The Power of Ideas

November 30, 2008 4:00 PM

What to Do.2008 Nobel Laureate in Economics Paul Krugman on what to do about the economic crisis. [Via]
posted by homunculus (67 comments total)

Amity Shlaes: The Krugman Recipe for Depression

Krugman's response: Changes in money-wages and Amity Shlaes
posted by homunculus at 4:05 PM on November 30, 2008

What Would Keynes Have Done?

The Keynesian moment
posted by homunculus at 4:07 PM on November 30, 2008

It's funny how, when you look at economics, and really dig -- it's all a house of cards. It's all argument by authority. People insist on 'providing sources', but when dig in the sources -- they just made the shit up out of whole cloth!

I haven't finished Krugman's "Amity Shlaes" rebuttal yet, but so far, his entire argument is "Keynes disagrees, so there." Well, what if Keynes was wrong, and how do we know?

Economics is not science. It's voodoo.
posted by Malor at 4:24 PM on November 30, 2008 [4 favorites has favorites]

Dismal Science AMIRITE?
posted by bardic at 4:29 PM on November 30, 2008 [2 favorites has favorites]

The Krugman Truth Squad, for what it's worth.
posted by Jahaza at 4:38 PM on November 30, 2008 [1 favorite has favorites]

I find the reverence for economic 'authorities' fascinating. I like reading Krugman, because his ideas often coincide with mine. However, I still have to question the robustness of his, or any economists, ideas. Of late, one of the most frequently quoted words in this field is 'confidence.' Credit confidence, consumer confidence, market confidence, etc. I work in a technical field, and I try to imagine my customers' response to my company's products if I told them 'It works really well as long as you believe in it.' That's Peter Pan thinking, and no way to run a country, or a worldwide trade network. As the world becomes more and more skeptical, we're going to have to think of a new way of addressing economic issues.
posted by Jakey at 4:41 PM on November 30, 2008 [3 favorites has favorites]

Economics is not science. It's voodoo.
posted by Malor

Yes, true. You of all people should heed that.
posted by Eekacat at 4:44 PM on November 30, 2008

You All Everybody.
posted by Balisong at 4:49 PM on November 30, 2008

Economics is not science. It's voodoo.

Science poses and tests hypotheses, then produces theories with explanatory and predictive power.

To the extent that all of economics fits the above definition, it is a science. But it's clearly a science with a looong way to go.
posted by ZenMasterThis at 4:56 PM on November 30, 2008

I've been a post-apocalyptic reading binge lately. World Made by Hand by James Kunstler, Alas Babylon by Pat Frank, and The Road by Cormac McCarthy.

Economics truly is voodoo. Guns, whiskey, tires, gasoline, salt, and engineering knowledge is where it's at. Get 'em while you can.
posted by billysumday at 4:57 PM on November 30, 2008 [1 favorite has favorites]

Area Economist Cites Onion
posted by fleetmouse at 5:11 PM on November 30, 2008 [4 favorites has favorites]

why is it that in every news photo of krugman he looks like he just stole some shit?
posted by kitchenrat at 5:13 PM on November 30, 2008 [10 favorites has favorites]

the basic principle should be clear: anything that has to be rescued during a financial crisis, because it plays an essential role in the financial mechanism, should be regulated when there isn't a crisis so that it doesn't take excessive risks

Thanks for another great post, homunculus.
posted by Blazecock Pileon at 5:27 PM on November 30, 2008

Economics is not science. It's voodoo.

its not science because its impossible to predict results with 100% accuracy. its a social science - there are people involved and people do not respond perfectly to stimuli. the trick is figuring out which version of voodoo will probably produce desired results. keynes' economics generally is a bottom up philosophy that leaves infrastructure in place after it is concluded. it also creates jobs and boosts confidence in the system.

i think the point of an economy is to create bubbles. its up to society to decide where the energy of the bubble should be focused. i would rather we had a bubble economy focused on building schools, bridges, and roads than big screen tvs, offshore accounts, and wall street investors.
posted by Glibpaxman at 5:38 PM on November 30, 2008 [3 favorites has favorites]

but also the notion that government could engineer economic recovery by favoring the public sector at the expense of the private sector. New Dealers raised taxes again and again to fund spending.

So maybe Amity should go back in time and ask all those people hired into WPA jobs if they'd have perferred that the government throw all that money at the assholes who caused the problem to begin with rather than giving them "a short-term, make-work project... to mask the anxiety of one who really didn't have regular work with long-term prospects". I wonder what the answer would have been, hmmm. Actually, wait, he doesn't even have to go back in time cuz guess what, some of these people are STILL ALIVE!! Let's ask them now.
posted by spicynuts at 5:43 PM on November 30, 2008 [3 favorites has favorites]

its not science because its impossible to predict results with 100% accuracy.

In the late 19th century we discovered that Newtonian mechanics did not predict results with 100% accuracy. Does that mean Newtonian mechanics is not science? No; it means that all scientific truths are tentative and/or limited in scope, and subject to revision when new evidence arises.
posted by ZenMasterThis at 5:49 PM on November 30, 2008 [2 favorites has favorites]

Those of you struggling with whether economics is a science may find Neil Postman's essay, "Social Science as Theology" [PDF warning], interesting.

You may consider it then to be part of my ideology that I believe in free
will and in choice; that human beings are fundamentally different
from orbiting planets and melting ice; and that while it is obvious
we are profoundly influenced by our environment, our ideas and
behavior are not irrevocably determined by natural laws, immutable
or otherwise.

In my view economics fits well within what Postman is talking about, being a "science" that ultimately studies human behavior.

Let's not forget how much we love to legitimize what we're doing by calling it science. Economics may is a fruitful field of study, but I don't think it's science. The assumptions upon which it rests-- economic rational actors, the concept of a perfect market, etc.-- must be taken as a matter of faith.
posted by Monsters at 6:08 PM on November 30, 2008

Malor - great comment, and so true. Economics is a little bit of science and a *lot* of art, as in: how creatively can you spin your particular brand of economic analysis and convince the most people?

I got an early education in the immense bullshit involved in economic theory in my freshman macro econ 101 course. My professor began class by stating:

"According to economic theory, if McDonalds is selling hamburgers for $1.00 and Burger King is selling chicken sandwiches for $2.00, you will buy the hamburger."

I raised my hand and said, "Umm, I want a chicken sandwich, so I'm going to Burger King."

My professor responded, adamantly, "No, you will buy the hamburger at McDonalds"

Rinse, wash, repeat the next few minutes as we parried back and forth over this issue. At the conclusion of our discussion Dr. Baird resorted to the equivalent of my parents saying "BECAUSE I SAID SO."

Needless to say, I've had a hard time with economic 'doctrine' ever since then.
posted by tgrundke at 6:09 PM on November 30, 2008

Economics is a science in the same way that meteorology is a science: to the extent that they can, they are able to examine data and explain why something happened. They are also fairly accurate when they predict what is going to happen tomorrow or the next day. Neither has any certainty about what is going to happen one week from now. And neither has a clue as to what will be going on one month or year from now. There are just way too many variables.
posted by flarbuse at 6:11 PM on November 30, 2008 [1 favorite has favorites]

tgrundke: Apparently your professor hasn't taken Economics 201.
posted by amuseDetachment at 6:16 PM on November 30, 2008

As I understand it, and I'm definitely not an economist, its not a problem of you wanting the chicken and not the beef; that's just a lazy prof that doesn't want to teach in more than one variable examples at a time and to not include statistics in his analysis - which, to be honest, may have been too complicated for an introductory course. As any economist will tell you, I'm sure, both multi-variable analysis and the statistical approaches are the bread and butter of real day-to-day economics.

The problem does seem to be an almost willful ignorance of these principles, however, taken out to the nth degree by thousands of different people to have caused our current situation. You know, that does sound a bit like voodoo, now that I think about it.
posted by i less than three nsima at 6:20 PM on November 30, 2008

I haven't finished Krugman's "Amity Shlaes" rebuttal yet, but so far, his entire argument is "Keynes disagrees, so there."

That's not what I'm reading. It looks to me like he's elucidating Keynes' arguments that lower wages wouldn't lead to higher employment under depression conditions:

a) lower wages would be matched by lower prices, leaving real wage unchaged
b) money supply might be larger but market mechanisms for getting it into hands ready to use it as capital are too weak
c) individual wealth in the mattress is worth more but doesn't translate into spending or investiment because individual debt is also worth more

It's entirely possible I don't understand these points and there's a leap of faith in some Keynesian theory required to believe each of these are true (thus making it "Keynes disagrees") but they look like real arguments to me.
posted by weston at 6:30 PM on November 30, 2008 [1 favorite has favorites]

When consumer confidence falls, spending goes down causing the Keynesian "insufficient aggregate demand". Krugman's call for more government spending is like forcing everyone to go out and buy something on a credit card to stimulate the economy. It's credit card spending because the country has no money to spend, in fact its 11 trillion in debt. That's 100K per taxpayer, plus interest. Even projections from last year (before the downturn and more projected spending) showed that just the interest on the debt would be greater than 100% of revenue in 2030. So, in the long run we're all dead, and our children are broke.
posted by 445supermag at 6:45 PM on November 30, 2008 [1 favorite has favorites]

...just the interest on the debt would be greater than 100% of revenue in 2030. So, in the long run we're all dead, and our children are broke.

Thank god for the miracle of runaway inflation.
posted by hexatron at 7:07 PM on November 30, 2008 [2 favorites has favorites]

but when dig in the sources -- they just made the shit up out of whole cloth!

posted by Malor

So why should anyone consider your comments in threads about the economy more than a big turd then?
posted by Eekacat at 7:11 PM on November 30, 2008

I think one of the reasons that economics has more difficulty moving truthward than other sciences is because it is in a sense the study of trade-offs. Flawed theories in physics don't tend to benefit anyone; flawed economic theories support policies that benefit some. This is virtually axiomatically true. No economic theory that I can think of does not suggest policy changes that help some and hurt others. The belief that we are in the tail of the laffer curve is pervasive because policies that treat this as true benefit powerful people.

When people benefit from flawed science science will be flawed. Look at the science surrounding environmental impacts of pollution or global warming or nutrition. These subjects are not so much more difficult than other aspects of science (except climatology which is) but there is a great deal of uncertainty and misinformation because some people benefit from it. The best thing for economics as a science would be if people didn't care.
posted by I Foody at 7:22 PM on November 30, 2008 [2 favorites has favorites]

Science poses and tests hypotheses, then produces theories with explanatory and predictive power... To the extent that all of economics fits the above definition, it is a science.

That's a bit tautological, no? To the extent that X is fits the definition of Y, X is Y.

It's rather difficult to conduct macroeconomic experiments, so economists generally "test" hypotheses against existing data and look for correlations. They often come up with mathematical models based on imagined behavior. Not to say it can't be useful stuff, but, it's not really a "science"

And the Economics Nobel isn't a "real" Nobel Prize. It wasn't endowed in Nobel's will, but rather is in "honor" of him.

Economics is not science. It's voodoo. --malor

Pretty rich coming from a guy who's constantly posting economic predictions, which seem based on some sort of theory.

Clearly economics has something to tell us, but it's more like sociology mixed with math. It has to start with assumptions about human behavior in aggregate, which is obviously very difficult to model.

Even projections from last year (before the downturn and more projected spending) showed that just the interest on the debt would be greater than 100% of revenue in 2030. So, in the long run we're all dead, and our children are broke.

If the interest on the debt were 100% of GDP then we would have some pretty serious problems. But revenue can be adjusted by changing the tax code.

But what's also important to remember is that the GDP itself grows, and the amount it grows changes depending on how much unemployment there is. So either the government can allow 9% unemployment (which some people are predicting for next year) or it can spend a bunch of borrowed money on "busywork" for people to do to keep them employed. Those people then have something to do and some money to spend which helps to boost the GDP.

If they let the 9% go unemployed, not only is there widespread suffering, but tax revenues actually go down because the economy is shrinking. Then, rather then interest on the debt taking a higher portion of the budget because we're borrowing, interest on the debt now take more of the budget because the budget is less.
posted by delmoi at 7:52 PM on November 30, 2008 [1 favorite has favorites]

So why should anyone consider your comments in threads about the economy more than a big turd then?

if you rub a big turd long enough, it shines just like gold
posted by pyramid termite at 7:52 PM on November 30, 2008

...it is in a sense the study of trade-offs.

Trade-offs are the stuff of engineering, not science.

Hmm ...
posted by ZenMasterThis at 7:53 PM on November 30, 2008

No; it means that all scientific truths are tentative and/or limited in scope, and subject to revision when new evidence arises.

Which is why Economics is not a science.
posted by Pope Guilty at 8:22 PM on November 30, 2008

Pope Guilty: What's your point? Eg., physics was subject to significant revision in the late 19th century based on new data; that doesn't mean that physics up to that point wasn't science.
posted by ZenMasterThis at 8:29 PM on November 30, 2008

Eg., physics was subject to significant revision in the late 19th century based on new data; that doesn't mean that physics up to that point wasn't science.

*woosh*
posted by Pope Guilty at 8:45 PM on November 30, 2008

Pope Guilty, economic theory often gets reworked in light of new evidence.

I appreciate your take on it, though. I think the issue is more that in a system involving billions of semi-rational human decision makers, it is very difficult to decide what is evidence, to trace a link between cause and effect.
posted by magic curl at 8:52 PM on November 30, 2008

Clearly economics has something to tell us, but it's more like sociology mixed with math.

So it's doubly mixed with math, then. Sheesh.
posted by raysmj at 8:56 PM on November 30, 2008

Economics is not science. It's voodoo.

You don't understand science. Name the scientific discipline where leading authorities don't disagree and contradict each other on the field's central issues.
posted by Crotalus at 9:20 PM on November 30, 2008

Krugman's Monday column: "Deficits and the Future"
posted by Glibpaxman at 9:22 PM on November 30, 2008

in science you can run an experiment in Germany and have results then email the experiment you ran to colleagues in Japan, Egypt, India, US, Brazil, and China and all of them will get the same result if they follow the instructions.

in economics this will never happen because the experiments are on the people alive at that time. rerunning an experiment would require a time machine or a few million sentient supercomputers.
posted by Glibpaxman at 9:28 PM on November 30, 2008

in economics this will never happen because the experiments are on the people alive at that time. rerunning an experiment would require a time machine or a few million sentient supercomputers

Which of course, doesn't mean that economics is not a science. It merely means that its subject matter is not amenable to classic experiements. Many branches of science are like this. Meterology being the easiest parallel.
posted by Crotalus at 9:30 PM on November 30, 2008 [3 favorites has favorites]

It merely means that its subject matter is not amenable to classic experiements. Many branches of science are like this. Meterology being the easiest parallel

social scientists do very good work. the trouble is the observer is part of the equation in whats being observed so calling it "science" in the same sense as biology, physics, or meteorology doesn't work. its qualitatively different.
posted by Glibpaxman at 9:47 PM on November 30, 2008

Debating whether economics is science is a brutal way for this thread to go. Wreaks of "my science is better than yours". How about debating the ideas around strengthening the economy? Can someone give me insight into the supply-side side of the debate? I admittedly am a neophyte when it comes to economics but I have been consuming a lot of CNBC content these days and guys like Kudlow (seems like a douchebag, but I digress) are having fits with the "socialist" stuff. Unfortunately there has been precious little substance to their argument to back up their hysterics. The Shlaes article is drivel as she proposes precious little as an alternative. Anyone?
posted by dieselid at 10:38 PM on November 30, 2008 [1 favorite has favorites]

This is a great book! I'm lucky to have chance to read it two day before.
posted by carol68 at 11:41 PM on November 30, 2008

Shlaes response to Krugman's argument is nonsensical.

Krugman: The best course of action is a Keynesian stimulus package based on building infrastructure.

Shlaes: Krugman is an idiot if he thinks that higher taxes and a higher minimum wage will get us out of this mess.

Krugman himself has criticized FDR for raising taxes in the 30s, and while he probably is for a higher minimum wage, no where does he say that raising it has anything to do with the current financial crisis.

It's so hard to take intellectuals on the right seriously when all they do is spew out knee jerk arguments on issues about taxation and labor.
posted by afu at 12:58 AM on December 1, 2008

but when dig in the sources -- they just made the shit up out of whole cloth! ...Economics is not science. It's voodoo.
- Malor

So why should anyone consider your comments in threads about the economy more than a big turd then?


Because Malor is a witch-doctor.
He knows voodoo.
posted by -harlequin- at 2:17 AM on December 1, 2008

Ah I hadn't seen this - many thanks for linking.

The comparisons to the thirties are interesting but I wish they'd gone deeper; for example, 1929 saw a complete collapse of the equity markets, driven by many of the instruments we take for granted, for example mutual funds. Of course back then they were known as "investment trusts", and the assets these funds could accumulate and the leverage they brought to bear played a significant role in the run up to the crash.

Now our current crisis is driven largely by another class of instruments - credit derivatives - but stepping back we can see a common lesson from both disasters - lack of strong regulatory control.

The Stock Market back in 1929 was a minefield for the cautious investor. Galbraith ('The Great Crash', 1954/1997) writes a key cause of the collapse was lax securities (read that as "non existent" by today's rigorous standards) supervision and associated problems.

For example, at one point in 1928 requirements to purchase shares on margin were only 10%! By contrast, today most stocks are 50%, sometimes higher and sometimes stocks are deemed by the SEC to not be marginable at all. The required margin is a function of multiple variables and changes often (disclaimer: I never trade on margin myself, so someone please correct if there are lower rates. There may be, but not across the board and by no means 10% - I seem to recall the lowest available today is 30%).

And what was worse than the unrealistically low margin requirements, folks could borrow the necessary deposit money from their broker to purchase securities. THE SAME BROKER YOU'D BUY THE SECURITIES FROM. Meaning all you needed was a view on the markets and a broker and you too, could load up on all the securities your tolerance for risk (or broker) would allow. No need to pony up your own cash, no messy credit checks. Worse case - you'd lose your securities. That you purchased with 100% credit. Also - as strange as this sounds now - there were minimal laws in place regarding the disclosure of information related to the shares you purchased; companies (and brokers) made up all sorts of rosy pictures about the firms future prospects.

And The SEC had no teeth back then; banks were getting away with all sorts of conflicts of interest - forming companies to be taken public, forecasting earnings, pitching the shares to the public, forming investment trusts to hold the same companies they'd just taken public, heavily advertising both the trusts as well as the companies the trusts held, lending money to the retail crowd to purchase securities, holding positions themselves as they hyped up the shares and selling at the top, (we call it "pump and dump" today, and it's illegal) on and on.

All sorts of crazy stuff, totally out of control, total madness.

Indeed, Galbraith's view is reinforced by passage of The Securities Act of 1933 and further tightening in The Securities Act of 1934, both of which laid the foundations for the highly regulated equity markets we've got in place today.

So what did we see in the run up to our current problems?

Just look back to 1929 and change a few of the operative phrases; yes, much of the same nonsense, but focused not in the now heavily regulated equity markets but rather in the largely unregulated credit derivatives markets.

So I'd suggest its clear we really have to start to regulate the credit markets, first and foremost.

But even as The Fed's are pushing forward plans to start regulating Credit Default Swaps and get centralised clearance in place, we're seeing some reluctance to move forward at the State level; not good, we've really got to tighten the screws on these instruments NOW, put multiple levels of controls in place and then later, if viable, relax regulations.

Regardless, regulatory reform will come and some day Credit Default Swaps and other credit derivatives will be routinely used, but used as they were intended, not as instruments of speculation. Its been the same with pretty much any other asset class developed over the last century or so; created, used, abused and then heavily regulated. It won't be any different this time.


The other point is we can't readily stop the international movements of capital; it's just too essential to global commerce. But therein lies a particularly intractable problem - the extremely large concentrations of capital held by hedge funds and other players.

What do we really know about hedge funds, for example? Well, not much if the industry continues to have it's way.

Regardless, estimates abound regarding how much money they really control but it seems that we're talking (before the recent difficulties, of course) of maybe two trillion to three trillion dollars. Serious capital, in other words, and even more impressive considering these funds operate almost all the time in a highly leveraged manner. And that's dangerous, in and of itself.

Back in 1992, for example we saw Britain blown out of the ERM because of well publicised hedge fund activities.

The international bond markets were roiled in 1994, again allegedly due to the activity of hedge funds.

Nobody is precisely certain of what they were up to in 1997 but we're all pretty certain some big funds were involved in the Asian financial collapse.

In 1998 we had a good picture of their activities with respect to Honk Kong and Australian currency markets as well as the near total collapse of LTCM.

Again, the only thing that's going to help here is more regulation. You can't stop the pools of capital from accumulating in off shore centres, but what we can do it control how they are used.

Now lots of these funds operate, for all intents and purposes, with impunity. If they do get caught circumventing local laws they consider and financial penalties the cost of doing business. Criminal charges are seldom sought and even if they are, if someone is sitting in a country at best indifferent to the United States (worst hostile) they won't be extradited. I don't know how to change that but I do identify this as a problem.

Once again, it seems tighter regulations are the answer but consistent, global regulation. The United States and Europe can only do so much alone. But the big players who operate purely for profit, the agents who totally lack a social conscience have to be controlled somehow.

I think the way forward here really is, much link the aftermath of the 1929 collapse, far more regulation and unlike 1929, harmonisation across much of the G20.

Thanks again for posting the links - lots of good reading there!
posted by Mutant at 2:30 AM on December 1, 2008 [9 favorites has favorites]

But still I think one aspect of comparing 29-08 is missing. In my opinion the actual economy is propped up by 80% of purchases which are non-essential. Let's say a bigger plasma, new car every 3 years and so on. Some time those purchase are hidden, like the smartphone i got for free from my mobile provider for subscribing for another 2 years.

I bet in 1929 most of the purchase of a family (except food) were essential items, like a stove that will hold 30 years, or a home they would live in and not sell for profit after 3 years.

So now people are locked in a situation where they cannot downsize costs - those non-essential items still cost, even if not used (heating on a too large home, repairs on 2-3 cars, cable subscription to use the tv and so on), or even indirectly through depreciation.

While in 29 "survive" would probably mean eating less expensive stuff (or eat less or/and heat less) now would be "get rid of non-essential items that cost money" - much more difficult. And because those items are paid on credit, does not matter what you try, even if you heat only one room, you will still have to pay for the McMansion.

So maybe the solution is not allowing people to make more debts to buy more crap and "reinflate" the economy, but punishing credit companies by essentially allowing consumers to cancel their debts without going bankrupt. Bet that next time the credit companies will make sure you *really* can afford that home ?
posted by elcapitano at 4:20 AM on December 1, 2008

While in 29 "survive" would probably mean eating less expensive stuff (or eat less or/and heat less) now would be "get rid of non-essential items that cost money" - much more difficult.

It's more difficult to survive without cable TV and a third car in good repair than it is to survive while eating less in the cold?
posted by roystgnr at 5:16 AM on December 1, 2008 [1 favorite has favorites]

Thanks (as usual), Mutant; I was hoping you'd come along to redeem this thread.
posted by languagehat at 6:01 AM on December 1, 2008

Which is why Economics is not a science.

This is correct.
posted by oaf at 6:14 AM on December 1, 2008

It's more difficult to survive without cable TV and a third car in good repair than it is to survive while eating less in the cold?

no, it is more difficult if you are contractual obliged to pay for Cable TV / Car rates etc than if you don't. If I own 3000 a month and go from making 4000 to 2000 I'm in much worst shape of someone owning 500 a month and making only 400. He needs only 100 more to break even, I need 1000. This is why I say let give the people the chance of forfeiting this debts and carry on - better than giving them more credit.

That is, while the frugal household will have few non-essential committments, the "typical" household will have a lot. So if the crunch comes, the frugal will be in much less trouble than the "typical". Just because it is possible to live on less it does not mean you can do it (try downsizing that nice holiday flat..)

One could read "Life in the woods" from Thoreau, he also observed the families "enslaved by debt on the homes" that could not afford to sell because they will make a loss. Many other things he wrote are crap btw.
posted by elcapitano at 6:17 AM on December 1, 2008

Just because it is possible to live on less it does not mean you can do it

No, actually, that's exactly what that means. You want to give people a free pass on debt, and this is somehow going to encourage responsible spending? How does that work?

It's also ridiculous that someone earning 400 a month who owes 500 is better off than someone who earns 2000 and owes 3000. Sure, the second guy has a bigger amount to make up, but he's also likely to have more nonessentials to cut. There's a huge difference in quality of life between eating less in the cold (thanks roystgnr) and selling that 'nice holiday flat'.
posted by echo target at 8:26 AM on December 1, 2008

NYRB WTF
posted by andromache at 8:58 AM on December 1, 2008

My comment was stupid. This is a good post with thoughtful comments.
posted by andromache at 9:12 AM on December 1, 2008

dieselid - here's my simplistic understanding of supply-side versus demand-side thought:

The Supply Side argument is basically that is you give more money (often through tax breaks) to investors and businesses, they will invest this money in the economy, investing in businesses to expand them and hire more people, and thus unemployment will go down and the economy will grow.

The Demand Side says that the true weakness in the economy is lack of demand, and that government spending should be directed at bolstering employment more directly, which will keep up demand and thus help the economy recover and grow.

The important thing to realise that tax cuts and government spending are - for government finances - the same thing. It doesn't matter if you spent $1 billion or give $1 billion worth of tax cuts in terms of your books - it only matters in terms of who it goes to.

Supply side economics has been very influential in the West - especially in the US since the election of Reagan. Critics of supply side say that it is a very inefficient way to stimulate the economy, because while giving money to the supply side might eventually "trickle down" through investment in the economy, a lot less of this money will get down to stimulate demand than if it were just spent in ways that helped the bottom (the majority of demand in the economy) in the first place - through tax cuts for the majority or government spending. Also, supply-side economics has been historically correlated with a noticable growth in income and wealth inequality even in boom times, and a large growth in government deficits (under Reagan and both Bushes).

To be honest, I'm not sure if the current economic crises are really about a lack of demand - and as such demand or supply-side solutions might not really fix the real problems (which seem to be more about a true clusterf&%k in the financial sector, combined with an ongoing transition from a manufacturing economy to a service economy, leaving behind a large gulf between well-paid professional service sector jobs and low-paid non-professional service sector jobs - and also increased competition from other countries, which is to be expected). But demand-side spending could cushion the effects of economic change, and thus ease the transition.
posted by jb at 9:17 AM on December 1, 2008

To further the demand/supply side explanation:

Keynes was promoting his demand-side economics at a time of deflation, when prices (and thus wages to follow) were falling - deflation, which can snowball. He basically saw the demand-side spending as a way to stop the snowball of deflation by raising demand and thus prices and thus wages and thus the economy. Basically, economies in Europe didn't lack stuff, they lacked people who could afford the stuff. I can't imagine what supply-side economics would have done at the time - if the money had been innvested in hiring people (always a question with supply-side), you might have had more employment, but you would also have had a bunch more stuff, and that wouldn't have helped demand at all.

Whereas when supply-side came in, it was in response to "stagflation" - an economy that was stagnant, but suffering from inflation (so not a lack of demand). (I'm a lot less clear on the details - I've never taught a class on 1970s economics the way I did a few weeks ago on the 1920s and 30s). The tax cuts and other supply-side politicies were intended to stimulate the economy by encouraging the growth of businesses, but also went hand in hand with monetary policies designed to control inflation (high interest rates).

Recently, we've had a lot of inflation (esp in food and commodities - its been disasterous in developing countries, but still hard on the bottom half of developed countries), but now people are talking about deflation (as commodity prices - esp oil - start dropping). And also a credit crunch - because of the financial sector's shenigans, no one is lending to anyone - which is really bad because the whole world operates on credit.

(notably - Credit is not a modern thing - pre-modern economies also operate heavily on credit, since cash is rare. Even the lower classes were constantly extending small amounts of credit to each other. But that credit is often very personal, face to face credit - thus the connections between credit and personal worth or character.)
posted by jb at 9:30 AM on December 1, 2008

in science you can run an experiment in Germany and have results then email the experiment you ran to colleagues in Japan, Egypt, India, US, Brazil, and China and all of them will get the same result if they follow the instructions.

That definition could be used to disqualify big chunks of astronomy, paleontology, evolutionary biology, meteorology, and geology as "not science".
posted by straight at 1:55 PM on December 1, 2008

delmoi: It's rather difficult to conduct macroeconomic experiments, so economists generally "test" hypotheses against existing data and look for correlations. They often come up with mathematical models based on imagined behavior. Not to say it can't be useful stuff, but, it's not really a "science"

It's rather difficult to conduct large scale gravitational experiments, so physicists generally "test" hypotheses against existing data and look for correlations. They often come up with mathematical models based on imagined behavior. Not to say it can't be useful stuff, ...
posted by atbash at 2:57 PM on December 1, 2008

Bush Administration Weakened Lending Rules Before Crash
posted by homunculus at 5:47 PM on December 1, 2008

Beyond the Bailout State: Roosevelt's Brain Trust vs Obama's Brainiacs
posted by homunculus at 12:30 AM on December 2, 2008

The biggest problem with supply-side, the one that nobody really talks about, is that it gives money to people who don't need to spend it. Given a choice between creating jobs and just pocketing the cash, the rich generally just deposit the money into their bank accounts. You give a poor person money, however, and s/he's going to go straight out and spend it on necessities and maybe a few low-level things like books, DVDs, or videogames.

The only way to make supply-side work is to find a way to require the money to be spent on job creation; since supply-side economics are largely the domain of "don't you fucking tell me what to do with my money!" types, this is flat-out never going to happen.
posted by Pope Guilty at 10:53 AM on December 2, 2008

The other thing is that you have to give the poor enough money to make it work. Those little piddly $300 checks were next to worthless, because most of them went straight into paying off debts that were being neglected anyway.
posted by Pope Guilty at 10:56 AM on December 2, 2008

What should we do about the global economy?

Fix it! Fix! It! FIX IT!
posted by kcds at 12:00 PM on December 2, 2008 [1 favorite has favorites]

Well, maybe supply-side could work (though very inefficiently) if its a matter of needing capital investment in the private sector to get your economy going - but Keynes was responding directly to a period of depressed demand, so was looking to stimulate demand.

Personally, I'm all for the infrastructure investment (which is a huge subsidy to businesses as well as citizens) as a means of employing people and keeping up demand in a down economy. I think one of those "infrastructure" things could be subsidized health care, which is also a big subsidy to both businesses as well as individuals.
posted by jb at 2:30 PM on December 2, 2008

Obama announces his New Deal for the 21st Century
posted by homunculus at 9:40 AM on December 7, 2008

Paul Krugman's depression economics
posted by homunculus at 12:22 AM on December 8, 2008

Finily!
posted by homunculus at 11:25 AM on December 10, 2008

Bailout Oversight: Too Little, Too Late?
posted by homunculus at 5:32 PM on December 11, 2008

Here's a new piece by Joseph Stiglitz:

Capitalist Fools: Behind the debate over remaking U.S. financial policy will be a debate over who’s to blame. It’s crucial to get the history right, writes a Nobel-laureate economist, identifying five key mistakes—under Reagan, Clinton, and Bush II—and one national delusion.
posted by homunculus at 1:13 PM on December 12, 2008