11 Nov 2008

Consumers Don’t Cause Recessions

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Ah, I have outdone myself in this one. You know how you’ve wanted someone to rip apart the “circular flow diagram” for years? Well, enjoy. Learn it. Live it. Love it. Here’s an excerpt for those readers who are “busy” and need a hint before clicking a link:

In his discussion of the “paradox of thrift,” Paul Krugman proves that he is not an economist—or at least, not a very good one. His policy recommendations are based on a Keynesian model bereft of time and the capital structure of production. Recessions are rooted in misalignments in this unbelievably complex structure, and there needs to be a period of below-normal output as these pipelines are fixed. Most important, consumers are doing the right thing when they increase their saving during a downturn. If solving a recession really were as simple as getting people to spend, then we wouldn’t keep experiencing them.

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