A 2% Inflation Rate Requires in the Long Run a 4% Rate of Growth in the Employment Cost Index
The Output-Employment Gap

John Maynard Keynes on the Ricardian Vice

Paul Krugman writes:

The Demand-Side Temptation: Nick Rowe makes a good point: most of the time, in market economies, sellers feel constrained while buyers don’t... because perfect competition is actually rare.... [T]hat... is how most New Keynesian models set things up: the classic NK model is one in which a number of little monopolists sell differentiated products, at prices they set and revise only occasionally.... [I]n these models more demand actually is good for everyone: if you could keep the economy running a bit hot all the time, that would be a positive thing. The problem is that you can’t: a monetary policy that tries to keep unemployment below the “natural” rate may initially be welfare-enhancing, but only at the cost of ever-accelerating inflation.

Rowe goes on to suggest that demand-side logic is dangerous, because it appeals to our sense that more demand is always better, and could lead to irresponsible policies. Well, there have been times and place where that was true: Latin America used to have outbreaks of macroeconomic populism, Britain had its “go for growth” debacle in the early 70s, and so on. But what I think Nick misses is the power of the contrary narrative, of the notion of the government as being like a family that must tighten its belt when the rest of us do, of the evils of printing money (hey, I can’t do that, why can Bernanke?).

As so often, Keynes was there first:

The completeness of the Ricardian victory is something of a curiosity and a mystery. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.

Add to this the Kalecki notion that captains of industry want governments to believe that it’s all about being nice to business, which makes them hostile to any active policy, and I think you have a rough explanation of the fact that right now hostility to demand-side policies, rather than demands for more, rule our discourse.