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Let's look at the actual CW policy versus a kind of generic Post Keynesian macro policy advice. I'm not really in shape in the middle of the week to get into nitty gritty, so I'll keep it generic.

(1) The interest rate should be low and stable.

(2) There should be active automatic stabilizers that kick in when the economy slows substantially.

(3) The economy should be allowed to move toward full employment ... running the economy at a perpetual idle reduces incentive to invest in plant and equipment which reduces productive capacity which increases the level of unemployment at which demand-pull inflation kicks in.

(4) The response to supply-side inflation is medium and long term investment in complementary infrastructure and development that increases productivity growth rates.

CW:

(1) Set the inflation benchmark absurdly low ... 0%-3% ... and use variable interest rates as the primary policy tool.

(2) Target a balanced budget over the business cycle and cap deficit spending at some low level except in periods of actual economic contraction.

The CW set of policies is perennially knocking the economy back from approaching full employment because the productive capacity is not in place to employ those people because the economy has not previously been allowed to approach full employment. Long term public investment in infrastructure and R&D, required to maintain productivity growth, are under constant budgetary pressure, while the focus of the private investment they complement are biased toward the short term by the risk premium required by the volatile interest rates generated by the monkeying around with interest rates.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Sep 3rd, 2008 at 11:30:36 AM EST
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