Dark Age of Macroeconomics (Wonkish) -- Paul Essay

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Dark Age of Macroeconomics (wonkish) -- Paul Krugman

Paul Krugman's column in The New York Times zeros in on the good and the bad that goes with government debt financing. He references economists Brand DeLong, Eugene Fama, and John Cochrane, all of whom claim that debt-financed government spending "…necessarily crowds out an equal amount of private spending" (Krugman, 2001). The economists that Krugman references believe that private spending is being blocked not based on some empirical model, but on simple accounting. In other words, because so much money is financed through debt dynamics, those with capital are being pushed out of the opportunity to invest. But Krugman begs to differ, and that is the sum and substance of this article in the Times.

Meantime while other economists try to read more into Cochrane and Fama than is actually contained within their narrative, Krugman asserts that it's not that complicated. Krugman offers a quote from Fama: "…bailouts and stimulus plans" are financed by putting the government deeper in dept, and that additional debt "absorbs savings that would otherwise go to private investment" (Krugman, 1). Debit financing isn't a matter of adding to present resources, Fama continues, that strategy just moves "resources from one use to another" (Krugman, 1).

Cochrane puts it very simply: "Every dollar of increased government spending must correspond to one less dollar of private spending… [And] jobs that were created by government stimulus spending "…are offset by jobs lost from the decline in private spending" (Krugman, p.

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1). Cochrane goes on to critique the stimulus concept (which President Obama and the Congress put in place in 2009 to prevent the country from falling into a deep depression), saying that those who advocate for the use of stimulus strategies want that money to be spent on "consumption, not saved." Past stimulus plans have been evaluated on how much people spent, Cochrane notes, not on how much of it was saved.….....

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