Here goes nothing….

Well, I have about as much faith in your models as I do in medieval medicine. Remember, to be a science you must attempt to be descriptive. It is not enough to drag around historically revered models and look for confirming evidence.

Savings – investment = Net exports? Oh really? Only if you conflate separate processes that are best viewed separately. Savings does not equal primary financial flows does not equal business investment.

Divide the economy into real and financial layers. In the real economy you have payments for goods and services, wages, taxes, etc, between four nodes: [H] [G] [F] and [W] (households, government, firms, and outside world. If you like you can label payment flows from [H], [G], [F], and [W] to [F] as C, G, I, and X, illustrating PY = C + I + G + NX. On this we all agree.

Now one unavoidable reality of such a diagram is that while any one node can run a surplus or deficit, aggregate surplus is zero. Moreover, domestic surplus equals world deficit (or vice versa, in fact).

So domestic savings equals net exports. Without investment. Investment is a payment flow from firms back to firms which at least on the aggregate level is self-financing. Which is why it is no surprise that in the real world investment is such a volatile a component of GDP and in fact has very little to do with savings.

Surpluses at individual nodes flow through the financial market as primary flows. Or not – when markets freeze up there are no flows. Moreover, financial flows can be used to support business investment (confirming evidence!!!) but can also be used to support deficit spending as well as speculation.

Maybe, just maybe, imbalances in the real economy led to unsustainably high primary flow volume which led to both overinvestment in housing and over-leveraging on Wall Street. The growing trade deficit was part of the problem – Bernanke’s global savings glut. But don’t forget household income polarization — if the top 1% of households receive 24% of income, of course there’s gonna be a helluva lot of money looking for a creditworthy borrower.

But if you assume savings = investment, you have just assumed away the whole problem.

Don’t even get me started on your equilibrium assumption or your production function assumption. Capital is a constraint on output? On which planet? Obviously there’s too much capital chasing too few opportunities. At the margin, capital is available instantly at very reasonable rates. And Demand is not a bottleneck? True only for plant managers in the former Soviet Union.

Shame on you for ignoring how the world works! Don’t obfuscate your mediocre assumptions with a veneer of mathematical sophistication. And certainly now is not the time for smug victory laps!

Tear up those crappy models and attempt descriptive realism.

It’s easy if you try!

The list of economists skeptical of the stimulus is starting to look more and more impressive though I remember reading there weren’t any out there) but I wouldn’t hold my breath for any of the stimulus supporting economists to address it on the merits. Indeed, the ease with which Professor Krugman is able to glibly slap around Bates Clark and Nobel winners without addressing their ideas on the merits is disturbing and, I think, sad for the economics profession.