Getting Smart About the Economy at Large: a Thank You to Paul Krugman

Monday, November 19, 2012 at 12pm
By John Friedman

Many of us took Macro 101 somewhere along the way. That introductory macro course — macro being short for macroeconomics — looked at the very largest of economic phenomenon, such as money, interest rates, international competition, etc.

Many of us also took Micro 101 — micro being short for microeconomics — which looked at relatively small-scale phenomenon such as pricing, supply and demand, competition between companies and the like.

Macro, more so than micro, as best I can tell, separated a lot of wheat from a lot of chaff — some people got it just fine and some people just dittint.

Both those who took to the macro water and those who did not, though, mostly remember one thing, which is this equation:

Y = C + I + G + NX

And a lucky and talented few also vaguely remember that the equation breaks down the size of the entire macro economy — the whole dern thing, forever mysteriously labeled in this equation as Y — into four components, i.e., the sum of private consumption (C), plus gross investment (I), plus government spending (G), plus net exports (NX).

Does that ring a bell?

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For many folks that equation rings a bell, though a bell that rings somewhat obscuredly off in the distant past, as the Y = C + I + G + NX equation is what they learned about, years and years ago, in the early weeks of their first-and-only macro class, after which the class went on to use the Y = C + I + G + NX equation as the basic building block for everything that was to follow. From that use and re-use, they mostly understood the equation, but that was many, many years ago . . .

They remember, though, that, way back then, the equation was mostly not even remotely subject to debate; instead, it was the starting point for learning about how the world — the macroeconomic world — worked.

Rather like evolution and biology.

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More recently, this equation, more than any other, has been at the heart of what is probably our greatest political divide, due to that G variable in the equation — government — and the whole question about whether government spending is good or bad or both and whether it is good or bad or both some of the time/all of the time/never. 

Take a look at the equation again.

   Y = C + I + G + NX

It takes but elementary-school arithmetic to see from the equation that, when government spending goes down (a decrease in G), then, ceteris paribus (economist-speak for all things being equal), overall economic output, or Y, must necessarily go down as well — otherwise, the equation would not balance which, is, ya know, the whole thing about equations, right? They have to balance; one side and the other have to equate. So if you decrease G on the right, and all the other things on the right stay the same, then overall economic output, the only thing on the left, must also decrease.

Simple.

If you believe the equation, then, and if you believe that the ceteris paribus assumption can reflect reality, and if you think that the economy getting smaller is a bad, bad thing to be avoided if it’s at all possible to do so, then you must necessarily also think that government should increase spending during a recession rather than decrease it because C and I — the goods and services we all as a group consume and invest in — go down mightily in recessions as we all pull back and tighten up our spending behavior.

Yet most of what we hear — and most of what has been done during the Great Recession throughout Europe in particular — has been to reduce government spending.

That would be just the opposite of what the equation indicates should be done.

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Picture, if you will, that you are at the top of your chosen field — you’ve had your pick of any job in the field, and you’ve won all the awards. And then picture that the absolutely most fundamental learnings of your field — learnings that are well more than half a century old, and that have been tested time and time again in a myriad of contexts since then — are capable of helping us, The Big Us, avert a huge problem, but that those learnings are being largely ignored by the powers that be, and entirely ignored by about half of the Ps-that-B.

Finally, picture that your chosen field is one that touches every person’s life in one of the most fundamental ways possible and that ignoring the learnings of the field means fundamental sorrow for the entire globe.

Such is Paul Krugman’s plight.

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Paul Krugman writes for the New York Times, both in a daily blog called The Conscience of a Liberal and a twice-weekly column. He is also a professor at Princeton. He is a Big Deal in lots of ways.

He is also, as you can note from the title of his blog, not afraid to use the word liberal.

One of his areas of expertise is The Great Depression, so Paul has a thing or two to say about how we as a group can smartly respond to recessions and depressions. He is a Keynesian — some would say he is The Keynesian — which means that he truly, deeply believes in the Y = C + I + G + NX equation.

And he has been doing his best to get the GPs-that-B — the Governmental Powers that Be — to increase governmental spending rather than to curtail it.

As best I can tell, Paul has had some success in shifting the debate, but it’s been nearly a half-decade-long slog, during which time the conventional wisdom has in fact gone if anything the other way.

Which is too bad because, as best I can tell (disclosure: I was more chaff than wheat in Macro 101) Paul has been right about pretty much everything the past five years, right down to his predictions trumping those of bigwig bond billionaire-guy Bill Gross and bigwig investor billionaire-guy John Paulson.

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This time of year we give thanks.

I give thanks to Paul Krugman. Some years ago, in attempt to make myself more wheat than chaff in macro, I decided to read his blog every day. So I give thanks to him at the micro level: he has helped me smarten up a lot.

Paul is a great writer. I think people miss this facet of his work because his subject matter is so important. He can quickly write great pieces in 500 words or less (I count his words sometimes . . . ) and does so on a near-daily basis. He is not, as I am, an abuser of curly-cued, multi-comma’ed sentences (or parentheticals), or re-words, i.e., retreaded versions of old words, or newards, i.e., entirely new words never before known to roam the earth; nor does he too heavily rely on semi-colons or ellipses . . . or on placing phrases in places that lawyers only would love.

And he never goes for the cheap sentence-start of using sing-songy conversational words like and and but. He’s also good at staying away from the building-long-compound-words-via-the-dash malady.

So I learn at his feet, not only about how the financial world out there works, but also how to write about complicated things in a very straightforward, accessible voice.

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More importantly, I also give thanks to Paul on a The Big Us scale — on the macro scale, because macroeconomics really is one of the most fundamental aspects of all of our lives.

And, while we’re at it, let’s get down into the detail and rank it, shall we? Let’s call it the second most fundamental of all aspects of our lives because, after love, there’s pretty much nothing more important to each of us than our basic economic well-being — a roof over our heads, enough food to eat, clothes to wear, etc. You know: it really *is* the economy.

Paul has been doing his ever-lovin, model-buildin’, data-based, prediction-filled, proud-liberal best to help all of us have a better world in which to live.

Thanks, man.

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One demerit: unlike Paul, I do *not* hear much music in the music of either The Civil Wars or Arcade Fire, and actually hear their music being rather lacking in music-ness. Feist, on the other hand, I totally get; she has music coming out of her every pore, as best I can tell.

So Paul and I differ on music more often than not. But that’s nothing.

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Thanks, Paul, for doing what’ch’ya do.

Exactly 1400 words (about a fifteen  minute read (sans linked-to content)

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