Thursday, June 23, 2011

Alan Meltzer On Alan Blinder's Keynesian Position

In yesterday's post I discussed Princeton economics professor Alan Blinder's poorly-reasoned editorial warning of a shortfall of government spending.

It turns out that Blinder's piece was just a part of a larger current exchange in several venues between liberal Democratic Keynesians and their adversaries who espouse more modern economic theories.

On Tom Keene's noontime Bloomberg program he described the Krugman/Blinder Keynesian position versus that of Alan Meltzer and other more modern economic thinkers, then had an on-air talk with Meltzer.

Meltzer noted that Krugman and, by inference, Blinder, espoused a rather old, primitive Keynesian brand of economic theory which ignores the last few decades of rational expectations work.

Specifically, Meltzer discussed more recent economic work showing that investors and consumers take note of government actions and develop expectations as a result which then affect their behavior.

These reactions involve several of the points I made in yesterday's post, i.e., expectations by consumers and investors regarding future tax and interest rates affect their behavior in a very dynamic and sensible manner. Some of that effect can result in a sort of palsy, in which both spending and investment await less government intervention and more predictable behaviors.

Meltzer's comments added an interesting dimension to the exchange because, without appearing mean-spirited, he basically characterized Blinder, Krugman and their kindred economists as rather backward and primitive, clinging to a discredited, eighty-year-old theory which has been eclipsed by new theory based upon empirical research.

Between Reynolds' empirical work undercutting traditional Keynesian stimulus programs, and the Nobel-prize winning work of Lucas and Prescott on rational expectations, it's difficult to understand why any thinking person would take Blinder's and Krugman's ideas seriously.

While I didn't read about Lucas' work while in college or graduate school or, for that matter, years after that, I noticed something which the linked site attributes to him, i.e., that modern Keynesians tend to build econometric models which are bereft of explicit theoretical bases or explanations, as well as being susceptible to only fitting periods on which they were calibrated, rather than being generically effective at prediction of consumer or investor behaviors.

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