Theory, Explanation, and Policy
By Arnold Kling
there are many so-called Keynesians who have been out there promoting policies that are quite the opposite. They have been promoting the re-capitalization of banks, forcing banks to lend, automotive bailouts, and a push toward developing “green” jobs. These attempts to micromanage the supply side of the economy are not consistent with Keynesian stimulus or that of modern macroeconomic theory.
In my mind, there are three dots that need to be connected:
2. the explanation for the recent crisis
3. policy to get us out of the crisis.
Hendrickson is worried about the disconnect between (1) and (3). I agree. But I also worry that there is a disconnect between (1) and (2) and between (2) and (3).
Neither textbook macro nor modern theory is focused on sudden shifts in the risk premium, although I think it is impossible to describe the recent crisis without referring to such a shift. In a sense, what we have is a a “just so” story, and not a theory. That in turn makes the connection between theory and policy rather tenuous.