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I just wane explain what Keynes was thinking, even while I don't agree. For Keynes it was all about overall spending, Aggregate Demand. If overall Aggregate De

by nickik 8y ago

I just wane explain what Keynes was thinking, even while I don't agree. For Keynes it was all about overall spending, Aggregate Demand. If overall Aggregate Demand goes down then you have recession. Then in some cases monetary policy can not raise AD anymore because of the 'liquidity trap' (interest rate at zero). In that case the only way to get out of the AD whole is for government to spend more money that they have either saved up, or make debt. Meaning that government could lower taxes, build roads or even to make his point 'pay people to dig wholes and close them'. He just tried to make the point that it had nothing to do with the productivity gain of the actual activity. The reason why Keynes was wrong is that the 'liquidity trap' is not a real thing. Second, even if it were real, the government fiscal policy would be unable by itself to raise AD and keep it raised. Even worse, if you tried to do that you would not only end up with AD shortfall but also with high debt (see Japan).

_Tev 8y ago
Good summary of the argument. I'll just note that this: > The reason why Keynes was wrong is that the 'liquidity trap' is not a real thing. Second, even if it were real, the government fiscal policy would be unable by itself to raise AD and keep it raised. ... is something many people would disagree with, especially as you provided no data to back it up. It's of course topic for longer discussion, I am just pointing out where is the disagreement.
- nickik 8y ago
  Well, its a hacker news comment. However I can tell you that evidence of the fiscal multiplier has been a terrible and if you look at where monetary policy was contracting fiscal multiplier is negative. Also, there are tons of countries who already have successfully eased monetary policy at the ZLB. Switzerland, Denmark, Sweden and so on. It was also in all monetary textbook before the crisis and was considered standard knowledge by many monetary economist. Even people like Krugman would agree that with setting a higher inflation target the Fed could have been more aggressive.

by nickik 8y ago

_Tev 8y ago

Good summary of the argument. I'll just note that this: > The reason why Keynes was wrong is that the 'liquidity trap' is not a real thing. Second, even if it were real, the government fiscal policy would be unable by itself to raise AD and keep it raised. ... is something many people would disagree with, especially as you provided no data to back it up. It's of course topic for longer discussion, I am just pointing out where is the disagreement.

nickik 8y ago
Well, its a hacker news comment. However I can tell you that evidence of the fiscal multiplier has been a terrible and if you look at where monetary policy was contracting fiscal multiplier is negative. Also, there are tons of countries who already have successfully eased monetary policy at the ZLB. Switzerland, Denmark, Sweden and so on. It was also in all monetary textbook before the crisis and was considered standard knowledge by many monetary economist. Even people like Krugman would agree that with setting a higher inflation target the Fed could have been more aggressive.