Sunday, October 11, 2009

Bad Economist vs Good Economist!

I started reading Henry Hazlitts book this weekend, "Economics In One Lesson" and want to share what I got out of the first two chapters, Bad Economist vs Good Economist. So a bad economist will only see or project the immediate economic effects from an event while a good economist will see and project the immediate and long term econimic effects of an event.

Heres Henry Hazlitt's example:
A kid takes a brick and smashes a bakers window, runs away and gets away. A Bad economist would pretty much say sucks for you now you need to spend $250 to have that window replaced. A good economist would pretty much say that sucks but hey the $250 you were saving will now be spent on the repair. The $250 will be put back into the economy, paying the salaries of the person who created and cut the glass, and the salaries of the poeple who came in and replaced the window. Yeah you loose some of your savings, but your $250 had a great effect on a ton people you don't know, securing their jobs for one more day keeping the economic cycle going.

My example:
A stimulus plan was used to give the people $600 to encourage spending. Other similar situations would consist of bank bailouts, corportate stimulus, etc. I would say the the bad economist might think this great, we'll print a lot of money and just give the money to the entire working class or to banks or other failing companies. Giving the people more money to spend and keeping banks and other companies in business is good for the economy. (If this is the case why not just give everyone 1 trillion dollars when they are born so they will never have to worry about money ever again, allowing us to living in a free utopian society) anyway I feel the good economist might feel stimulus is horrible for the economy! If you are just merely printing up money out of thin air then the money already out there will loose its value becoming worth even less and causing inflation to rise. Your giving people $600 but in return the value of the dollar will decrease causing the prices of commodities to increase. Your giving people $600 dollars but through taxes and elavated food, metal, etc prices will increase and the people will be suffering later on down the road. As for banks and business (A) maybe it was there time to go due to people not liking their interest rates, products, and services, (B) maybe people would love to contribute to the wellbeing of those business but people just don't have the money. Instead of devalueing the dollar lets raise bank interest rates, encourage investing, and cut taxes. Doing so will honestly give the people more money to circulate, and hopefully kick start the economy over time.

What are your Thoughts?

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