David Shemano: >> >Why do you presume the correlation equals causation?
Bill Lear: >> Basic economic theory says this should happen, and it does. Why is >> this so hard to understand? David: >> Basic economic theory says what? If the government spends more money the unemployment rate decreases? What if I found a situation where the government spent more money and the unemployment rate went up? What would happen to the theory? Michael Perelman wrote: > The theory says it is so, all other things held equal. no & yes. It says that (all else constant) an increase in government spending (or a tax cut for that matter) lowers the unemployment rate -- unless the economy isn't already at full employment. On the other hand, cutting spending (or raising taxes) raises the unemployment rate no matter what (though it's still all else equal). Classical or Austie economic theory misses two points here: (1) they (including Barro and, I guess, Mulligan) assume that they economy is always at full employment -- or, if it isn't, the deviation from full employment is temporary, soon to be solved by "market forces." This is contrary to the dominant theory in macroeconomics (Keynesianism), which somehow became intensely popular during the last year. (2) they assume symmetry: the economy works the same way going up as going down. Alas, "new" Keynesians fall for this trap, assuming that a "recessionary gap" is simply the mirror image of an "inflationary gap." But recessions, if they go too far, can cause debt-deflation depressions, among other things. -- Jim Devine / "All science would be superfluous if the form of appearance of things directly coincided with their essence." -- KM _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
