Wednesday, January 09, 2013

Challenging the Classical Position

According to the classical position, when incomes fall, wages and prices will fall too.  In the Keynesian theory, government spending will reduce incomes when taxes are raised.  So how can both the government and households keep spending when their incomes are reduced?

One can't ignore the foreign sector.  If America keeps importing goods, then spending will eat the assets of the public and private sector.

The cure for what ails us is not austerity, but innovation and new and improved goods.  If America quits spending, America will cease to innovate.

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