Rebranding Additive Shocks
By Bryan Caplan
know about you, but I don’t recall reading; “Severe AD shocks are
really, really bad, except when the economy is also suffering from some
other structural problem. Then they’re just dandy!”
As an analogy, suppose you had pneumonia, and then someone stabbed
you in the gut. You show up at the hospital, and the doctor says
“there’s no need to patch up that knife wound, your real problem is
pneumonia.” I think you’d look for another doctor. A severe AD shock
causes lots of unemployment; that’s true whether you start from full
employment, or whether you already have lots of unemployment from
So when economists react to the sharpest fall in NGDP since 1938 by
announcing that the economy really needs tighter money, I’m inclined to
react as if a doctor ordered leeches for someone already bleeding from
a knife wound. I’m going to look for another economist.
I wonder if Arnold would like to suggest an alternate medical analogy.