Monday, November 29, 2004

Crooked Timber: Fighting Inflation as Class Warfare

Great discussion of the politics of macroeconomics.

Macro has always been the messy part of economic theory. Reality is much more complex than any workable model could ever be. This state of affairs has had the salutary (for economists, anyway) of letting some pretty silly theories maintain a veneer of legitimacy long past their sell-by dates. Remember Arthur Laffer? He was the guy who said that Reagan's tax cuts would shrink the deficit. Despite the evidence to the contrary, he still has adherents, because, natch, they can read the data any damn way they please. Perhaps the best statement of the realities of macro came from my macro professor. When a student pointed out that a theory the prof had just explained was refuted by the evidence of the real world, he replied, "The real world is a special case, which need not concern us here."

The linked posting casts inflation in class terms, and makes a pretty good case. The interesting question is, of course, about what happens next. Bush's fiscal policies are setting us up for big jumps in interest rates, and inflation was rolling at 20% annulized clip last month. But given the over-leveraging ofthe American consumer, a big boost in interest rates is likely to bring a wave of foreclosures, bankruptcies and other fun happenings.


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