Saturday, August 20, 2011

Getting Defensive

Paul Krugman and Mystery Man both have words to say about a WSJ article concerning common sense in economics.
From a layman's perspective that only taught high school economics a few times I can't get into too much on the macro economic level. I've figured out that there are two main competing economic theories divided between the University of Chicago around Lake Michigan and Princeton close to the Atlantic Ocean. So they two groups have been dubbed freshwater for Chicago and Salt water for Princeton.
Fresh water economics is the cut taxes, get the government off business's backs, deregulate and privatize everything crowd.
Salt water follows Keynes who's policies FDR used to set the social safety net during the Depression by regulating business, especially banks, getting off the gold standard, creating Social Security, subsidising farmers, minimum wage, unemployment. Medicare and Medicaid was an expansion of this by Johnson in 1964-5 in his Great Society.
So you could say that from 1933 to 1980 Salt water economics rules the day. From 1981 to the present day fresh water economics has ruled. Clinton and Obama both embraced freshwater economics.
So lets examine historically how the two theories have fared. That's what common sense would dictate: what works, what doesn't.
Hmmmm, FDR had a pretty big mess to clean up that the old timer freshwater guys made, but his safety net and regulations kept us from going even deeper into the economic hole created by Coolege and Hoover's do nothing attitude. After WWII our economy boomed until the 70's when we hit stagflation. In those years there was no stock market crash: you couldn't make money selling low. No banks went under.
Reagan came along and unemployment went from 8% to 12%, but he's a hero, he saved the day. He busted the air controllers union ya see. Since 2001 when Bush took over and ruthlessly applied freshwater economics our economy had done nothing but tank. a trillion dollars lost in deregulating the savings and loans. Crash of 1987, crash of 2001, dot com bubble, crash of 2008, housing bubble, too big to fail, and nothing has been done to stop this. The freshwater panacea for keeping out of a depression is to fight wars: good for business, cuts unemployment, who cares about the lives destroyed, but unfortunately that hasn't worked this time.
That's why they write non-sense editorials like this, they say Obama is a salt water guy, but other than an too weak stimulus package and a cloned Republican health care package all of his policies have been staight out of the university where he taught law: Chicago.
The fresh water guys are running scared. Edward Prescott can win all the awards economics can throw at him, but Krugman is being consistently proved right. They know their fiercly held religous belief in supply side economics has only opened the flood gate to graft, corruption and the pre-New Deal roller coaster ride of boom and bust economics.
Common Sense says fresh water economics seems to be winning the reality debate.

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