Wednesday, September 23, 2009  Klingonomics 2  Kling's argument
that the current recession involves a need to reallocate
resources, is plausible. It seems likely that resources need to
be moved away from producing single family homes, building SUV's
and other low mileage vehicles, and perhaps less financial
engineering on Wall Street. The resources need to be redeployed
to more valuable uses. Because this adjustment takes time, the
productive capacity of the economy will be temporarily
depressed.  What is remarkable, however, is Kling's view that
the decrease in productive capacity somehow generates a matching
decrease in nominal expenditure. He argues that "recalculation"
generates a reduction in "y," that is real income. Given "P,"
the price level, that implies a decrease in "Y," nominal income
and nominal expenditure. And given "M," the quantity of money,
this necessarily implies a decrease in "V," the income velocity
of money. From the equation of exchange MV = Py, V = Py/M.
However, the income velocity