Sigh: John Cochrane Is completely wrong. He writes:
Economist Debates: Keynesian principles: The basic Keynesian analysis... is simply wrong. Professional economists abandoned it 30 years ago when Bob Lucas, Tom Sargent and Ed Prescott pointed out its logical inconsistencies.... Robert Barro's Ricardian equivalence theorem was one nail in the coffin. This theorem says that [fiscal] stimulus cannot work because people know their taxes must rise in the future...
Barro's "Ricardian equivalence" case describes the conditions under which tax cuts do not affect interest rates or consumption spending. Barro's case has no implications whatsoever for the effect of government spending increases on employment, production, and output. None.
It gets worse. Cochrane writes:
Economist Debates: Keynesian principles: How can borrowing money from A and giving it to B do anything? Every dollar that B spends is a dollar that A does not spend.... Neither fiscal stimulus nor conventional monetary policy (exchanging government debt for more cash) diagnoses or addresses the central problem: frozen credit markets...
"Frozen credit markets" means that private intermediaries cannot borrow money from A and give it to B. And if Cochrane is right that "[e]very dollar that B spends is a dollar that A does not spend," then every dollar that B does not spend is a dollar that A spends. So if government deficit spending cannot do any good to boost employment, frozen credit markets cannot do any harm to reduce employment either.
But frozen credit markets have reduced employment: the unemployment rate has gone screaming toward the sky like a rocket:
How can this be, when all that frozen credit markets mean is that B cannot borrow from A, and so B does not spend but A does? And if B not borrowing from A because of frozen credit markets can have a big negative effect on employment, then is there any reason not to think that the government borrowing from A and spending it might not have, through similar mechanisms, a big positive effect on employment?
Perhaps Cochrane has some more complicated story in mind. Perhaps the goods that B would have spent his or her money on are goods made in high-value capital-intensive production processes while the goods that A would have spent his or her money on are goods made in low-productivity production processes, and that the shift in demand from B to A has reduced labor productivity and reduced the real wage, and as a result of this fall in the real wage a huge number of workers--5.2 million--have decided that at current wage levels it is worth their while to take vacations?
I can't see any sign of real employee compensation cost declines as a result of the frozen credit markets at all. The terms on which you get a job--if, of course, you can get a job right now--are the same this year as they were last year or the year before. It's just that, scaled by population growth, 5.2 million fewer people have jobs this year than had them two years ago.