Tuesday, January 10, 2012

Why the government shouldn't make decisions like a business

Krugman has weighed in with some more on the distinctive challenge of macro-economics, of running an economy. In the previous post I linked his arguments on why family debt and national debt are different.

This time, I think his argument is even more telling, where he distinguished between the considerations of a running a business, and an economy. He says: "The key point about macroeconomics is the pervasiveness of feedback loops due to the fact that workers are also consumers. This makes a huge difference.

"A businessman can slash his workforce in half, produce about the same as before, and be considered a big success; an economy that does the same plunges into depression, and ends up not being able to sell its goods. Nothing in business experience prepares one for the paradox of thrift, or even the inflationary impact of increases in the money supply (which is real when the economy isn’t in a liquidity trap.)"

The key point, which I feel he doesn't make totally clear is that in an economy you are responsible not only for your business, but for workers and consumers throughout the country. Most relevant here, if a business person fires workers he may be being a good businessman, as Romney in fact did at Bain Capital. But if you have big unemployment, then you have failed as a manager of the economy. If you approach the government with a private business sensibility only, you don't understand unemployment, and don't do the right things to prevent it. That's why the "expansionary austerity" approach of the Republicans makes sense to small business people, but makes no sense as policy for the whole country.

The whole country's economy doesn't operate like a small business. And this doesn't even take into account that the government prints the money and has a central bank.

Obama should really be talking about this stuff, because if he doesn't educate the public, he may get defeated.

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