Sunday, June 10, 2012

Economics 101

Yesterday, Paul Krugman explained to the Netroots crowd why another round of government stimulus is necessary if we are really serious about moving the economy out of its current sluggish state. Of course his ideas were popular with this crowd, but they're probably not so popular with the general public. That's probably because the general public is not too conversant with Keynesian economic theory, which still sounds counter-intuitive to most people. Even Frankliln Roosevelt did not understand what Keynes was talking about when Keynes visited the White House, at the time that these ideas were new and untested. But it was Keynesian stimulus that finally pulled this country out of the Great Depression, in the form of massive investment in infrastructure and manufacturing capacity needed to fight World War II. Krugman's point was that Keynesian theory tells us how to solve the economic situation in which we find ourselves. Unlike in Roosevelt's time, policy makers do not have the excuse that we do not understand these ideas. Now these ideas are Economics 101.

Krugman has been saying for a long time that the stimulus enacted in 2009 was much too small. He is probably right about that. He faults the Obama administration for not pushing for a larger stimulus, even though he seems to recognize they could not have obtained more than they got from Congress at that time. That gives Krugman the satisfaction of being able to tell us, over and over, that he was right, and we would all have been better off if only we had listened to him. And he seems to think that if the Obama administration had only advocated his ideas, instead of just advocating the most that they believed they could achieve, they could have the satisfaction of being able to say the same thing.

Krugman has a new book out still making the case for more stimulus. More power to him. It can't hurt for more people to understand the basics of Keynesian theory. If Krugman can persuade enough people that we should apply more Keynesian remedies, maybe that will create some political pressure for more action.

What Krugman does not seem to recognize, however, is that it doesn't really matter whether or not he is right. That is worthless unless those who agree with him also have the political power to implement his possibly correct ideas. And what Krugman also does not recognize is that he may be an expert in economics, but he is no expert in politics.

And I'm no expert in economics, though I have taken Economics 101 and a few more advanced courses. But I have a theory that the economic system will respond in a positive manner to anything that people actually believe will work, regardless of whether the economic models predict its success. You might call that the placebo effect, or the Tinkerbelle effect. Anything that policy-makers can do that will give business more confidence to invest, or consumers more confidence to spend, would be helpful to the economy. Unfortunately, in our fractured and divided political system, it is difficult to convince at least half, and probably more of the population, that anything either the Congress does, or the President does, is having a positive impact. If we could change that, we could probably get the economy rolling again.

1 comment:

  1. << I have a theory that the economic system will respond in a positive manner to anything that people actually believe will work, regardless of whether the economic models predict its success. You might call that the placebo effect, or the Tinkerbelle effect >>

    Yes, and since most Americans who we want to loosen their purse strings do not agree with Krugman, and the most successful cities, states, mayors and governors are doing the opposite of Krugman's suggestions, it may serve us well to ignore the man who has become a characture of himself.

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