How do we teach economics students about one of the most fascinating case studies in our recent economic history and one they can probably relate to personally? Hoover Institution fellow John B. Taylor, a well-known economist who teaches at Stanford, has some ideas on how the recent crisis can be used to teach economic theory. As Taylor points out, the history of the recession is still being written so professors will have different views on what lessons it holds. He offers a few of his own in the form of slides from a recent talk he gave on the topic.
Two graphs I found particularly interesting:
The first graph shows the failure of increases in personal income due to the stimulus to increase spending on personal consumption. This data supports Milton Friedman’s personal income hypothesis (PIH) that people make their consumption decisions based on their long-term income expectations, and short-term changes in income (like tax rebates and other temporary stimulus measures) don’t have much of an impact on consumer spending. The second graph shows how targeted incentives – like the “Cash for Clunkers” program that offset the cost of newer, more fuel-efficient vehicles for people who traded in their old cars – can bend the PIH and increase personal consumption spending.
You can find more on Taylor’s blog.
Lessons From the Financial Crisis For Teaching Economics
John B. Taylor // Hoover Institution // June 6, 2011