Thursday, July 1, 2010

Paul Krugman is Really Worried and That's a Good Thing

Paul Krugman is beside himself that Germany and other European nations are not going to continue trying to spend themselves out of the current recession; thank god! The economy is like an engine and if it running good, it creates enough goods and services to keep everyone secure and happy. The engine uses money as fuel. The owner of the engine also pays it’s workers to keep the engine running good, makes what the workers want to buy and the workers use their wages buy the goods and services produced by the engine; this is called supply and demand. When money is not used to buy goods and services, it is used as more fuel to run the engine. The system is pretty much self correcting, except when a company gets so big it can sell products and services at a loss to drive it’s competition out of business. This is where the government steps in to make sure this doesn’t happen. However the government has also taken control of all the fuel (money) and taxes the engine owner and workers to redistribute tax money as they see fit.

Every once in a while, the engine’s fuel tank runs low and the engine starts to sputter. Now there are two theories on how to fix this problem. One is called “supply side” and the other is called “demand side”. The supply-siders believe you should help the engine owner, by cutting spending and reducing taxes on the workers and the engine owner. This is so the owner can buy more fuel and the workers can buy products. The demand-siders (or Keynesians) believe the answer is to raise taxes, borrow large sums of money and distribute it to the workers through particular workings of the engine as they see fit. Both these concepts have been tried and history shows that the supply side solution acts by filling the fuel tank, and actually results in more money going back to the government then with the higher taxes. The demand side solution has never worked. It acts like pouring gas down the carburetor; yes the engine will run, abet poorly, but only as long you pour in the gas. As soon as you stop, the engine will stop and the fuel tank will still be empty; plus the workers and engine owner will be burdened by higher taxes and will still have to pay back all the money borrowed by the government.

The big demand-sider these days is Paul Krugman. During the recent G20 meeting, the European countries have decided that after 30 years of trying to make their welfare states work and watching countries like Greece and Spain going bankrupt, they are going to turn away from Keynesian theory, unlike President Obama and stop borrowing money to infinitum. This led Mr Krugman to hysterically forecast that the world is now headed for a depression. The last time this happened, was the end of WWII. The Keynesians hysterically warned that if the US did not maintain wartime control over the economy the US was economically doomed. The result of course was an economy that grew at record rates. If you get one thing from this, let it be that when the Keynesians becomes hysterical, we’re probably doing the right thing.

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