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Paul Krugman's ideas are part of the problem - Printable Version

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Paul Krugman's ideas are part of the problem - Helsworth - 11.01.2017 19:07


Excerpt from article:

"Students then spend hours in excruciating exercises where the gains in output from the rise in government spending are partially, wholly, or more than wholly offset by the loss of output from private investment as interest rates rise.
They then have moral intonations forced upon them about the relative merits of public spending (which is not ‘disciplined’ by the market) and private investment spending (which is assumed to be always efficient and highly productive.
The morality play ends with students being told that fiscal deficits are bad, force out good private investment and lead to lower efficiency and degraded outcomes for all.
Then the IS-LM framework is married up to another illegitimate framework – AS-AD – which completes the horror story – fiscal deficits end in accelerating inflation.
It is really an amazing con.
There is no educational content in studying the IS-LM framework except from an history of economic thought perspective. It has very little correspondence with the real world."

RE: Paul Krugman's ideas are part of the problem - VineFynn - 15.01.2017 03:13

Why should anyone care about what this blogger says?

I mean, ISLM doesn't say that fiscal deficits cause inflation any more than it says any other demand causes inflation. Borrowed money for the deficit comes out of the existing pool of loanable funds, which reduces private demand anyway. I can't see how that would cause inflation, since they effectively cancel each other out.

If the government prints money for the deficit, sure. But obviously increasing your money stock will cause inflation if you force people to treat new money as an increase in demand, which you will if you buy stuff on a regular basis with it instead of constraining yourself to only swapping it with an item of fixed supply like government bonds (which at the liquidity trap is financially identical to money, so swaps have no effect on demand for other investments)

But this isn't a post about ISLM. It's a complaint about what the blogger assumes to be a problem in economics education- a preference for private spending. As far as I'm aware, education and axioms like that (presented as they are without evidence) constitute a political argument, not an economic one.