*SMACK*

That’s the sound of my hand hitting my head.

Nick Rowe makes some interesting points (followed by Krugman) on economics education, which I’m slowly realizing did me a unforgivable disservice when I went through mine (formally).

Firms supply goods and people buy them. Economics is concerned with the problem of increasing total output, which is the quantity of good traded.

The constraint here isn’t demand, you can only push how much people can buy so far (it’s related to how much they can produce!). The constraint is supply: what we need are more firms/competition to drive down prices to sell more stuff.

So policies that aim to increase the amount of demand for products are doomed to very mediocre results. These are things like tax cuts, tax increases (ie government spending) and inflationary monetary policy.

Except now is different.

The idea is that, during this past recession, people/firms were holding onto money for some reason. Because they have to repay debt? Because they expect things to get worse in the future and so are saving against that outcome? Maybe…

Scott Sumner is awesome here.

Debts are paid in nominal dollars. Salaries are paid in nominal dollars. If firms start worrying they’ll have fewer nominal dollars next year than this, they’ll cut back. If they fear this because their business just sucks, so be it, they deserve to go out of business. But that kind of thing doesn’t happen to EVERYONE at ONCE.

That’s the difference.

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