Economic Insight

Economists are arguing viciously among themselves – this exchange is a good example and provided me with some new insight. Here, in a nutshell, is my view of the raging debate.

For a variety of infuriating reasons, the world’s capital and labor has been invested poorly, producing too much of what people don’t want very much and not enough of what they do want. Markets eventually discovered this and starting adjustment. Factories and institutions are shrinking and closing, while new factories an institutions are being built. But rebooting the global economy doesn’t happen instantaneously. In the interim, a lot of people are left unemployed. The unemployment problem will resolve itself eventually, but that is of little comfort to the unemployed. Keynesians argue that government spending (stimulus) can reduce the pain of unemployment. Austrians argue that doing so merely slows down the correction of capital and labor allocation.

Who’s right? I think they both are. The difference is a value judgment. Stimulus will help employment but it will also retard the correction of resource allocation. It’s good in the short run and bad in the long run. Good for us and not so good for our children. But it would also be good to feed and clothe our children in the interim, even if it reduced their future prosperity. The question is – how much and to what degree? I haven’t read an economist yet who aknowledges both sides of the problem and offers an answer to the question of degree. This is left to politicians, which is better than nobody. I hope.

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