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Tuesday, June 1, 2010

WHY ARE ORTHODOX KEYNESIANS --- COMPARED EVEN TO NEW KEYNESIANS, NEVER MIND FREE-MARKET NEW CLASSICAL THEORY --- FRUSTRATED THAT THEIR ADVICE FOR NEW FISCAL STIMULI IS BEING IGNORED BY THE WHITE HOUSE AND ALL EU GOVERNMENTS

Yes, Agreed: Quite a Mouthful --- Today's Buggy Subject-Title

Still, accurate enough.  Prof bug's analysis of the usual left-wing patter on the issue --- either idiocy in the White House or in the EU or, to the liking of the posters at Economist's View, the political control of policymaking by monopolistic and politically powerful big finance and big business --- can be found at that web-site if you click here.

As usual, too, you'll encounter little more in the numerous posts besides buggy's than assertions of shared groupthink . . . with the usual attacks on anyone, however much his work is evidence-based, as a vicious type. 

One Other Point Worth Remembering

You don't have to know much macroeconomics to read the threat, never mind prof bug's stuff, if you keep in mind these distinctions:

  • Orthodox Keynesianism denied that expansive monetary policies could help bring an economy in serious recession back to full-employment.  It was and remains in the eyes of its followers (not very numerous in academia these days) a conviction that only fiscal stimuli would work here.  And the current followers espouse new fiscal stimuli because though the US economy has been rebounding for three quarters of solid economic growth, the growth hasn't been enough to bring down unemployment from a high of 10%.  (In the Great Depression of the 1930s in this country, unemployment reached a staggering 23% or so when FDR came into office.  His fiscal stimuli did help bring down the unemployment level to slightly less than 10% in three years if you count workers employment in government subsidized jobs.)

  • New Classical economists --- trained originally in three bastions of free-market theory from the early 1950s on: the University of Chicago, the University of Minnesota, and Rochester and Washington of St. Louis Universities --- attacked Keynesianism and extensive government regulations and high taxes as impeding the self-adjusting, self-regulating tendencies built into free-markets.

They argued, specifically, four things things: 

 1) Keynesian macroeconomics had no solid foundation in microeconomics --- the study of what motivates and drives the behavior of individual economic agents (business and financial firms, workers, financial investors, and consumers). 

2) They argued further that the motives of these agents were grounded in the self-interest of rational behavior to maximize profits and income, with trade-offs between income and leisure taken into account. 

3) They then refined rational behavior to include expectations by these maximizing agents of the future direction of the economy: in fact, it was argued, their expectations were just as good as those of professional economists and policymakers at the Federal Reserve and in government, given all available information. 

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 Click on the continue-link just below here.

And to top it off, 4): the causes of recessions and hence of the business cycle of ups and downs --- booms and busts every few years --- derived from "real" and sudden changes in the national and global economies: changes in technology, sudden surges in oil prices, or the need for sector-reallocation of labor, financial capital, and managers from former excessive booming industries like the dot.coms of the late 1990s or in housing in the last decade to new, more promising industries. 

And so neither fiscal nor monetary policies could have any impact until the self-adjusting forces in the real economy --- new technologies, movements of labor and capital, adjustments to higher oil prices among consumers --- ran their course.  The only fiscal policy that would help would be permanent tax cuts to spur these supply side changes over both the short- and long-terms

  • New Keynesians emerged in the 1970s when old Keynesianism seemed to lack a guide on how to deal with both rising inflation and rising unemployment --- no stable trade-off of a little more inflation to get less unemployment existed (the Phillips curve). And it agreed with New Classical theorists that old Keynesianism did in truth lack a foundation in the motives and behavior of individual economic agents. Its agreement even included the adoption of rational-expectations of the New Classical theorists.

Where New Keynesians differ is on the issue of a self-adjusting, self-regulating aggregate national economy.  Like Old Keynesians, they argued that there were systemic market-failures that could bring about a serious and prolonged recession.  These failures showed up in price-rigidities even as demand for individual firm products fell off.  They also showed up in wage-rigidities for a variety of reasons as well.  As a result, some active monetary policy would be useful --- which means that interest rates should be brought down to a low point to stimulate the recovery of the economy to its long-term growth path.

As for fiscal stimuli, New Keynesians tended generally to think they wouldn't be needed --- monetary policy could do the job (the exact opposite of Keynes' original views); and probably most thought they wouldn't work.

  • The Old Keynesians reply to both New Classicals and New Keynesians that in a serious recession like the aftermath of the present --- with 10% unemployment --- monetary policy is up against a zero-bound limit: it hovers just a tad over zero percent (in nominal terms, not adjusted for ups or downs in the overall price level.) As a result, new fiscal stimuli are needed to jump-start a faster economic recovery. And we shouldn't worry about the long-term growth of national debt that deficit-spending would generate: much more important is to bring down the unemployment quickly in the short run, generate faster economic growth and hence taxes in the mid-term, and make sure this way that national debt as a percentage of GDP falls steadily in the long-term.

By contrast, all New Classical theorists deride fiscal stimuli as either needed or effective in influencing real supply side problems that take time to self-adjust, just as they worry that excessive government debt that ensued from any fiscal stimuli would harm the free-market's ability to return full employment and its growth-potential.

Enough Said

You should have no trouble following the buggy post at Economist's View if you made sense of these broad distinctions among macroeconomists today