Krugman Goes Medieval

A Dark Age of macroeconomics (wonkish) – Paul Krugman Blog –

“There’s no ambiguity in either case: both Fama and Cochrane are asserting that desired savings are automatically converted into investment spending, and that any government borrowing must come at the expense of investment period.
What’s so mind-boggling about this is that it commits one of the most basic fallacies in economics interpreting an accounting identity as a behavioral relationship…
S + T = I + G

After a change in desired savings or investment something happens to make the accounting identity hold. And if interest rates are fixed, what happens is that GDP changes to make S and I equal.
That’s actually the point of one of the ways multiplier analysis is often presented to freshmen.”

(Via NY Times Blogs.)

Ouch. Fama and Cochrane made a freshman mistake. That’s why political ideology is soft-think.

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