Saturday, September 23, 2017

Reply to Roger Farmer regarding Akerlof and Shiller

Hi Roger,

Thanks for your excellent and extended response to my short post, very illuminating.  I was mainly reporting on a “Clash of the Titans,” in which you (a possible future Nobel Laureate) criticized two recent Laureates, Akerlof and Shiller, for recommending more Obama-type monetary and fiscal stimulus in 2009.  You put forward two arguments against this proposal:

1) “Orthodox Keynesian economics was discredited in the 1970s and there are compelling grounds to be skeptical that fiscal and monetary policy will work today [2009] in the way that Akerlof and Shiller believe”; and

2) “History has taught us that a massive expansion of liquidity will lead to inflation.”

I was simply comparing your assessment of what made good policy sense in 2009 with Akerlof and Shiller’s assessment.  A lot of economists have advocated more “stimulus” in recent years, but they’re obviously more impressed with the economics of the Romers than with the rational expectations musings of Robert Lucas, et al.  Leaving the fiscal side of the matter aside, however, surely the claim that “a massive expansion of liquidity will lead to inflation” is mistaken.

My argument, in this regard, is that the New Classical economic theory that succeeded the “discredited orthodox Keynesian economics” in the 1970s” hasn’t outperformed the Old Keynesian view in drawing conclusions about the effect of liquidity on inflation (assuming, for the moment, that you’re provisionally representing the former view and Akerlof and Shiller the latter). 

You conclude with, “When the Keynesian prophets call for more of the same without explaining why their policies failed us in the great stagflation; take your cue from Clara Peller and ask them loudly: Where’s the beef?”  I assume your “Keynesian prophets” in this case are Akerlof and Shiller, but I can’t really make sense of your critique even if I assume it was written in 2009, rather than 2017, as a challenge to them.  No one in 2009, including Akerlof and Shiller, was arguing for “more of the same” kind of policies “that failed us in the great stagflation.”

If I were in their shoes, I might say, “well the government didn’t borrow and invest as much as it should have, but it did have some effect and, by most accounts, it was mainly to the good.” [See OECD and other studies of fiscal stimulus with significant positive multipliers or the effect of Obamacare (ACA) in freeing laborers to look for another job without losing their health insurance.]  And I might add that while the overall effects of the Fed’s large balance aren’t clear, one is pretty hard-pressed to claim it caused much, if any, inflation.

So, with all due respect, I’d respond to your “where’s the beef?” question this way: if the stagflation of the 1970s discredited the Keynesian economics of the period, why didn’t the failed predictions about the effects of large budget deficits and the massive Fed balance sheet discredit the theories on which these predictions were based?

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