I spell out my current thinking on macroeconomics.

Over the past twenty years, Keynesian forecasters, such as Morgan Stanley’s Stephen Roach, have predicted many phantom recessions–slumps that never took place. In order to remain attractive, the picture of Keynesian economics has to be heavily airbrushed.

My current view is that what we call “cyclical” unemployment is in fact a severe version of structural and/or frictional unemployment. During the Great Depression, many government policies, such as the National Recovery Administration, served mainly to create structural unemployment. There also was an unusually high level of frictional unemployment, as the spread of motorized road transport greatly altered the efficient structure of production.

Given this theoretical outlook, I would be inclined not to forecast a severe recession in 2008.

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