Paul Krugman comments on Gavyn Davies:
Whispers, Giggles, and Epicycles: Gavyn Davies marvels at the sight of Robert Lucas clutching at straws, trying to explain the current slump with highly implausible stories about incentive effects of policy changes that haven’t happened.... What Davies doesn’t say is that there’s a good reason Lucas won’t even consider the obvious explanation [for the depressed economy] in terms of a shortfall in demand. More than 30 years ago, in a burst of radically premature triumphalism, Lucas and his colleagues declared the “Death of Keynesian economics”. As cited by Greg Mankiw (pdf), Lucas wrote that Keynesian theorizing was so passe that people would giggle and whisper if it came up in seminars.... Keynesian economics continues to be very useful. But to concede that, to even consider the possibility that we’re in a demand-shortfall slump of the kind Keynes diagnosed, would be an incredible comedown for Lucas.
Gavyn Davies watches the collapse:
The classical view of the global recession: [I]t is hard to believe that American economic policy has suddenly changed so much in the last couple of years that the trend rate of growth of the economy has already dropped by as much as 1 to 2 per cent per annum. Structural changes of this type normally work into the economy extremely slowly and, while they can have large cumulative effects over long periods, their initial effects are not large.
As yet, there has been no increase in taxation, on the rich or anyone else. Nor have the Obama administration’s medical and financial sector reforms really taken effect. It would take a remarkably far sighted private sector to have already reacted adversely to this set of long term reforms, even if they might do so eventually.
There is of course another possible reason why the US (and UK) economies might not be converging on their long term GDP growth trends at present, and that is that there is insufficient growth in aggregate demand to fuel a “normal” recovery in output.... Yet a shortage of demand is not mentioned, even as a remote possibility, by Prof Lucas. As a convinced classicist, he seems to have ruled this out by a priori conviction, rather than any detailed empirical work...
Hell, I'm not asking for Lucas to take Keynes seriously. I'm just asking for Lucas to take Milton Friedman seriously. Or if not Friedman Knut Wicksell and Walter Bagehot. Or even John Stuart Mill or Jean-Baptiste Say. Those would be almost as good...