Tuesday, February 17, 2009

It's The People Stupid!

RealClearPolitics - Articles - Deconstructing Krugman

When Slick Willie was running against Bush Sr, the mantra was "it's the economy, stupid!" -- the media loved it, calling Republicans stupid is always good sport. Perhaps we have a turn about here -- BO and his economic advisors are "doing it by the numbers", but people don't always behave "by the numbers".

But why is the economy performing below capacity in the first place?
Many reasons, too many to list here. And why won't it simply recover on
its own, as it has many times in the past? Here things get a bit more
interesting. Like many economists, Krugman points to Keynes's "paradox
of thrift": in uncertain times, ordinary people defer consumption and
businesses postpone investments. The economy shrinks below capacity,
because of people's desire to save money.

It's hard to escape the sense that the best economists and the
President of the United States are blaming ordinary people for the
economic crisis. If only we'd spend our money instead of save it, we
wouldn't be in such a big mess.

This is where devotion to mathematics gets the better of those who
would do better to try to understand people. Krugman is very concerned
that the liquidity trap we're arguably in will degenerate into a sticky
and persistent deflationary spiral, with far lower output for years to
come (an American "lost decade").





People feel uncertain about the future -- and the government spending Trillions of dollars of their future money at a time that every bone in their body tells them to save makes them even MORE uncertain! So they spend even less.

The economic wizards are so intent on following their models and
ignoring the people, that they will waste tremendous resources trying
to postpone a reckoning that is fated to come. What we really should be
talking about is mortgage finance. We have to figure out how to reduce
the burden of mortgage debt on millions of people (including people
that can perfectly well afford their payments, but are unaware of the
creeping effects of deflation on their purchasing power).


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