Robert Barro on the Impotence of Stimulus

by Mario Rizzo In an interesting opinion piece for the Wall Street Journal, Robert Barro and Charles Redlick give empirical evidence supporting the claim that stimulus spending doesn't work. By "doesn't work" they mean that the government spending multiplier is less than 1. This means that stimulus spending increases national income by less than the … Continue reading Robert Barro on the Impotence of Stimulus

Richard Posner on the Precipice

by Mario Rizzo    Richard Posner's latest conversion is both charming and alarming. It is charming because it exhibits a youthful enthusiasm for a newly-discovered idea: Keynesianism. He just recently read John Maynard Keynes’s book The General Theory of Employment, Interest and Money. Posner’s tone echoes that of Paul Samuelson: “To have been born as an … Continue reading Richard Posner on the Precipice

The Great Moderation In Macroeconomics

by Mario Rizzo   I have now read both Paul Krugman’s New York Times essay on the state of macroeconomics and John Cochrane’s reply. They are each, in very different ways, quite disappointing. The level of argument is poor, the prejudices are simplistic, and the tones are annoying.   Beginning with tones: Krugman is too dismissive of … Continue reading The Great Moderation In Macroeconomics

Auction Markets and Optimally Sticky Prices

by Joseph T. Salerno Keynesian macroeconomists, old and new, have long criticized their classical and contemporary opponents for ignoring reality and treating the market economy as a giant auction in which prices are “perfectly flexible,” responding instantly to changes in supply and demand.  This charge is wrong on two counts.  First, all markets for outputs … Continue reading Auction Markets and Optimally Sticky Prices

Prices and Information

by Jerry O'Driscoll   In the recent discussion of Say's Law, the issue of "sticky" prices came up. The term is the source of much confusion. The opposite of "sticky" prices is not "flexible" prices, but infinitely flexible prices. No matter how flexible a price, short of infinite flexibility, there will be quantity responses. Quantity responses are … Continue reading Prices and Information

Say’s Law Today

by Jerry O’Driscoll   This post follows on my earlier one, “It’s All About Say’s Law.”   Say’s Law of Markets answered the fears of under-consumption as the spreading industrial revolution brought forth an ever more bountiful supply of goods. The law’s logic is that production creates the income that is the source of the demand for … Continue reading Say’s Law Today

It’s All About Say’s Law

by Jerry O'Driscoll A friend with Keynesian leanings recently remarked that "it's all about Say's Law."  He was referring to the contemporary debates over macroeconomic policy.  He was correct, but few economists on any side of the debates understand that is the issue, or why it is important. Say's Law was anticipated by Adam Smith … Continue reading It’s All About Say’s Law

Should Economists Think About What They Do?

by Mario Rizzo   Believe it or not, this is a controversial question! Brad DeLong has argued that the profession seems to know less today about macroeconomics than, say, Keynes did. Paul Krugman has expressed similar sentiments. They see a kind of collective or professional unlearning in the past thirty or forty years. They are right.   … Continue reading Should Economists Think About What They Do?

Monetary Policy At War With Itself

by Mario Rizzo   It is well-known that John Maynard Keynes favored permanently low interest rates in order to foster adequate and stable investment demand. Let us first focus on stability and then we'll see a connection to adequacy.  What happens when counter-cyclical policy (aka Lerner’s “functional finance”) is practiced?   The Wall Street Journal ran an excellent small … Continue reading Monetary Policy At War With Itself

Keynes versus Hayek: A rerun of the 1930s

by Mario Rizzo   [This was submitted to the Financial Times as a possible op-ed piece. Unfortunately, it was rejected. Nevertheless, it seems to me that most readers of the financial press are still unaware of just how fundamental a challenge F.A. Hayek made to the economics of J.M.Keynes. Hayek’s challenge often gets homogenized with other … Continue reading Keynes versus Hayek: A rerun of the 1930s

DE HAUT EN BAS: Niall Ferguson, Paul Krugman and John Maynard Keynes

by Mario Rizzo   Recently Niall Ferguson wrote an interesting op-ed piece for the Financial Times about a debate of sorts he has been having with Paul Krugman on the spike in long-term interest rates and its relation to the large debt the U.S. Treasury must finance.   In the course of that article Ferguson described Krugman’s … Continue reading DE HAUT EN BAS: Niall Ferguson, Paul Krugman and John Maynard Keynes

Relative Prices Matter At All Times

by Mario Rizzo Paul Krugman has written a column stating that wage cuts at this time are a bad idea. Following Keynes he claims that nominal cuts will do no good – they will not stimulate employment (or prevent unemployment) – because aggregate demand will fall. Real wages will thus remain unchanged.   In part, Keynes … Continue reading Relative Prices Matter At All Times

Keynes Against DeLong: A Comment on the Cowen-DeLong Debate

by Mario Rizzo   I am reading with some exasperation Brad DeLong’s comments in his exchange with Tyler Cowen on the efficacy of the stimulus package.   Clearly, DeLong is a rigid aggregate demand theorist. He talks about output and employment as if it were some homogeneous thing. In his mind, macroeconomics is just about … Continue reading Keynes Against DeLong: A Comment on the Cowen-DeLong Debate

Keynes on Taking the Punch Bowl Away

    by Mario Rizzo   There has been a great deal of discussion about stimulus as a cure for recession and incipient depression. Let’s now look ahead a bit.   When is it time to start worrying about inflation? Not according to Ben Bernanke or me, but according to John Maynard Keynes.   We … Continue reading Keynes on Taking the Punch Bowl Away

Lord Keynes: A Hayekian Appreciation

by Mario Rizzo   No, I haven’t gone crazy. John Maynard Keynes’s economics is not Austrian economics. He and Friedrich Hayek had serious disagreements over economic theory and policy.  I believe that Hayek was largely right in these disagreements. Nevertheless, Keynes was personally kind to Hayek. He found him a place to stay in Cambridge … Continue reading Lord Keynes: A Hayekian Appreciation

In Defense of Reasonable Ideology

    by Mario Rizzo   There have been many statements recently to the effect that we should not let “ideology” or “philosophy” stand in the way of solving our economic problems.  Indeed, the Obama Administration (and the previous Bush Administration) are keen to persuade us to drop all of this prejudice and to go … Continue reading In Defense of Reasonable Ideology

Keynes on How to Create a Liquidity Trap

by Mario Rizzo   There is frequently confusion about whether John Maynard Keynes thought monetary policy is effective. This confusion is furthered by some renditions of John Hicks’s graphical IS-LM analysis (which, by the way, he repudiated in the 1980s). Most economics undergraduates have been subjected to this art.   The simple story about Keynes’s … Continue reading Keynes on How to Create a Liquidity Trap

Keynes: Stimulus Follows Stability and Not Vice Versa

by Mario Rizzo   I have been arguing for some time, both here and elsewhere, that the ideas of John Maynard Keynes after the mid-1930s and into the 1940s are more sophisticated that the prime-the-pump notions of many modern day economists who call themselves Keynesians. Keynes, himself, evolved away from those simple ideas he advocated … Continue reading Keynes: Stimulus Follows Stability and Not Vice Versa

Orthogonal mindsets

by Sandy Ikeda At the Colloquium lunch on Monday, one of my esteemed colleagues wondered aloud whether Paul Krugman’s insistence that the humongous stimulus package needs to be much bigger wasn’t evidence of madness. Then, something came up during the actual colloquium – with Larry White, with whom we were discussing a chapter, dealing with … Continue reading Orthogonal mindsets

Keynes Supported Counter-Cyclical Payroll Tax Reductions

by Mario Rizzo   It seems that a number of conservative or libertarian economists are now supporting a temporary reduction in payroll taxes as a preferred stimulus idea. See, for example, here     John Maynard Keynes beat them to it! In correspondence with the economist James Meade in 1942 Keynes says he is “converted” to … Continue reading Keynes Supported Counter-Cyclical Payroll Tax Reductions

Keynes as Public Works Skeptic — Part II

by Mario Rizzo  My post below, "Keynes as Public Works Skeptic" elicited much comment. Some of these comments accused me of quoting Keynes out of context and of generally getting it all wrong. To set things straight requires much more than blog posting.  I expect to be publishing an article with the American Enterprise Institute … Continue reading Keynes as Public Works Skeptic — Part II

Illusion of Confidence and the Confidence of Illusion

by Mario Rizzo   One hears a lot about restoring confidence in the economy these days. What is that? The economy is a complex entity. In fact, Friedrich Hayek wanted to drop the use of the term and replace it with “catallaxy” that is, an abstract order of interpersonal exchanges. The word “economy” has its … Continue reading Illusion of Confidence and the Confidence of Illusion

Keynes as Public Works Skeptic

by Mario Rizzo Paul Krugman raises a very good point: “Is it too much to ask that someone criticizing Keynes actually, you know, read Keynes…?”  However, I suggest that the point also be applied to those who use Keynes to support their own ideas today. This latter group may be in for some surprises.  Consider, … Continue reading Keynes as Public Works Skeptic

What Gets Stimulated When The Stimulus Kicks In?

by Mario Rizzo   Let’s assume for the sake of argument that, initially, increased government expenditure does stimulate a meaningful measure of national income. Is this sustainable? In other words, will the private sector be jump-started by this action such that when the temporary government expenditure is eliminated private consumption and investment will replace it? … Continue reading What Gets Stimulated When The Stimulus Kicks In?

“The Stimulus is Too Small”: Channeling Karl Popper

by Mario Rizzo   Paul Krugman is now saying  that the Obama prototype of a stimulus plan is not enough. Other, more cautious economists are saying there is no economic evidence that it will be enough. We don’t even have a Congressional bill yet but macroeconomists like to think in aggregates and the specific content … Continue reading “The Stimulus is Too Small”: Channeling Karl Popper