Monday, April 06, 2009

Shorter Paul Krugman


The business cycle fluctuates based on mass behavior. When people take on debt, the demand for debt goes up (and we get a bubble). When people try to clear out excess capacity, the demand for clearing capacity goes up (and the economy crashes). Working in mass, people behave in ways that damages everyone at the same time (think prisoner dilemma). The government is in the unique position that it can act counter to "common sense". When people try to increase debt (because they can make more money while doing so), government should shed debt. When people try to reduce debt (because they have to much inventory), government should take on debt.

In the first case, government acts as a brake when the financial whiz kids want to push on the gas. In the second case, government acts as the gas when people get older and want to slow down.

The idea that government should function the same way as every other financial player in the market is one of the greatest flaws of modern conservative thinking. But it is politically appealing because it seems to make sense on the surface.


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