Back to the 1960s

Olivier Blanchard writes,

The IS relation remains the key to understanding short-run movements in output. In the short run, the demand for goods determines the level of output. A desire by people to save more leads to a decrease in demand and, in turn, a decrease in output. Except in exceptional circumstances, the same is true of fiscal consolidation.

Pointer from Scott Sumner, who disagrees for different reasons than mine.

In the 1960s, macro was distinct from micro, and few people worried about that. If “spending creates jobs and jobs create spending” was contrary to Walrasian general equilibrium, then so be it. By 1985, the situation (at the graduate level) was totally reversed. Every macro model had to nod in the direction of general equilibrium. It stayed that way until 2008.

Now, the best that MIT economists can do is revert back to 1960s thinking. In my forthcoming book, I offer the alternative of PSST.

1 thought on “Back to the 1960s

  1. I look forward to testable predictions, even if only consistent rather than definitive.

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