Grasping Reality with Both Hands: An Appeal for Help: Recent History of Economic Thought

Grasping Reality with Both Hands: An Appeal for Help: Recent History of Economic Thought: "An Appeal for Help: Recent History of Economic Thought

Somewhere, somehow, without as far as I know leaving any paper trail, Chicago-School economists became convinced of two false things:
1. Ricardian equivalence means not just that deficit-financed tax cuts have no short-term stimulative effects but also that deficit-financed spending increases have no short-term stimulative effects on nominal spending.
2. There are no issues worth discussing at the zero nominal interest rate bound: monetary expansion via open market operations retains its full potency and power to affect the level of nominal spending spending even when open market operations are just the swap of one zero-yielding government liability for another."

Robert Lucas:

Why a Second Look Matters: [1929-1932]

[W]ould a fiscal stimulus somehow get us out of this bind, or add another weapon that would help in this problem? I've already said I think what the Fed is now doing is going to be enough to get a reasonably quick recovery committed. But, could we do even better with fiscal stimulus? I just don't see this at all. If the government builds a bridge, and then the Fed prints up some money to pay the bridge builders, that's just a monetary policy. We don't need the bridge to do that. We can print up the same amount of money and buy anything with it....

But if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder... then it's just a wash.... [T]here's nothing to apply a multiplier to. (Laughs.) You apply a multiplier to the bridge builders, then you've got to apply the same multiplier with a minus sign to the people you taxed to build the bridge... taxing them later isn't going to help, we know that...

John Cochrane wrote:

Economist Debates: Keynesian principles: The basic Keynesian analysis... is simply wrong. Professional economists abandoned it 30 years ago when Bob Lucas, Tom Sargent and Ed Prescott pointed out its logical inconsistencies.... Robert Barro's Ricardian equivalence theorem was one nail in the coffin. This theorem says that [fiscal] stimulus cannot work because people know their taxes must rise in the future...

Barro's "Ricardian equivalence" case describes the conditions under which permanent tax cuts do not affect interest rates or consumption spending. Barro's case has no implications whatsoever for the effect of government spending increases on employment, production, and output. None.

William Poole: The self-correcting nature of markets will ultimately prevail. We should not underestimate the power of monetary policy; with the sharp increase in the nation’s money stock starting in September, monetary policy is now extraordinarily expansionary. I believe, though without great confidence, that the recession will end in the second half of this year.... [G]overnment spending can’t lead the way to sustained recovery, because its stimulating effect will be offset by anticipated higher taxes and the need to finance the deficit.