KRUGMAN Straw Man Of The Day : iPhone 5 Shows We Are All Keynesians?

Krugman’s straw man of the day uses discussions about the impact of the iPhone 5 release on the economy to suggest we are all Keynesians, and that government should spend more money.
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But all actions have costs. And Americans have decided that the cost of funding expansion of government influence, power, and corruption is so high, that government stimulus is even worse then continuing recession.

So, while Americans may understand, within reason, the value of stimulus. Unlike Keynesian economists, American’s also understand the cost of the expansionist state. And they have had quite enough of it.

Unlike certain Nobel laureates.

2 responses to “KRUGMAN Straw Man Of The Day : iPhone 5 Shows We Are All Keynesians?”

  1. John,I am no Hayek, Selgin, or Sumner, but I’ll try to answer as best I can.Consider the fnllowiog equation:NominalExpenditure = MoneySupply*MoneyVelocty = PriceLevel*TotalTransactionsSome people don’t like this equation, but, for our purposes, I don’t think their objections are important. In any case, what this equations entails is that if there is a $4000 money supply and each dollar is spent 10 times on average (money velocity) for some period, then nominal expenditure for that period will be $40,000. Furthermore, the equations entails that if nominal expenditure is $40,000 and the price level is 5, then 8000 transactions were completed during the period. And finally, we should note the equivalence of nominal expenditure with nominal income. By replacing the words with these numbers, we get the fnllowiog equation:40,000 = 4000*10 = 5*8000Now, suppose that money velocity declined to 8. How can the equation be rebalanced? If we decide to hold nominal expenditure, the price level, and total transactions constant, then we can increase the money supply to 5000:40,000 = 5000*8 = 5*8000If we decide to hold the money supply constant, then we can lower nominal expenditure to 32,000, and the price level to 4.32,000 = 4000*8 = 4*8000In the real world, however, a sudden fall in money velocity is unlikely to be instantly accounted for by a fall in the price level, and instead total transactions is more likely to fall. The decrease in total transactions is not a result of their being fewer goods to purchase, but a consequence of prevailing prices being too high, and when prices are too high a surplus is created. For any particular business, this might mean a greater quantity of goods left in inventory at the end of the week; producers receive the signal that they are producing too much for present consumption and many companies starting laying off workers.At this point financial intermediaries, like banks, should be reacting to the lower velocity (which is also an increase in money demand, i.e. savings) by extending more credit. In other words, the fall in the rate of spending created by the additional savings should be offset by increased spending on investments the composition of expenditure changes but total nominal expenditure does not. Thus, producers who receive the signal that they are producing too much for present consumption, also receive a signal to shift their efforts to the early stages of investments for future consumption. But central banks, mandated reserve ratios, capital requirements, legal tender laws, etc., often prevent this second stage from occuring. In a nutshell, saved resources are not being invested for future consumption, because financial institutions cannot offset the change in money demand with a greater money supply, and a symptom of this problem is a fall in nominal expenditure.Hopefully this makes a little more sense. And I am not really an authority on these matters sometimes I come across like I actually know what I am talking about, but my formal economics education consists of two introductory classes. I am a nobody from nowhere, and it feels wrong to see my name alongside, Selgin, Sumner, and Hayek y’know actual professionals.Regards,Lee

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