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Fighting Keynes with Keynes

March 7, 2013 in Economics

By Daniel J. Sanchez

Video director and economics educator John Papola (of Keynes/Hayek rap fame) has a new article called “Consuming Our Way to Prosperity is Macro Folly” up at the PBS Newshour web site. In the article, he once again criticizes Keynesian economics. However, to support that critique, he enlists “market monetarist” Scott Sumner and monetary equilibrium theory. He writes:

“To paraphrase monetary economist Scott Sumner, there are only two ideas students of macroeconomics should be taught: Say’s Law of markets and monetary equilibrium theory. The rest of Keynesianism with its focus on real spending, government deficits and encouragement of unproductive consumption can and should be discarded.”

Elsewhere, Papola has indicated the extent to which he has become converted to the position of the market monetarists like Sumner, who advocate targeting Nominal Gross Domestic Product (NGDP):

Given, I’m not a monetary economist so my views MUST be taken with skepticism… now…

I think that NGDP-targeting makes the most sense as a central bank policy with the goal of monetary neutrality. I think this is the right goal. I think that it is consistent with Hayek’s view of money and it’s function as a “loose joint” in the economic system. It seems like the most effective way of equilibrating the supply of money with the demand for money. Here are my caveats with Market Monetarism.

1. Central banks injecting money in particular places will have injection effects with relative price changes that are not the product of consumer/producer decisions. This is bad for the sustainability of the structure of production that emerges. But a futures-market based system as Sumner and Lars favor seems aimed at addressing this concern. So, NGDP-targeting is a second-best in a world of central banking.

2. I don’t think targeting NGDP growth should be the ideal. NGDP shouldn’t grow at all. The target should be stable, zero-growth NGDP. So, if the demand for money increases, increase the supply to meet it… not to exceed it. Let productivity drive the nominal price level DOWN. Productivity-norm deflation is good. It would reduce excessive risk-taking and prevent the accumulation of loose credit conditions that manifest in malinvestment and bubbles.

Papola has stressed that while he is critical of “underconsumptionist” explanations of recessions, he is not critical of all “demand-side” explanations. While defending his awesome Christmas econ video, “Deck the Halls with Macro Follies”, Papola wrote:

I was very VERY explicit about what was a fallacy: that consumer spending can grow the …read more

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