Garett Jones writes about sticky-wage Keynesian economics.
there’s no failure of “effective demand” for final goods in a sticky-wage Keynesian world. The reason there’s so little output during a recession according to sticky-wage Keynesians is because high wages make output too expensive to produce.
I think that Keynesians have good reason to resist being boxed into a particular microfoundations model, or theory. I think they are better off just asserting that more spending leads to more output, and responding to the question of “why” with hand-waving. To me, Keynesian economics is nothing more and nothing less than the view that spending creates jobs and jobs create spending. The attempt to articulate microfoundations has never added value.
Incidentally, the Scott Sumner view is that nominal GDP creates jobs, which might appear to be close to the Keynesian view. However, Sumner argues that the central bank controls nominal GDP, which means that fiscal policy only affects the mix between private-sector and public-sector spending.
The Keynesian counter-argument is that the central bank is constrained in some way. Again, I think they are better off just asserting this rather than relying on some specific explanation, such as low nominal interest rates. First, there are powerful arguments that low nominal interest rates are not a constraint. Second, I do not think that Keynesians want to tie themselves down to a view that says that fiscal stimulus is completely unnecessary when interest rates are above zero.
For those of you not already familiar with my own views of macro, see the papers listed here.
I think its fairer to say that Sumner believes the central bank CAN control NGDP than it does and that it can do so even at ZIRP. If they do that, then fiscal policy can’t influence aggregate demand. He would also argue that inflation targeting would have at similar impact as NGDP targeting in neutralizing fiscal policy if followed.
Keynesian’s are resistent to acknowledging the one real benefit of fiscal stimulus, the government gets to pick and choose (in theory) who benefits and might actually be able to target a numerical increase in employment. Any monetary stimulus will have uncertain implications for what path ends up creating more demand and the magnitude of the numerical increase in employment that might come with it. In fact, I think they don’t trust monetary stimulus simply because it might allow inequality to grow, which is 100% the overlapping concern of most Keynesians.
Your point seems to be that Keynesians have the prejudice “that spending creates jobs and jobs create spending”. And you thing that they should not try to give a good reason (microfoundation) for that, because this would constrain their argument and contradict with their prejudice that ALWAYS holds: “spending creates jobs and jobs create spending”
For me it is very clear that this is not “the most charitable view” of Keynesians.
Thanks, especially for the list of papers, which I gobbled up addictively. Once I had read the shorter version on PSST, I just had to somehow squeeze the other two papers by A.K. into my daily programme. I just finished the longer version. So refreshingly open-minded, it does not even perturb me that some of my firmer beliefs feel shaky now. Mind you, for the time being, the ingress of ideas and the new relative positions amongst them seems to constitute a Goldilocks transition.
As for PSST, I see one important aspect that deserves to be looked into more fully, perhaps even in a future post. The PSST model is being presented as if it was the sole and exclusive cause of the Great Depression (GD), at least that is how I read it. However, there is ample evidence being proposed to corroborate that the GD was largely a case of massive government failure, having been caused and lengthened by detrimental economic policies. It would be interesting to see how PSST and other causes of the GD might be delimited against each other, and what relative weights could plausibly be attached to the respective causal contributions.