Posted by: erichosemann | January 16, 2010

Bastiat & Cochrane

From John Cochrane’s New Yorker interview:

It is even deeper than saying people will respond by saving. First of all, there’s this presumption that spending is good and saving is bad—except that we also want saving to be good and consuming bad. Let me try to put it (like this): You save money. It goes into a bank, which lends it out to somebody to buy a forklift. Why is that bad, but you buying a car with the same money is good? So, presumption number one, that consuming rather than saving is good for the economy, I don’t get that. The Chinese are investing fifty per cent of their income, and they seem to be booming.

Second, just on basic accounting: I’m going to be the government, I’m going to borrow from you, and I’m going to spend it. So over here, that’s more output. But you were going to do something with that dollar, which is now invested in government debt. Now, what else were you going to do with it? Well, you were going to buy a mortgage backed security; you might have bought a car. You were going to do something with that money. So, on basic dollar accounting, if I take that money that’s a dollar more demand, but you have a dollar less demand.


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