Wednesday, September 29, 2010

Tyler Cowen, another supply sider with tired talking points

So via Kevin Drum I saw this post by Chicago School economist Tyler Cowen:



Yet Keynesian theory has a no less serious problem, namely that workers take a "stupid voluntary vacation" during the downturn, due to their stubbornness on nominal wage cuts......Aggregate demand macroeconomics works in many cases and it almost always "works" (predicts well) when the macro forces are pointed toward destructive ends.  We are not sure why it works at all, or if it always works, and yet we see a great fervor of belief in it and a demonization of those who are skeptics.


Huh? I mean you could say we're not sure of all the detailed dynamics of why it works, or it may be an incomplete theory which doesn't encompass the complexities of real world economies. But my understanding is we're pretty sure of the generalities of why it works. There's a mismatch between demand for goods/services vs supply, with an excess of supply. Thus unemployment rises above the natural level, lowered consumer and business confidence etc. This can lead to a self-reinforcing cycle of less consumption, more savings, yet higher unemployment and possible deflation which further exacerbates the cycle. Some form of governmental stimulus to aggregate demand can help break this cycle and act as a counter cyclical force.

This model has fit quite well with real world data over many decades and several economic cycles. So there's a perfectly good model, it makes both mathematical and intuative sense AND it works (as Cowen says). But pointing this out to skeptics and saying their models don't seem to "work" is "demonization". I don't get it. And by the way, who exactly is doing this demonization?

And finally, I'd like to see the statistics for people taking "stupid voluntary vacations" and an explanation of what exactly he even means by that.  Currently I believe there's broad underemployment across all categories of jobs, so its not as if there's some huge pool of people refusing to work because the pay's too low.  Jobs aren't there because demand isn't there to justify hiring.  But apparently Cowen thinks this is all a problem of people being to stupid to work.  Good theory there.  We don't even need Keynes with that kind of genius explanation.

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