Code Orangish Reddish

Today the Department of Economic Security released an "Orangish Reddish" rating. The rationale was that either people are stupid and that means trouble for the economy, or people are stupid and that means Keynesian economics actually work and we won't self-destruct today. For those of you who are new to Keynesian economics, the principle in question is whether a gov't can increase deficit spending during a downturn to help the economy. There is a supposed to be a "multiplier" effect so that if the gov't spends $1, then the economy reacts by increasing demand and output by $1.5 or more.

The problem is that either Keynesian economics are wrong headed, or people are nincompoops. Allow me to explain. You own a factory and supply duct tape to the gov't and part of the new stimulus is buying a roll of duct tape for every family in the U.S. As the gov't knows, duct tape solves real problems. Anyhow, you have two choices:

1) Get really excited about the demand, hire twice the number of workers offering them generous benefits packages and short work weeks, train your new hires for future management positions, blow the extra profit on a huge new duct rolling machine that will pay itself off in 20 years, spend the salary on flat screens and pedicures...

OR

2) Hire only temporary menial contracting labor, push full time staff to the limit, make the old equipment get by just as long as product is shipped out the door, take the extra profit and squirrel it away because you don't know when you'll see that kind of money again, and you warn workers to save their paychecks because this may be the factories last big order.

Now, for the Keynesian multiplier to work, people have to take option number 1) above. This assumes that economic participants are fools and don't know the difference between a vaporware order from the gov't and raw demand from a competitive market.

Let us all pray that the Keynesian multiplier does not work. If it does, we've got much bigger problems than a credit crunch...