Uncertainty and Aggregate Demand, Brad DeLong, November 15, 2010
"The future is always uncertain--and how uncertain it is fluctuates. When the future is more than unusually uncertain, economic players want the security of extra financial asset holdings before they are willing to spend to put people to work. It is, then, the business of the government to make sure that they have the amount and the kinds of financial assets they need to sleep easily. That was one of the insights of John Maynard Keynes. That was one of the insights of Milton Friedman.
Uncertainty about the future cannot be eliminated. But its harmful macroeconomic consequences can be neutralized.
Matthew Yglesias preacheth the lesson:
Uncertainty and Aggregate Demand: [T]he notion that the economy is being held back by a mysterious increase in “uncertainty”... is no different from the standard Keynesian diagnosis. Indeed, Keynes himself put uncertainty front and center in his diagnosis of the business cycle....
Policymakers can’t make it cease to be the case that the future is uncertain. Policymakers can observe, however, that if economic actors’ level of uncertainty about the future increases that would manifest itself as an increased demand for money. Increased demand for money is a funny beast. Normally if demand for one kind of good or service falls, demand for other goods or services has to rise. But if what people demand is money itself then we find ourselves mired in a general glut, a shortfall of aggregate demand. Which is to say you’d be in just the normal Keynesian situation and you’d want to get out of it in just the normal Keynesian way—looser monetary and fiscal policy to bolster aggregate demand, soak up the excess capacity, and return us to a low-idleness equilibrium.
So if for whatever reason businessmen or politicians or media figures or anyone else feels more comfortable expressing the situation as one caused by “uncertainty” that’s fine. But the name of the game is still fiscal and monetary expansion. But instead the proposed cure typically seems to be “shift public policy in a more rightwing direction.” That wouldn’t do anything about uncertainty or a shortfall in aggregate demand. It’s just a faux-sophisticated way of saying “I’m a rich businessman who wants politicians to cater to my interests more.”"