Macroeconomics vs. real life


Economist Paul Krugman claims that, "the worst thing we can do for future generations is not to run sufficiently large deficits right now." Obviously, under the current very unusual economic conditions, it no longer makes sense to view the sharp increase in our national indebtedness as a bad thing. How did such nonsense invade the science of economics? It all began with the prophet of state-run capitalism some 80 years ago and it continues to this day with brilliant mathematicians and hardworking econometricians manipulating their neat macroeconomic models, explaining everything except real life.

John Maynard Keynes, having lost his fortune on the stock market, had an axe to grind with the investor class. He claimed that their actions were driven by "animal spirits" rather than long-term strategies for sustainable business expansion. Wild speculation leads to bubbles, the eventual bursting of which triggers a downward spiral of declining private consumption and investment, trapping the economy indefinitely at a depression equilibrium with unemployment way above its "natural rate." Since low interest rates are not enough to incentivize the private agents to spend, the government has to do it for them in order to end the recession.

How fortunate for the average Joe that he, unlike Krugman, has not been blinded by years of high-level economics training. Most people are able to see that politicians who spend much more than what they have received as tax revenue unavoidably place a huge burden on tomorrow's economy. The accumulated debt must be serviced and, unless we find enough fools to continue to invest their savings in a government that has become insolvent, we will have to turn to contractionary fiscal policies.

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Those who learn economics from historical experience rather than textbook fables will not miss the fact that the cost of one generation's follies is paid for later by a combination of higher taxes (depressing household consumption, slowing down the process of capital accumulation in the private sector, and causing another recession) and lower spending (compromising the nation's defenses and the administration of justice as well as inflicting unbearable pain on those who have gradually been tempted to become overly dependent on government largesse).

Alex Tokarev
Alex Tokarev

Alex is the chair of the Department of Business at Morthland College in West Frankfort, Ill., and teaches at Northwood University in Midland, Mich. The native of communist Bulgaria fanatically supports the Bulgarian soccer team, Levski.


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