Businessmen and Economics

[phantom power]

Krugman has done several posts over the last year about the theme: "Macroeconomics is not like Microeconomics," which is a theme that ought to get more air time. Things that are locally successful for an individual or a business do not work when everybody does them simultaneously. Krugman calls it the Lake Woebegone fallacy -- "...all the children are above average"

A brief thought on something I’ll try to expand on later. Leaving aside all the questions about what Mitt Romney did or didn’t do at Bain — and about his self-aggrandizing double standard — there’s an even broader question: why does anyone believe that success in business qualified someone to make economic policy?

For the fact is that running a business is nothing at all like making macro policy. The key point about macroeconomics is the pervasiveness of feedback loops due to the fact that workers are also consumers. No business sells a large fraction of its output to its own workers; even very small countries sell around two-thirds of their output to themselves, because that much is non-tradable services.

This makes a huge difference. A businessman can slash his workforce in half, produce about the same as before, and be considered a big success; an economy that does the same plunges into depression, and ends up not being able to sell its goods. Nothing in business experience prepares one for the paradox of thrift, or even the inflationary impact of increases in the money supply (which is real when the economy isn’t in a liquidity trap.)

And I haven’t even mentioned the fact that presidents need to work with Congress, and face far more limits on their authority than CEOs.

The idea that what America needs now is an executive type is just foolish.

http://krugman.blogs.nytimes.com/2012/01/10/businessmen-and-economics/