My problems with this neo-classicalism are twofold.
First, just because the macro economy has reached some form of equilibrium doesn't mean we are at the outer bound of productivity (http://en.wikipedia.org/wiki/Production-possibility_frontier). We can do better than double digit unemployment and while we're stuck in this liquidity trap the Government (with a capital G) is the only one who can spend the money that needs to be spent.
Second, the repackaging of says law (http://en.wikipedia.org/wiki/Says_Law) and this idea of perfectly rational markets that don't account for panic and fear driving a liquidity trap is just plain nonsense.
That being said, I'm a big fan of the issues brought up by distrust of Markets vs. distrust of Government. While it's probably a false dichotomy, it raises some interesting parallels about stubborn dogmatic thinking on either end of the spectrum. Ideally regulation should ramp up under good times (just as monetary policy should tighten the money supply spigot) and shed the red tape in the bad (and the fed should open the fire hose). This is a delicate balancing act that our political economy is not well suited for.
You know a lot more about macro than I do so I'm at a bit of disadvantage, but on your first point I would advocate recaluction theory (http://econlog.econlib.org/archives/2009/09/kling_on_the_st.html). To me, the input G as and end all be all is absurdly simplistic and functions more as a short-term political tool than an effective policy strategy.
Secondly, you're right, pure rational markets do not exist, especially when examined in short-term snapshots under extreme situations of duress (aka the past 18 months). But over the long-term the effect of animal spirits is neglibible because all actors (except for those in government because their incentives are radically different, and perverse in my humble opinion) will be acting under the same information. Panic will come in turn, then confidence, and all will balance out in the end.
It's too rosey and simplistic, I know, but what're you gonna do?
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My problems with this neo-classicalism are twofold.
ReplyDeleteFirst, just because the macro economy has reached some form of equilibrium doesn't mean we are at the outer bound of productivity (http://en.wikipedia.org/wiki/Production-possibility_frontier). We can do better than double digit unemployment and while we're stuck in this liquidity trap the Government (with a capital G) is the only one who can spend the money that needs to be spent.
Second, the repackaging of says law (http://en.wikipedia.org/wiki/Says_Law) and this idea of perfectly rational markets that don't account for panic and fear driving a liquidity trap is just plain nonsense.
That being said, I'm a big fan of the issues brought up by distrust of Markets vs. distrust of Government. While it's probably a false dichotomy, it raises some interesting parallels about stubborn dogmatic thinking on either end of the spectrum. Ideally regulation should ramp up under good times (just as monetary policy should tighten the money supply spigot) and shed the red tape in the bad (and the fed should open the fire hose). This is a delicate balancing act that our political economy is not well suited for.
You know a lot more about macro than I do so I'm at a bit of disadvantage, but on your first point I would advocate recaluction theory (http://econlog.econlib.org/archives/2009/09/kling_on_the_st.html). To me, the input G as and end all be all is absurdly simplistic and functions more as a short-term political tool than an effective policy strategy.
ReplyDeleteSecondly, you're right, pure rational markets do not exist, especially when examined in short-term snapshots under extreme situations of duress (aka the past 18 months). But over the long-term the effect of animal spirits is neglibible because all actors (except for those in government because their incentives are radically different, and perverse in my humble opinion) will be acting under the same information. Panic will come in turn, then confidence, and all will balance out in the end.
It's too rosey and simplistic, I know, but what're you gonna do?