September 29th, 2008



Macroeconomics is like astrology or Freudian psychology, in that a lot of people used to believe it, and a lot of people still do, but many with a scientific bent tend to stay away from it.
--In ordinary economics, the choice to save or consume is only important in that more saving raises long-term productivity. In macroeconomics, more saving is "contractionary" and more consumer spending is "expansionary."

--In ordinary economics, a good trade is one in which the value of what you buy is higher than the value of what you sell. In macroeconomics, it is bad to have foreign trade in which the value of what we buy is greater than the value of what we sell. Thus, a trade deficit is "contractionary" and a trade surplus is "expansionary."

--In ordinary economics, government should only borrow as a last resort, because borrowing generally crowds out private investment. In macroeconomics, a balanced budget or surplus can be "contractionary," while a deficit is "expansionary."
Moreover, classical economics says that there is nothing that government can do to affect demand. As Don Boudreaux put it,

Government cannot create genuine spending power; the most it can do is to transfer it from Smith to Jones. If the Treasury sends a stimulus check to Jones, the money comes from taxes, from borrowing, or is newly created.

...Over the past twenty years, Keynesian forecasters, such as Morgan Stanley's Stephen Roach, have predicted many phantom recessions--slumps that never took place. In order to remain attractive, the picture of Keynesian economics has to be heavily airbrushed.

... I would be inclined not to forecast a severe recession in 2008. There have not been any major developments that would have an impact on structural unemployment. Frictional unemployment should not be extensive, either. The housing construction industry needs to be smaller than it was two years ago, but much of that contraction has already taken place. Higher oil prices will cause some shifts in our mix of goods and services, but these do not need to be terribly drastic or terribly rapid.

But I may be wrong. ... But for now, the main "crisis" motivating "stimulus" is the fact that this is an election year
"A Very Stimulating Crisis" By Arnold Kling

via Econlog