Economists’ Nightmares

CBO direc­tor Doug Elmen­dorf: “For the econ­omy as a whole, the more peo­ple save, the more money is avail­able for busi­nesses to invest in fac­to­ries, office build­ings, and equip­ment.” (via Ezra)

This fright­ens me because it betrays a bru­tal mis­un­der­stand­ing of eco­nomic mod­els since Keynes:

“Keynes’ intel­lec­tual rev­o­lu­tion was to shift econ­o­mists from think­ing [that] a dog called sav­ings wagged his tail labelled invest­ment to … a model in which a dog called invest­ment wagged his tail labelled sav­ings.” (James Meade, 1975)

After Keynes pub­lished, we grew to under­stand that the level of invest­ment *deter­mines* the level of sav­ings, and not the other way around. This has mas­sive impli­ca­tions for the shape of pol­icy, and Elmen­dorf of all peo­ple should under­stand the basic prin­ci­ples of mod­ern economics.

7 June 2010 – 4:30 pm | By Benjamin Daniels | Posted in Economics | Comments (166)