A varied and sometimes erratic record of what I'm learning inside and outside of the classroom

Monday, November 8, 2010

Economics: Where Is the Key?

First of all, I would like to point out that I took high school economics in summer school for a reason--to get it over with as quickly as possible. But I think we would all agree that it is important to understand the basics of how the economy works, despite the fact that some of us (i.e. me) have little natural affinity for the subject. So here goes my attempt at understanding.

A lot of the material I looked at regarding Keynesian economics and the American economy today had a very negative view of the effects of Keynes' system, as evidenced in this rather biased video explaining how Keynesian economics works, with an emphasis on its shortcomings.



It seems to me that there are only long-term solutions with few immediate effects (i.e. unpopular solutions), or short-term solutions with immediate results that do nothing to fix the long-term problem; if anything, they make the problem worse. Economic solutions are, in a word, sticky. Complicated. Complex. There is no over-arching solution that will magically fix all economic problems with the waving of a wand or the signing of a bill. I think Arnbjorn Ingimundarson, CFA and stock investor, puts it quite nicely in his article on Seeking Alpha.com (P.S. Thank you, Dalton, for sharing this on Diigo):
At the heart of the problem is what I consider the main flaw in Keynesian economics: it only seems to work in one direction. Politicians who seek re-election have an incentive to give their voters instant gratification. Since people do not feel the pain of fiscal deficits as immediately as they feel reductions in government benefits or a general slack in the economy, it makes political sense to roll the problems forward and let someone else deal with them. When times are good, there is rarely much talk of reducing government expenditures to cool the economy down and reduce the public debt.
This is one reason some people lose sleep over the national debt; it keeps growing, and what are we going to do about it? What will happen if we keep going the direction we're going? It probably won't be pretty. It seems like the long-term solutions are always the least popular and therefore least likely to happen with politicians seeking re-election. Would the economy benefit from disentangling from political influence? Or would that even be possible with the government and its influence growing every year?

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