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Voodoo economists

November 2nd, 2009 · No Comments

One has just been on Bloomberg (10.15AM). The amount of nonsense leaving her mouth is quite staggering…

We didn’t quite catch her name but she’s from the University of California. Here is wat she argued:

  1. The stimulus will be negative for the US economy because it leaves less resources for the private sector.
  2. Consumers consume less because they partly anticipate higher taxes down the road.

It sounds pretty reasonable. However, it isn’t, really. The first argument goes under the (rather broad) flag of ‘crowding out’. That would make sense in an economy where resources (capital, raw materials, labour, etc.) are scarce. They aren’t. The argument is bogus under the present circumstances with 10% unemployment and factories with large amounts of spare capacity.

The second argument is known as ‘Ricardian equivalence’. It’s a consequence of an extreme rationality assumption by the so-called new-classical school in economics. The assumption is that rational economic agent (consumers, investors, etc.) will take all available information on board when they make economic decisions.

So, when confronted by a rather large government stimulus program financed by borrowing, they will realize that tax hikes will be somewhere down the road, and start saving for these.

When we were still lecturing economics, the question we always put in front of the classroom was who would actually start saving more to be able to pay for future tax hikes. Invariably, nobody raised their hands. If you’re still not convinced, ask yourself the same question.

What’s more, we predict that even all that Voodoo economics aiming at deligitimizing the Keynesian reaction to the crisis and scaring you with deficit numbers will not led people to save more to be able to pay for future tax hikes.

We think consumers have other things on their mind right now…

Tags: Opinion · The World according to Economics