Krugman Goes Medieval

A Dark Age of macroeconomics (wonkish) – Paul Krugman Blog – NYTimes.com:

“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…

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.