Sunday, June 7, 2009

Krugman Disses Savings

An economy will never grow unless individuals and corporations save, so that the savings can be invested in creating more goods. This is simple basic economics, which apparently Nobel Prize winning economist and NYT columnist, Paul Krugman, just can't seem to grasp. Krugman writes:

...if there were a shortage of savings, the economy wouldn’t be depressed.
In actuality what a recession is all about is a decline in a certain type of "savings". Money printing by the Fed enters the savings sector and causes funds to be added to investment portion of the economy. It is this type of "savings" that is in decline when the Fed slows money printing that causes the recession.

By using the term "shortage" Krugman adds further Keynesian confusion to the discussion, since a shortage can only occur when price controls are instituted. What Krugman means by shortage, here, is the Keynesian notion that savings do not equal investment. But, again, how can this occur in a market economy if there are no price controls (in this case on interest rates)?

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