Very clear explanation of J. M. Keynes in The General Theory v. New Keynesianism. It's not really wonky and no math, so if you aren't totally clear on this important issue, take a look.
In my view, it's a likely factor in shaping the Obama administration's lackluster push for an initial stimulus package to adequately stimulate effective demand to address involuntary unemployment. Christina Romer seems to have gotten it, with her 1.2T proposal whittled from her original estimate of 1.5T.
But Larry Summers, not so much. Summers complained about the politics of it as the reason for his smaller package, but he was paid as chief economic advisor to the president, not as a political strategist. Was he thinking that depressing the real wage would address unemployment "more cost-effectively"? Apologies to Professor Summers if I am imputing analysis and motives that are incorrect, and which he never profess in terms of setting policy, but it looks plausible to me. Otherwise why propose a stim that would be too small, with little chance for getting a second shot?
Lars P. Syll's Blog
New Keynesians, price stickiness and involuntary unemployment (wonkish)
Lars P. Syll | Professor, Malmo University
3 comments:
"Otherwise why propose a stim that would be too small"
It would have made the deficit higher Tom...
I know its hard sometimes to think like a moron for someone like yourself, but if you are going to get into the business of looking for motives of these people your going to have to give it a try....
rsp,
Absent enough stim to goose up effective demand enough to address UE, the Keynesian solution, there are two neoclassical options, one of which O mentioned, that is, increasing exports. A higher deficit would have depressed the USD according to neoclassical thinking, and this would have helped exports. The other route is increasing investment and the neoclassical prescription in lowering the real wage to reduce costs and make investment more attractive.
A major reason wages and prices MUST be sticky is that debt is sticky since debt is measured in nominal, not real terms.
Of course, if one is debt-free the above does not apply but how common is that situation given the government backed-credit cartel which drives people and businesses into debt during the boom?
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