve does not single out how much it deals with any particular banks by name under normal circumstances. (During some of the special operations undertaken after the Financial Crisis, the Fed published some information about their counterparties.) The most you would get would be on the basis of the category of bank.

The specific amount is irrelevant because it is just a gift to banks.

The currency "purchases"  are offset by deducting their account, which is based on fractional reserves, which are limited by a reserve ratio based on how much currency the bank has. Which is a circular logic, and thus meaningless. Banks can withdraw whatever they feel like from the Fed.

Economics is of course about pretending that banks are bounded by some kind of law or whatever


Supply curve when the marginal cost is zero The supply curve is built as the average marginal cost (MC), when the MC is equal or higher than the average cost (AC)
The marginal cost increases, as a result of the opposite effect of marginal production
In this case, we get a supply curve that's rising from left to right: higher cost per rising quantity

In the case of marginal cost of zero, I can think of no other case than a supply curve that is equal to AC, and that the AC is dropping, since fixed costs do not change as a result of quantity
And so, we'll receive a curve that's dropping from left to right: lower cost per rising quantity

Real life cases can be broadcast tv, surpluses in production, "internet economy" etc.

Am I wrong in my assumption?
Is there any reference of this type of equilibrium ?
Is it a stable equilibrium ? I mean, since the marginal cost is zero, there is no impact on increasing demand

Took me a bit, but I have figured its out:

The single firm's supply curve is defined as it marginal cost, as long as MC is above it average cost
A firm would not sell below its average cost, since it would loae money, Mathmatically we can define, for the single firm
S = MAX(AC, MC)

Our basic assumption,for this discussion, is that MC = 0

Under the basic assumption and that costs are positive, obviously, then, the supply curve will always equal AC:
S = MAX(AC, 0), AC > 0
S = AC

The other conculsion from the basic assumption is that the production function, under the costs limit, is completely unaffected by quantity
Intuitively: its costs the same to produce 100 products and 1000 products.

If the Total costs function, as a function of quantity, is fixed, then the average function is:
AC = TC/x

In that case, we'll get a supply curve, though a very special one:
It'll decrease price as a result of increasing quantity, and prices will aspire to zero. always

Update:
Allowing myself to add a link to an article I wrote on the topic:

Start-Up economics: the disrupt model


Optimal population allocation layout over the Earth Does exist some model of optimal people occupancy over whole our planet?

Something accounting for climate, resources (with and without existing settlements) availability, progress and grows perspectives and so on.
I would like to find it in form of heat map.
All I can find is just studies about cities layout or population size and density.

I came to the question thinking about advisability of my little hometown existence and ways to improve it - may be the game is not worth the candle.

The closest I can find to what I believe you’re looking for would be the biocapacity map of the Global Footprint Network. They don't seem to publish granular spatial data, i.e. where in a country its biocapacity is located.
Note, however, that actual economic activity does not correspond to local biocapacity because high density stock energy (fossil fuel) can be transported to population centres. (Source)


Why do yield spikes reflect badly on tech stocks Yield spikes are a reflection of market equity valuation.
How I interpret this is that there’s real fear that some companies in the market won’t be able to pay their debt. Therefore, bonds trade cheap, hence spiking the yield.
Large Tech companies (FANGs) are not going to default on their debt.... so why does yield spikes impact their stock value?

You are referring to recent market events where the yield of US Treasury bonds has risen and some tech stocks have been falling?   My interpretation of this situation is that the rise in yields reflects growing optimism in the broader economy , as we overcome Covid and head back to work.  In the stock market, this leads to a preference for traditional stocks that do well in a ‘normal’ economy, and a rotation away from the tech stocks that did especially well in the pandemic.  This we have a correlation rather than a causation.

The answer is in inflation expectation. Bond yields and inflation are intertwined. As we know, inflation eats the future returns of investments, so when people expect more inflation, bond yields tend to rise alongside them. Inflation also reduced the future stream of payments. For example, 1 dollar of profit today, would be valued at 0,5 dollar tomorrow with 100% inflation. This means that businesses's valuation that are heavily reliant on future returns tends to decline, since future profits are valued less than present ones. Those companies are typically technology firms, like Palantir, which recieve a lot of hype, without current profits, or revenues, but are highly thought to return big profits in the future.
See: https://www.investopedia.com/articles/bonds/09/bond-market-interest-rates.asp for bond yields and inflation.


What are the known refutations of Mises' Axiom of Human Action? From Mises' Human Action

  Human action is purposeful behavior. Or we may say: Action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego's meaningful response to stimuli and to the conditions of its environment, is a person's conscious adjustment to the state of the universe that determines his life.

Are there any criticisms of this axiom as not being a complete description? By complete, I mean not that it describes all aspects of human behavior or fully explores it, rather I am asking whether or not it fully expounds some first cause of human action from which we can deduce answers to other questions about human economic behavior?

This question is not about whether or not the corollaries deduced from this axiom are true, simply: Is this description sufficient to allow us to, from it, describe corollaries of human behavior?

I am asking whether or not it fully expounds some first cause of human
  action from which we can deduce answers to other questions about human
  economic behavior?

What it is getting at:

Praxeology [the science of human action] says that all economic propositions which claim to be true must be shown to be deducible by means of formal logic from the incontestably true material knowledge regarding the meaning of action. Specifically, all economic reasoning consists of the following:

an understanding of the categories of action and the meaning of a change occurring in such things as values, preferences, knowledge, means, costs, etc;
a description of a world in which the categories of action assume concrete meaning, where definite people are identified as actors with definite objects specified as their means of action, with some definite goals identified as values and definite things specified as costs. Such description could be one of a Robinson Crusoe world, or a world with more than one actor in which interpersonal relationships are possible; of a world of barter exchange or of money and exchanges that make use of money as a common medium of exchange; of a world of only land, labor, and time as factors of production, or a world with capital products; of a world with perfectly divisible or indivisible, specific or unspecific factors of production; or of a world with diverse social institutions, treating diverse actions as aggression and threatening them with physical punishment, etc; and
a logical deduction of the consequences which result from the performance of some specified action within this world, or of the consequences which result for a specific actor if this situation is changed in a specified way.

Provided there is no flaw in the process of deduction, the conclusions that such reasoning yield must be valid a priori because their validity would ultimately go back to nothing but the indisputable axiom of action. If the situation and the changes introduced into it are fictional or assumptional (a Robinson Crusoe world, or a world with only indivisible or only completely specific factors of production), then the conclusions are, of course, a priori true only of such a “possible world.” If, on the other hand, the situation and changes can be identified as real, perceived and conceptualized as such by real actors, then the conclusions are a priori true propositions about the world as it really is. [19]

Such is the idea of economics as praxeology. And such then is the ultimate disagreement that Austrians have with their colleagues: Their pronouncements cannot be deduced from the axiom of action or even stand in clear-cut contradiction to propositions that can be deduced from the axiom of action.
— Hans-Hermann Hoppe, Economic Science and the Austrian Method, pg 25.

  What are the known refutations of Mises' Axiom of Human Action?

There aren't any that have been successful...

"All of these categories which we know to be the very heart of economics—values, ends, means, choice, preference, cost, profit and loss—are implied in the axiom of action. Like the axiom itself, they are not derived from observation. Rather, that one is able to interpret observations in terms of such categories requires that one already knows what it means to act.

No one who is not an actor could ever understand them, as they are not “given,” ready to be observed, but observational experience is cast in these terms as it is construed by an actor. And while they and their interrelations were not obviously implied in the action axiom, once it has been made explicit that they are implied, and how, one no longer has any difficulty recognizing them as being a priori true in the same sense as the axiom itself is.

For any attempt to disprove the validity of what Mises has reconstructed as implied in the very concept of action would have to be aimed at a _goal_, requiring _means_, excluding other courses of action, incurring _costs_, subjecting the actor to the possibility of achieving or not achieving the desired goal and so leading to a _profit_ or a _loss_.

Thus, it is manifestly impossible to ever dispute or falsify the validity of Mises’s insights. In fact, a situation in which the categories of action would cease to have a real existence could itself never be observed or spoken of, since to make an observation and to speak are themselves actions.
— Hans-Hermann Hoppe, ESAM

Is this description sufficient to allow us to, from it, describe corollaries of human behavior?

Short answer: no.

Slightly longer answer: It sounds like it's written by someone with no self-insight who was unaware that humans are just mammals with slightly-enhanced intelligence. Do you really need it refuting? Do you sincerely believe that all your actions are meaningful expressions of conscious will? Did that start at a particular age? Was a switch flipped in your brain on your 18th (or 21st or 25th or 40th) birthday, causing you to become a rational agent despite all that had gone before?

The full answer is contained in a whole field of science on this subject - psychology. Indeed, many good universities have whole libraries dedicated to it And that's a bit too long for here. As you're interested, then you could start with behavioural economics - there are plenty of books on that alone.

Here's Bertrand Russell for starters - philosophy rather than economics, so let the etymology of the word "philosophy" guide you:

  Man is a credulous animal, and must believe something; in the absence of good grounds for belief, he will be satisfied with bad ones.

Economics is still recuperating from the shock of the irrational. Some try to extend the rational-agent framework, for example with penalties for partial information, and so on, to rationalise, post-hoc, observed sub-optimal actions (such post-hoc rationalisation being a very common manifestation of human irrationality). A confidence-tricksters' tools still out-perform these extended models.

There's a lot of very good empirical work going on in behavioural economics. One could choose to axiomatically ignore it, but that would be to hold a pre-judged belief as superior to any and all empirical evidence. That doesn't seem very rational to me.


When can the fiscal multiplier be negative? I am looking for a case study or data which shows a negative (fiscal/spending) multiplier effect.

Does anyone know a study where this is analyzed?

The paper How Big (Small?) are Fiscal Multipliers? by Ethan Ilzetzki, Enrique G. Mendoza, Carlos A. Végh (2010)should give you useful information.

  We contribute to the debate on the macroeconomic effects of fiscal
  stimuli by showing that the impact of government expenditure shocks
  depends crucially on key country characteristics, such as the level of
  development, exchange rate regime, openness to trade, and public
  indebtedness. Based on a novel quarterly dataset of government
  expenditure in 44 countries, we find that (i) the output effect of an
  increase in government consumption is larger in industrial than in
  developing countries, (ii) the fiscal multiplier is relatively large
  in economies operating under predetermined exchange rates but is zero
  in economies operating under flexible exchange rates; (iii) fiscal
  multipliers in open economies are smaller than in closed economies;
  (iv) fiscal multipliers in high-debt countries are negative.

Only the injection is multiplied not the withdrawal - once money leaves the economy that is the end of it's journey in the circular flow of income - full stop.

The injection continues being spent around the economy which is why it is subject to the Multiplier.

There is no negative Multiplier.

The Multiplier is not a micro concept - the withdrawal is on the money supply not on an individual or even groups income even if he is called Clouseau.

Therefore there is no real world example - only in the surreal world of micro economists.


Does the Federal Reserve buy and sell stocks? Can the Fed buy and sell stock in publicly traded companies? Is there evidence of this and, wouldn't this behavior drive the price as opposed to actual market forces?

No, the Fed is not allowed to buy stocks, they are allowed to buy government securities in open market operations in order to achieve the target rate for the federal funds rate. The guidelines for this are explained in the Section 14 of the Federal Reserve Act. You can find the Fed holdings in the Federal Reserve Statistics.

However other central banks, like the Bank of Japan, started buying stocks as a measure to support their financial institutions (their banks were subject to too much market risk because of their stock holdings). The have detailed their stock purchasing plan in their website.

Is it relevant here to speak about the Plunge Protection Team (PTT) or the Working Group on Financial Markets? There is lots of talk that they do interfere in the broader stock market. One can also question that when a central bank like the FED prints tons of money and lends it out at 0 interest rates that money will start looking for yield... in the stock market. It's my opinion that the FED (and the other central banks around the world) reinflated the stock markets. The runup since 2009 is largely based on money printing, not on genuine 'growth':


If all Banks in the world are emptied..? What would happen if every person in the world pulled their money out of their bank accounts?

The thing with these economics questions that never happened empirically is always the same: nobody really knows.
Befor Creditanstalt 1931 nobody thought that a bank can go bancrupt, during BrettonWoods/Goldstandard freely floating exchange rates were sought of being detrimental and dumb....

But in theory everything should collapse due to our fractional reserve system that requires banks to have a certain amount of money stored in their books for every granted loan.
But thats not going to happen because centralbanks would intervene and convince people that they are going to do anything to keep the banking system working. If the CB is able to make a trustworthy commitment that should work. Because a rational individual should have no incentive to have so much cash... The costs of carrying so much money are simply too high...

Once there was this Eric Canton attempt....

A such systemic bank run would be caused by a massive loss of trust in the banking system and financial markets. Its a collapse and bankrupt of banks possibly capitalism system as we know it. It would be a new era.

New institutions would emerge. Possibly decentralized ones like Bitcoin. If there is no possibility of international payments, international trade would be almost non existent.

How would credit would exist in such a world without money creation and central banks?
Majors big investissements would be difficult.

In fact I don't think people would withdraw money in the first place. In a total loss of confidence money would be worth nothing. Perhaps metals would be back in fashion for trades. Perhaps a cooperative system of reputation like Stackoverflow...

There exist a realistic possibility of collapse. What if a virus enables automatic payment system like interact or cirrus? In an instant destroy the banking system before people could actually withdraw.

In any case I do not forsee a calm transition to a new system. Forget rational behaviors then.


Will price increase as demand increase? I know the law of demand which states that

  if price of a product increases then the demand will decrease

In this, I think we assume that price is a function of demand. But I feel otherwise i.e.

  if demand increases then the price of the good will increases

My reasoning:

If demand increases then the producers will capitalize on this fact and to increase their profits, will increase the price of the goods.

Where am I wrong?

Note: I have taken an introductory course on microeconomics as a minor and therefore know just the basic concepts only.

The law of demand is a microeconomic law that states, all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa.

Now, when you say that "if demand increases then the price of the good will increase"", you aren't changing the price and based on the change in demand you are now predicting that the price would rise which is clearly against the law of demand as your "increase" in demand is obviously due to more user engagement, advertising, or some other external factors.

If we assume that the demand increases will the price increases so it neglects the law because the law of demand of microeconomics is that "other things remaining same,when price of commodity increases the  quantity demand decreases and vice versa".
Therefore, the price is not depend upon the demand and price can also not predict through demand, demand is depend upon price and also demand can be predict through price..


Why would a CBDC (Central Bank Digital Currency) be good for the economy? I've read about CBDC, how it could be a cryptocurrency like digital payment system, that could replace fiat currencies. But what I don't get is what value would it give to the economy?
Someone who works at a Central Bank explained to me, that by holding the a currency in your own crypto wallet, and not not as a deposit in a commercial bank, the commercial bank's balance sheet would shrink significantly. By shrinking, it could lend out less money with higher interest rates, and could disrupt the complex commercial banking system in a bad way.

There is good summary (with references) of the benefits of CBDCs on Wikipedia.
With respect to banking sector disruption see this 2018 report by the Sveriges Riksbank. It finds that

while a given outflow of retail deposits into e-krona
reduces banks’ liquidity portfolios and worsens their funding
profiles, banks can normally control this outflow via deposit rates.
Banks can also issue more market funding to restore their liquidity
and funding profiles.

That said,

The exact features of an e-krona can, however, be controlled by the
policy maker. In sum, we do not find any decisive argument against the
issuance of an e-krona when studying financial stability effects on
banks.

The function of a bank is to take in assets and create loans.
If a bank doesn't have as many assets, especially money, it can't create as many loans.
One major way that banks get assets is when people give them their money for safe-keeping.
If people didn't need to give their money to banks for safe-keeping, banks would have a lot less money. Therefore, they couldn't create as many loans. Therefore, it would be harder to get a loan.


Why do lenders dislike early loan repayments? I've frequently seen references in blogs and articles about how banks and other lending agencies like to refer to people who repay loans on an accelerated schedule as "deadbeats", because they get less interest out of that person.  Some institutions even implement early-repayment penalties in debt contracts, a practice that's been outlawed in some places.

But when I think about it, this doesn't make a lick of sense.  It seems to me that creditors should regard these "deadbeats" as their very best friends:

The lender gets their principal back ahead of schedule, improving their liquidity and making them able to loan it out again more quickly, should they wish to.
By reducing the principal outstanding, the amount at risk in the event of a default is reduced.
By demonstrating that the borrower has the ability to pay beyond the minimum, the risk of default is reduced.

What's not to like?

The reason that lenders dislike early repayments (known as "prepayments" or "voluntary prepayments") is that most lenders match their assets— the loans they've made to others— with liabilities of their own. This can lead to lenders facing significant interest rate risk. This is important to understand— while default risk is certainly significant, interest rate risk can be very large as well, sometimes greater than default risk.

Consider: a lender loans you money at 6.5% for 30 years to take out a mortgage, and funds this by issuing debt in the secondary market for 10 years at 4%. A recession comes along, the Fed drastically cuts interest rates, and the prevailing interest rate for mortgages drops to 3.5%. You repay your mortgage early by taking out a loan from another lender at 3.5%, and now the original lender has the principal back, but cannot reinvest it at a rate high enough to repay its own interest rate expense. If this happens on a broad enough scale, the lender is now bankrupt, with all that entails. That is why they don't like it.

With regard to prepayment penalties— the option to prepay debt is what is known as a call option, and it's often quite valuable. Prepayment penalties are simply a way for lenders to be compensated for the exercise of that option.

The specific case that you're talking about sounds an awful lot like the way that some credit card lenders feel about consumers who take out loans at low (often zero) "teaser" rates and refinance them before they ever have to pay anything to the lender, which bears its own interest expense in the meantime. That's probably best regarded as a strategy by consumers that takes advantage of lenders who are hoping that the consumers will not repay the debt in time. This hope on the part of lenders can sometimes cross the line into predatory behavior (see, for example, the discussion of teaser rates on mortgages in the Financial Crisis Inquiry Commission report), so the fact that the borrowers and lenders in such a situation aren't particularly fond of one another comes as little surprise.

A regular payer is a valuable customer for a bank. Banks can and do pay an introduction fee to third parties (such as Home Improvement companies) to generate new business. If that business terminates early, they have effectively wasted the commission and some of their staff salaries. Back when I bought my first house, interest rates were above 10%. If a customer takes out a mortgage over 25 years they will end up paying 3 times the value of the house before they have finished. Similar egregious deals apply to vehicle finance, except frequently the interest rate is higher and, at the end of the deal, the vehicle is all but worthless.