[Politics]
I apologize in advance for an apparently political post, but it is really about story telling.
People use stories to understand their world -- to boil it down to things they understand. No one can truly understand the global economy, though maybe some nobel prize winners get the gist of it. So people, and politicians in particular, tend to use paradigms they can understand. I think that human beings are in fact hard-wired to understand the world through stories, just as we're hard-wired to learn language. Otherwise the world is just too big.
But if you understand the world through the wrong story, you can get into trouble.
I read a piece yesterday about the "belt-tightening" paradigm. In a recession, there's less money. If a family has less money, they need to spend less until they can make more money. Simple. Right? To spend more than you have is irresponsible.
The problem is, what if we're not a family? What if we're a village.
If a village is in a recession, what happens if everyone spends less money? The cobbler spends less money. He decides not to buy as many nails for his shoes. So now the blacksmith has less money. So he doesn't buy a pig to eat. So now the farmer has less money. So he doesn't buy new shoes. So now the cobbler has even less money...
And you get caught in a recessionary death spiral. Money doesn't circulate.
What happens if the government comes along and taxes everyone, and then spends their money for them, let's say by hiring everyone to fix the bridge over the creek? It takes money from the farmer, the cobbler and the blacksmith, and then it gives it back to them. Now they're all working full time, and spending full time.
Aha, but no one has enough money to pay their taxes, because they're in a recession? Okay, so the government borrows money from the Chinese village across the river. And pays everyone to fix the bridge. Soon, everyone is working and earning, and not in a recession any more. And now there are enough taxes to pay back the Chinese.
This is a slightly more complicated story than "when the family doesn't make enough money, everyone has to spend less." But there is a danger in boiling down the world to a story that is too simple. Because the world is not actually that simple.
For example, money. Money seems simple but it's not. The non-intuitive thing about money is that it isn't just the amount of dollar bills flowing around, it's how fast they flow. If I give you a dollar and then you give Joe a dollar and then he gives Delia a dollar, everyone gets to buy a dollar's worth of stuff. There's essentially three dollars in the economy. If I hold onto my dollar because I'm tightening my belt, I essentially take three dollars out of the economy.
At least that's what I remember from freshman economics.
Obviously, I am not someone you should consult about economics. Many smart people in the German government and the Tea Party are convinced that "belt-tightening" is just the thing.
But I do know that you have to be careful which stories you use to interpret the world. If you pick the wrong one, you'll do the wrong thing.
So maybe what this post is really about is the failure of the people in favor of spending more money to come up with a good story. It is not intuitive that you should tax and spend in the middle of a recession. It is not intuitive, to say the least, that the thing you should do when you have less money is spend more.
So let's suppose your in-depth understanding of the complexities of markets leads you to the conclusion that you must spend in a recession and cut the deficit only in a boom. Then you had better come up with a good story. It is no use saying, as Paul Krugman has been doing in The New York Times for years, that mainstream economists have agreed about this since the Great Depression, and have a great deal of data to prove it, including the current American recovery and the continuing European economic death spiral. "Experts agree" just doesn't cut it with people. People need a story they can understand.
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