Thursday, September 02, 2010

Figuring It Out

They must be giving out Nobels based on airline mileage or something these days, given that Paul Krugman has one and is saying that he can’t figure out why the country did not return to a depression after the end of World War Two.

The context is an essay to the effect that we can grow our economy by using inflation, a rather bizarre concept in itself. It’s true enough as far as it goes; if you sell the same amount of stuff, but that stuff is priced higher, then the economy is “bigger” because the economy is measured by how much money is moving around. If it were measured by how much stuff is moving around it would be the same size. We’re getting kind of Clintonite, here, but it depends on the definition of “bigger.”

His objection to inflation is not that it hurts the wage earner, because during inflation prices go up but wages don’t, his objection is that he can’t figure out how to make inflation happen. Poor baby.

He actually likes inflation because it can magically make the national debt disappear without having to raise taxes. If inflation raises the GDP, then the national debt becomes smaller as a percent of GDP. If we can do that to a sufficient degree the debt vanishes altogether. I’m not sure if a tiger appears in its place, or if a beautiful woman scares the shit out of Howie Mandel.

Back to the question he can’t figure out. The country was in a depression before it got into a World War which took it to almost 100% employment. When the world ended, why did the country not return to a depression?

Why, then, didn’t depression return? The best answer I’ve come up with is that the depression was, at least in part, a Koo-type balance sheet slump — and the private sector emerged from World War II with much-improved balance sheets.

His "best answer" has to do with freaking balance sheets?

I think I’m less impressed with balance sheets than I am with piles of rubble created by that war. Piles of rubble that needed to be turned into buildings and factories and such, and only one country in the entire world which had the wherewithal to provide the means to do that. We spent the next two decades, in fact, becoming enormously wealthy by producing stuff to sell to the nations which we had just finished destroying in the war.

Pretty hard to go into a depression when you're rebuilding the entire world.

1 comment:

bruce said...

I'm not an economist, but I tend to think inflation is NOT a good thing. The kind of hyper inflation he's talking about (need to erase the debt as a % of GDP), would be disastrous.. look at post WWI Germany or Zimbabwe recently.

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