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More on Aggregate Demand and Micro-level Coordination

Earlier this week, Paul Krugman claimed that the current stimulus plan is “too small and too cautious.”  And, as I mentioned, my colleague Tom Hazlett (and his co-author George Bittlingmayer) offered empirical evidence against Krugman’s claim.

I weighed in, taking another angle, with this letter to the New York Times:

To the Editor:

Paul Krugman insists that the current stimulus plan will fail because it is too small (“Behind the Curve,” March 9). We non-Keynesian economists also believe that it will fail, but for very different reasons: the chief problem is less one of deficient aggregate demand than it is one of poor coordination of the plans of producers with the (non-bubblicious) demands of consumers.

Economic prosperity requires that workers whose jobs were created by the bubble be redeployed into jobs that are viable.  Stimulus spending does nothing to promote this greater coordination of economic activities – and, by promising higher taxes or higher inflation in the future, likely interferes with the economy’s capacity to coordinate.

Donald J. Boudreaux

Any deficiency in aggregate demand is more a statistical consequence of failed economic coordination (at the micro level) than it is a foundational cause of economic malaise.

There’s no doubt that failures to coordinate in any individual market can cause consumer demands in that, and in other, markets to be lower than they would be were coordination more complete.  But, again, first, the problem is not one of deficient aggregage demand, and second, any deficiencies of demand are more a consequence than a cause of economic woes; to the extent that these deficient demands in each market further contribute to economic downturns, they are a secondary problem — not the fundamental one.

As I recall my professor Roger Garrison pointing out many years ago, at the very least, Keynes’s 1936 book should have been titled A Special and Secondarily Important Theory of Employment, Interest, and Money — rather than The General Theory of the same.