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Economics is Simple

Some people, including Paul Krugman of the New York Times, claim that economics is so complicated that the average person can’t understand it.

This may be true.  But it also may not be true.  The anti-thesis of the idea that economics is complicated is Caruso Economics.  This is the economics of, say, two small islands with, say, 100 people on each island.  What is the best economic policies to have?  Your choice of economic theory for the two islands then could be applied to national and international economics.  The two islands and the international situation are basically the same phenomenon.

Another way of understanding Caruso Economics is with the idea that national and international economics is not much different from the economics of your household or the economics of a small business.

From the viewpoint of Caruso Economics, let’s ask these questions:

“What would happen if your household spend 40% more than it took in?”

The answer is simple.  Sooner or later your credit would max out; the interest rates would rise; eventually you wouldn’t be able to afford the interest payments; and eventually you would default on your loans and then finally declare bankruptcy.

This is exactly what is happening in Greece today, and their economic policies have been similar to the U.S. policies.  The only difference is that because the U.S. economy is so much bigger, it will take a little longer for our credit to max out.

Thus if we practice rational austerity now, it will be a whole lot less painful than if we wait until we are in Greece’s shoes.

(See my policy on a Green Economy and other economic policies)

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