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Spend More or Less?

Aug 29, 2010 • Economic Debates, Macroeconomic Measurement, Regulation • 221 Views    No Comments

It was perfect. On the left side of the NY Times Op-Ed page, David Brooks defended the austerity approach. On the right was Paul Krugman saying spend more. Those are the alternatives. Maybe now it will be easier to choose one?

Using Germany as his model, David Brooks presented the facts. He quoted economist Gary Becker saying that, “…the Americans borrowed an amount equal to 6 percent of G.D.P. in an attempy to stimulate growth. The Germans spent about 1.5 percent of G.D.P. on their stimulus.” Now, the American economy remains sluggish while Germany has 9 percent growth and unemployment at “precrisis” levels. Brooks’s conclusion is that the U.S. needs to pay attention to the fundamentals. Fundamentally, we are very good at innovation. Our political institutions, however, are leading us in an unproductive direction.

Krugman meanwhile says that we have to focus on unemployment. And focusing on unemployment takes us, inescapably, to the fact that we are in the midst of a recession. Why? Stimulus spending has been inadequate.  On the fiscal side, more spending is the answer; on the monetary side, the Fed has to inject more money into the economy.

A summary? Brooks says less is more. Krugman says more is more.

The Economic Lesson

The two economic thinkers we can turn to are F.A. Hayek and John Maynard Keynes. A wonderful rap from econstories.com summarizes each man’s perspectve.

 

 

 

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