Any force strong enough to fight against the power of prices should be a strong force indeed, strong enough for all to see. But when economists talk about the "frictions" that keep gluts alive, we usually talk about "sticky prices" and "sticky wages" and cultural norms and public sector unions and a few other forces. Strong forces, yes, and forces I believe in, but stronger than creative destruction and supply and demand? For years on end?
Here's my favorite friction, one that exists by force of contract, not because of worker sociology: Debt. Debt in the household, debt in the firm, and--for state and local governments at least--government debt. Irving Fisher beheld debt destroying a deflating economy, and he wrote an excellent paper about it in Econometrica v.1 back in 1933--a theory of depressions better than anything I've seen in Keynes's General Theory.
Wednesday, September 12, 2012
Garett Jones makes mainstream new-Keynesian macroeconomists and central bankers look like idiot savants with this bright observation about one of the main failures of modern applied macro: