December 24, 2008
Economic Theory and Bailouts
ThreeSources friend Josh Hendrickson (the Everyday Economist) has an excellent column in TCSDaily on "What macroenomic theory has to say about the financial crisis."
The work of Robert Barro, Charles Plosser and John Long as well as Nobel laureates such as Milton Friedman, Franco Modigliani, Finn Kydland, and Ed Prescott have much to say about the impact of macroeconomic policy.Unfortunately, with a few notable exceptions, the work of these economists has received scant attention during the current crisis. Nonetheless, their work remains important in explaining the futility of much of the current policy prescriptions. Equally disturbing is the return of self-professed Keynesians with policy prescriptions that are wholly inconsistent with both Keynes and modern macroeconomic theory.
He explains several theories that speak to expected efficacy of stimulus plans. If there's a common thread, it's that none of them predicts much success for the proposals under consideration.
Oh well, Merry Christmas!