An antidote to Keynesian Macro?

Posted by

Yesterday, I linked to a re-enactment of Sargent and Lucas’ After Keynesian Macroeconomics — here is the paper.

Sargent and Lucas over-reach by pinning the entire mess of the 1970s on Keynesians:

these events did not arise from a reactionary reversion to outmoded, “classical” principles of tight money and balanced budgets. On the contrary, they were accompanied by massive government budget deficits and high rates of monetary expansion, policies which, although bearing an admitted risk of inflation, promised according to modern Keynesian doctrine rapid real growth and low rates of unemployment.

… still, it’s worth recalling that easy money and more government spending create their own problems, and are by no means sure to cure the ones we are currently suffering.

6 comments

  1. “easy money and more government spending create their own problems”

    Well… that’s just a given. Just think what exactly “government spending” is… The so-called “government” is a group of people that need to be re-elected every x years and that are not spending their own money. By definitions, they have a very short-term view. For instance, all of the people that created the govt debt mess in Europe, those people, they are all gone, and current goverments “can’t be blamed for past mistakes”. Governments do not have competition nor alternatives, if not from the opposite parties (however all parties know they are really the only alternative, so there is no real competition) and anyway, only in the very short term: the next elections.

  2. Keynesian economics is using fiscal policy ONLY when there is a liquidity trap because monetary policy isn’t working. ( I would add when it is impaired as well so limited credit impairing monetary policy would be part of this. So for example the ONLY time a government would have used Keynesian policies in Australia since WW2 was in 2008.)

    Simply using fical policy ain’t Keynesian economics. I certainly do not recall a liquidity trap in the 70’s.

    It seems to me these tow gents should read the General Theory.

  3. The argument we should have continued with classical econmics is one of the silliest I have heard.

    We had no golden age under the classical school.

    There is a good reason for that.

    Attempting to balance the budget in times of say a GFC merely makes a recession a depression.

    See Ireland, Greece, Finland et al

    Only having a balanced budget in good times exacerbates inflationary dangers. Costello ran a variation of this prior to losing office and merely got AD/AS out of kilter.

    Keynesian economics relies on using monetary policy as the preferred instrument unless you experience either a liquidity shock or simply have monetary policy impaired.

    It also means larger structural surpluses each fiscal year good times are with us allowing the private sector to do its job.

    1. See the Lucas slides in my earlier post – the leader does about 1.8%yoy in per capita terms no matter what. Policy seems to be able to dampen volatility – possibly. Or perhaps we just got lucky and there was no great moderation. It is too soon to tell.

  4. Simply increasing budget deficits in ‘bad times’ and allowing those defcits to stay in good times is not Keynesian economics.

    I am amazed anyone would attempt to say so indeed they seem to disagree with themselves in various parts of the paper

Comments are closed.