Friday, January 13, 2012

Cut down those trees, Mr. Krugman!

Paul Krugman's op-ed yesterday in the New York Times takes on Mitt Romney--via the strawman of Gordon Gekko--and carefully explains why the nation cannot be run like a company:
America is not, in fact, a corporation. Making good economic policy isn’t at all like maximizing corporate profits. And businessmen — even great businessmen — do not, in general, have any special insights into what it takes to achieve economic recovery.
Krugman is right, of course, insofar as the nation--or more precisely its economy--is not a corporation and comparisons that make that assumption are inherently flawed. In that regard, Krugman questions the idea that a successful businessman might have the needed tools and acumen to "fix" the troubled economy.

Obviously, that's an idea Romney and previous Presidential hopefuls--like Herman Cain and H. Ross Perot--have latched onto and promulgated in their various campaigns. Because it plays well, nevermind the truth of it. But is there any truth to it? Krugman says no, that business experience doesn't translate into running the country experience. He points to Herbert Hoover as evidence for this and returns to his own mantra on government spending to highlight the very different nature of an economy, as opposed to a business:
Consider what happens when a business engages in ruthless cost-cutting. From the point of view of the firm’s owners (though not its workers), the more costs that are cut, the better. Any dollars taken off the cost side of the balance sheet are added to the bottom line. 
But the story is very different when a government slashes spending in the face of a depressed economy. Look at Greece, Spain, and Ireland, all of which have adopted harsh austerity policies. In each case, unemployment soared, because cuts in government spending mainly hit domestic producers. And, in each case, the reduction in budget deficits was much less than expected, because tax receipts fell as output and employment collapsed.
And while that's true, Krugman makes the fatal mistake of assuming that the approach would be identical, that someone with a strong business background would not recognize these differences.

But more significantly in my opinion, Krugman says something else in this piece that is very, very true, something that he otherwise ignores when he offers his own solutions for "fixing" the economy:
Why isn’t a national economy like a corporation? For one thing, there’s no simple bottom line. For another, the economy is vastly more complex than even the largest private company.
Focus on the last bit: "the economy is vastly more complex than even the largest private company." Right. Exactly right. Vastly more complex, exponentially more complex. Yet, Krugman consistently argues that if the government simply spends more money, all will be well. See it? He sees complexity in the system when criticizing approaches that he does not like, but sees simplicity in the same when presenting his own approach.

The Great Conceit continues.

Cheers, all.

2 comments:

  1. Nicely done, as always.

    Great Conceit or Fatal Conceit? ;)
    http://en.wikipedia.org/wiki/The_Fatal_Conceit

    Or the fun version: http://econstories.tv/2011/04/28/fight-of-the-century-music-video/

    Econometricians, they’re ever so pious
    Are they doing real science or confirming their bias?
    Their “Keynesian” models are tidy and neat
    But that top down approach is a fatal conceit

    @AgoristDon

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  2. Yes, Mr. Krugman, it's a good thing the government is not a corporation. With its flim flam accounting and miserable balance sheets, its officers and board would have been in the SEC dock a long time ago.

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