John Taylor has a post up on Keynesian economics that's a little interesting and a little odd. I'll just quote in full:
"This past weekend Columbia University hosted a conference on the occasion of the 40th anniversary of the famous Phelps volume on the micro foundations of macroeconomics. In addition to the technical papers, which will eventually be published in a conference volume, important lunch and dinner talks were given by two of the most recent Nobel Prize winners in economics--Dale Mortenson and Chris Pissaredes--as well as by Fool’s Gold author Gillian Tett of the FT and Ned Phelps.
Ned spoke about what he called the “recrudescence of Keynesian economics.” He explained why, as he put it in his New York Times column of last August, “The steps being taken by government officials to help the economy are based on a faulty premise. The diagnosis is that the economy is ‘constrained’ by a deficiency of aggregate demand. The officials’ prescription is to stimulate that demand, for as long as it takes, to facilitate the recovery of an otherwise undamaged economy — as if the task were to help an uninjured skater get up after a bad fall. The prescription will fail because the diagnosis is wrong.”
The problem with these Keynesian policies is that at best they give short term boosts to the economy, but then fizzle out as we are seeing now. Sustaining growth in employment requires sustaining investment, which requires government policy that encourages investment and innovation, not short-run stimulus packages that try to boost consumption and government purchases, which crowd out investment.
Will there be an end of this recrudescence? Politics as well as economics will be an important determining factor, at least that’s what the historical analysis in the paper I presented at the conference shows. The good news then is that more people are beginning to see the problems with these stimulus packages and the political process is responding."
I find his position quite reasonable, but what's strange to me is that he's describing sort of an odd version of Keynesian economics. He's playing fast and loose with terms like "demand" and "consumption", acting like the point of stimulus is to boost the latter. The point of a Keynesian stimulus isn't (primarily) to boost consumption, and the fact that the fiscal stimuli we've seen largely do is a valid critique of the focus of the stimulus package. But it's not really a valid critique of Keynesianism, whose primary emphasis is to boost investment demand through (1.) reducing interest rates, and (2.) the enigmatic "socialization of investment". The General Theory is not really a consumption story at all. Consumption is that psychologically stable-sloped slide that a depressed economy drifts down. To use classic econ 101 phrasing - "we move down the consumption schedule in this case, the consumption schedule doesn't move". Other points, like the idea that stimulus packages crowd out private investment, are of course absurd - but if you don't think it is true then you are forced to accept some important Keynesian premises, which I don't think John Taylor wants to do.
I do think there's an extent to which what we traditionally think of as "innovation policies" can be put to good use as "stimulus policies". We categorically separate them because of how we think of innovation as a determinant of secular growth, but it's not clear why that's necessary.
Buchanan Reading Group
26 minutes ago