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November 16, 2014

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Posted: 16 Nov 2014 12:06 AM PST

'The Unwisdom of Crowding Out'

Posted: 15 Nov 2014 11:40 AM PST

Here's Paul Krugman's response to the Vox EU piece by Peter Temin and David Vines that I posted yesterday:

The Unwisdom of Crowding Out (Wonkish): I am, to my own surprise, not too happy with the defense of Keynes by Peter Temin and David Vines in VoxEU. Peter and David are of course right that Keynes has a lot to teach us, and are also right that the anti-Keynesians aren't just making really bad arguments; they're making the very same really bad arguments Keynes refuted 80 years ago.
But the Temin-Vines piece seems to conflate several different bad arguments under the heading of "Ricardian equivalence", and in so doing understates the badness.
The anti-Keynesian proposition is that government spending to boost a depressed economy will fail, because it will lead to an equal or greater fall in private spending — it will crowd out investment and maybe consumption, and therefore accomplish nothing except a shift in who spends. But why do the AKs claim this will happen? I actually see five arguments out there — two (including the actual Ricardian equivalence argument) completely and embarrassingly wrong on logical grounds, three more that aren't logical nonsense but fly in the face of the evidence.
Here they are...[explains all five]...

He ends with:

My point is that you do a disservice to the debate by calling all of these things Ricardian equivalence; and the nature of that disservice is that you end up making the really, really bad arguments sound more respectable than they are. We do not want to lose sight of the fact that many influential people, including economists with impressive CVs, responded to macroeconomic crisis with crude logical fallacies that reflected not just sloppy thinking but ignorance of history.

'The Quantity of Labor Demanded is Not Always Equal to the Quantity Supplied'

Posted: 15 Nov 2014 08:42 AM PST

Roger Farmer:

Repeat After Me: The Quantity of Labor Demanded is Not Always Equal to the Quantity Supplied: I've been teaching a class on intermediate macroeconomics this quarter. Increasingly, over the past twenty years or more, intermediate macro classes at UCLA (and in many other top schools), have focused almost exclusively on economic growth. That reflected a bias in the profession, initiated by Fynn Kydland and Ed Prescott, who persuaded macroeconomists to use the Ramsey growth model as a paradigm for business cycle theory. According to this Real Business Cycle view of the world, we should think about consumption, investment and employment 'as if' they were the optimal choices of a single representative agent with super human perception of the probabilities of future events. 
Although there were benefits to thinking more rigorously about inter-temporal choice, the RBC program as a whole led several generations of the brightest minds in the profession to stop thinking about the problem of economic fluctuations and to focus instead on economic growth. Kydland and Prescott assumed that labor is a commodity like any other and that any worker can quickly find a job at the market wage. In my view, the introduction of the shared belief that the labor market clears in every period, was a huge misstep for the science of macroeconomics that will take a long time to correct. ...
Ever since Robert Lucas introduced the idea of continuous labor market clearing, the idea that it may be useful to talk of something called 'involuntary unemployment' has been scoffed at by the academic chattering classes. It's time to fight back. The concept of 'involuntary unemployment' does not describe a loose notion that characterizes the sloppy work of heterodox economists from the dark side. It is a useful category that describes a group of workers who have difficulty finding jobs at existing market prices. ...
Repeat after me: the quantity of labor demanded is not always equal to the quantity supplied.

[There is quite a bit more detail and explanation in the full post.]

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