Scene: Jordan and former colleague, whose views lean far right, are at dinner. Conversation started Entry 146. (More about author and the general content of the Blog, Entry #1.)

Steve: “You asked how much I really understand about economics.”

Jordan: “That’s the question.”

science_rocksSteve: “What’s there to understand? You cannot spend more than you earn…at least not for very long. I mean, what else is there to know?”

Jordan: “Let’s see Mr. Geophysicist. Oil and gas are stored in the ground someplace. Some rocks are more likely than other rocks to hold oil and gas. If I want to drill for oil, I go find someplace with a bunch of rocks.  What else do I need to know?

Steve: “Alright, point well taken. Truth be known I had one economics class in undergrad…and I don’t remember if it was micro or macro-economics.”

TurtleneckJordan: “But I watch Fox News, therefore…”

Steve: “C’mon, that’s not a fair-and-balanced comment. But really, how complicated is economics?”

Jordan: “Real economics…not political economics…is a science with lots of empirical data and structured analysis, just like any science.”

Steve: “But it’s a dismal science.”

Jordan: “I don’t view it that way at all. In fact, I think economics is quite exciting. Some of the fundamentals are not well understood…or worse, ignored, especially politicians and ideologues.”

Steve: “Well, then tell me what you think was wrong with the EEC demanding Greece repay its debts. The demand to repay seems very logical to me. And logical to a lot of other people as well.”

Piggy BankJordan: “I am not advocating shirking financial responsibility. However, let me ask you a question. Who do you think has a better chance of repaying debts – someone who is working or someone who is not working?”

Steve: “That’s a really dumb question.”

Jordan: “No it isn’t. That’s the question that should have been asked as Germany was imposing penalties on Greece.”

Steve: “You mean the EEC, don’t you?”

Jordan: “No, I mean Germany. From everything I’ve read about the agreement, Germany drove the decision.”

Steve: “So you think the loan restrictions are too harsh…were too harsh?”

SpiralJordan: “Absolutely. The restrictions effectively limited Greece’s ability to grow its economy and generate enough income to pay down the debt. The restrictions created a death spiral and effectively killed Greece’s economy.”

Steve: “How so?”

Jordan: “By forcing everyone, not just the very wealthy, to take a large portion of income for taxes and debt repayment.”

Steve: “You mean tax rates matter after all?”

Jordan: “Of course tax rates matter. And it’s not just Republicans who say that. Even your hated John Maynard Keynes said tax rates matter…and that was many decades ago.”

down chartSteve: “You think the loan restrictions precipitated the revolution in Greece?”

Jordan: “Yes. And here’s what’s so amazing to me. After WWI, the Allies imposed harsh repayment penalties on Germany. What happened? The economy collapsed, Germany had no income so it printed scads of money, which was followed by hyper-inflation.”

Steve: “I always knew printing money would cause inflation.”

Jordan: “Be careful. Here’s where you need to study economics. The two are not always so directly linked. In Germany’s case, the amount of money was excessive for the good available. Plus some other factors. But, then what happened in Germany?”

swastikaSteve: “German people rebelled and elected Hitler…and then we had WWII.”

Jordan: “You’d think the Germans might remember their history. But no, Merkel seemed more focused on extracting revenge on Greece for what she thought was ‘fiscal irresponsibility.’ Rather than allowing Greece’s economy to grow and repay debt over time, she put the screws to it. And Germany claimed forcing harsh terms on Greece was really a lesson in fiscal management.”

Steve: “Pardon me for what might seem like an obvious statement…in order to repay the debt, a country…in this case Greece…needs to grow the economy and generate Line chartincome, just like a person needs income to repay debt.”

Jordan: “He’s starting to understand.”

Steve: “And for the program to work, people need to retain a decent percent of income. A country or individual cannot save their way into prosperity. You have to earn the money and then spend most of the money for the economy to grow. My expenses are your income, right?”

Jordan: “By George, I think he’s got it. The rain in Spain…”

Steve: “Tell me one more thing. Should families and government take the same financial actions?”

122913_1337_14BringingU2.pngJordan: “Basically, yes. But they take those actions at exactly opposite times. And the Germans either didn’t understand or refused to acknowledge that. I’ll tell you why over another glass of wine and desert.”

(Conversation to be continued next entry.)

Ebook format of recent series of entries on Federal Budget.  15 05 23 Do They Really Understand Entries #121-#130