Tuesday, February 17, 2009

The bright, shiny, happy wisdom of Paul Krugman

I know we're all worried, what with the economy and birds downing all our helicopters, but Paul Krugman is happy. He's figured out a solution. Turns out that even if the stimulus plan doesn't work, in the long run, the economy will recover on it's own. What's the long run mean? A couple of decades or so.
Now, the Great Depression was ended by massive fiscal expansion, in the form of World War II. Maybe that will happen again; but so far policy seems inadequate to the task, and the political environment raises concerns about whether we’ll be able to do much more.

So we may end up waiting for the economy’s ills to go into spontaneous remission. Which raises the question, how does that happen?

And it turns out that this is a question our grandfathers thought about quite a lot. Maybe it’s time to dust off Keynesian business cycle theory.
Recovery comes because low investment eventually produces a backlog of desired capital stock, through use, delay, and obsolescence. And eventually this leads to an investment recovery, which is self-reinforcing.

And what do we mean by use, delay, etc.? Calculated Risk had a nice piece on auto sales, which I find helps me to think about this concretely. As CR pointed out, at current rates of sale it would take 23.9 years to replace the existing vehicle stock.
As autos go, so goes the capital stock. In the long run, we will have a spontaneous economic recovery, even if all current policy initiatives fail. On the other hand, in the long run...
...we'll all be dead. So no need to worry, if government isn't up to it, we all just need to hunker down for a little over two decades until business is sufficiently destitute to need reinvestment and our infrastructure resembles that of late seventies Russia. Then we can start growing this bitch of an economy! Of course we might need to reinvest in everything because we've devolved into an agrarian barter economy and have been relearning iron age technology and how to exist without power for about a decade.

Technically at some point our devolved society would return to using the technologies of the 19th century, perhaps our great-grandchildren will re-unlock the secrets of the coal mine and those bicycles with the one big wheel and the small back wheel. Then the economy will grow, just as the Keynesian business cycle predicted! Happy hunkering, the decades will fly by. Horde the secrets of fire.

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