Morning Must-Read: Simon Wren-Lewis: Understanding Anti-Keynesians
Lunchtime Must-Read: Justin Fox: Andy Haldane: The Regulator Who Explained the World

Over at Equitable Growth: A Question for Simon Wren-Lewis: How Can You Not Think That It Is All Ideology on the Other Side?: Daily Focus

NewImageOver at Equitable Growth: Simon Wren-Lewis bends over so far backwards to be fair that, I think, he loses sight of the ball:

Simon Wren-Lewis: Understanding Anti-Keynesians: "I have always thought it important to try and understand...

...where the other side is coming from.... Let me single out three Keynesian propositions.

  1. Aggregate demand matters, at least in the short term and in some circumstances (see 2) maybe longer.
  2. There is such a thing as a liquidity trap, or equivalently the fact that there is a zero lower bound to nominal interest rates matters.
  3. At least some forms of fiscal policy changes will impact on aggregate demand, and therefore (given 1), on output and employment. Because the liquidity trap matters, when interest rates are at their zero lower bound we should use fiscal policy as a stimulus tool, and we should not embark on fiscal austerity unless we have no other choice. READ MOAR

If propositions (1) and (2) strike you as self evidently correct... I would... note that there are large numbers of academic macroeconomists... who dispute one or both.... Tyler Cowen... talks about a ‘so-called’ liquidity trap.... Many macroeconomists... did think as recently as ten years ago that there was a broad academic consensus behind both (1) and (2). I was one of them....

However, my reason for including (1) and (2) is that if you accept these two points, point (3) follows.... The two sides are not symmetrical.... Keynesians are happy for central banks to undertake various forms of unconventional monetary policy, the aversion on the other side to using fiscal policy seems more absolute.... An easy answer is that it is all political or ideological.... That in my view would be a sad conclusion to draw, but it may be naive to pretend otherwise. As Mark Thoma often says, the problem is with macroeconomists rather than macroeconomics.

I can think of two alternative explanations.... The first comes from thinking... [that] money is very important, and... to therefore feel that monetary policy has to be the right way to stabilise.... The second is... the New Classical revolution.... For some, the association of fiscal policy with old-fashioned Keynesian ideas set down deep roots... some notable academics were surprised that New Keynesian models actually provided strong support for the use of countercyclical fiscal policy in a liquidity trap.

I should really stop there, but having started with Tyler Cowen’s post, I really should say something about his comments on the UK.... Why the obvious fact that other things besides fiscal policy are important in explaining growth in any year is thought to be an anti-Keynesian point I cannot see. And if the case against Keynesian ideas rests on the incorrect forecast once made by a prominent Keynesian then this is really scraping the barrel.

Consider things like:

Douglas Holtz-Eakin: Structural Reforms to Reduce Debt and Restore Growth: "The second flaw in recent policy approaches...

...has been its misguided reliance on temporary, targeted piecemeal policymaking. Even if one believed that countercyclical fiscal policy (‘stimulus’) could be executed precisely and had multiplier effects, it is time to learn by experience that this strategy is not working. Checks to households (the Economic Stimulus Act of 2008), the gargantuan stimulus bill in 2009 (American Recovery and Reinvestment Act), ‘cash for clunkers’ (the Car Allowance Rebate System), tax credits for homebuyers (the Federal Housing Tax Credit and the HIRE Act, consisting of a $13 billion payroll hiring credit, expensing of certain investments, and $4.6 billion for schools and energy), the Small Business Jobs Act of 2010, and the state-local bailout Public Law 111-226 ($10 billion for education, $16 billion for Medicaid) have all failed to generate growth. The policy regime of macroeconomic fiscal (and monetary) fine-tuning backfired in the 1960s and 1970s, leaving behind high inflation and chronically elevated unemployment, and it is working no better in the 21st century...

And how can you not think it is all ideology on the other side of the hill.