Monday, August 15, 2011

Aaron, Please Help!

Sorry to keep posting economics garbage. But that's the stuff I'm reading lately and I can't help myself. Just tune me out if I'm getting pedantic. Anyway, this one is for Aaron. Aaron, is there any reason we should keep (or start) taking guys like Krugman remotely seriously? Here we have Krugman with the broken windows fallacy writ large. His arguments just seem so intuitively wrong on every level that I've been suppressing guffaws in my office for the last ten minutes after watching this clip.

I know Krugman comes off as an ideologue, but lots of economists still think this way. Help!


  1. Rob,

    I don't like Krugman, personally. He's pretty full of himself.

    However, I don't see that what he's said here is all that contentious (unless you're reading a bunch of hardcore Austrians on the subject -- who will be farther from the economic mainstream than a guy who won the Nobel price).

    The problem with the broken window fallacy, or applying it in this case, is that it doesn't take into account the unwillingness to spend/invest in a down economy. If, in the parable, the guy who pays to have his window repaired wasn't going to do anything with his money without being forced into it, then his broken window does actually benefit the economy in that it induced him to start spending.

    You won't hear this from the von Mises crowd, but there's a lot of data that suggests that government spending can actually help pull an economy out of a recession.

    Now, if you'll excuse me, I have to go wash the stink of macroeconomics off of me.

  2. Hah! Thanks Aaron. Well my problem is that I HAVE been reading hard core Austrians--but I need to get my mainstream economics education knowledge improved simultaneously (I like Greg Mankiw's blog and he's at least conservative/mainstream.) Anyway, I know this still gets debated by people a lot smarter than I am so there isn't an easy answer. I get the whole "boost aggregate demand" argument for short term downturns--but hasn't the govt. been attempting this ad nauseum by expanding the monetary supply and running deficits over the last decade (or longer)? Isn't that what Japan has been trying to do, unsuccessfully, over the last two decades with lots of QE and monetary stimulus? I know in the long run we're all dead but when do we admit that a decade or two of crappy, bubble growth is no longer the short run and we've run out of options in the Keynesian tool kit?