Tuesday, March 3, 2009

Where Are The Rational Expectation Economic Theorists In The Public Media?

One does not find Paul Krugman in his NY Times column or other economists with newspaper articles writing about expectation theory, rational expectations, and efficient markets. There is little widespread mention in public media about Lucas, Prescott, and others who have laid the foundation for expectations in economics. Consumer and business expectations are the Achilles heel of Keynesian economics. Expectations were the objection to Keynesian economics even in the 1930s. In addition, Keynes was writing for his own country, England, which was heavily unionized with extremely sticky wages that would not let the labor market clear and increase employment. That is not the current US problem. Wages could not go down and jobs were not created so the only option Keynes thought was to have the government increase its spending to increase total wages and employment. Similar to the problem that Roosevelt created in the 1930s through wage and price controls. However, Keynesian economics did not work in the 1930s.

Government stimulus spending does not change consumer and business behavior and expectations to cause a permanent increase in demand. The government's stimulus spending only increases demand by at most the amount of government spending and its small if any secondary effects. Unless the public modifies its expectations and increases its own demand, the economy will not improve and government spending by itself will not shift consumer demand and cause a permanent increase to turn our economy around.

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