University of Chicago finance professor John Cochrane believes that slow economic growth “trumps every other economic problem.”
He and a number of macroeconomists believe that the Keynesian model drilled into your head in Econ 1 has a number of shortcomings that make it produce lousy economic policy, even in its New-Keynesian version. Shortcoming number one is that the New-Keynesian models do a very poor job of explaining reality. Just how poor a job is shown in the graph below.
In a July 2, 2014, Wall Street Journal op-ed he explained that the New-Keynesian models have a number of possible solutions. The ones most attractive to those in power produce “attractively magical policy predictions” in which “government spending, even if financed by taxes, and even if completely wasted, raises GDP.” Even if the assumptions were made more realistic, it might not be a good idea to use their untested predictions to drive “trillions of dollars of public expenditures.”
Paul Krugman is apparently so entranced by the magic that he believes that forcing firms to replace capital, even if it makes them poorer, “can stimulate spending and raise employment” and “the broken windows fallacy ceases to be a fallacy.” In this alternate universe, hurricanes Katrina and Sandy could do more for U.S. economic growth than the development of the petroleum industry, the refinement of the internal combustion engine, the development of the electric power industry, or the development and use of the semiconductor transistor.
Professor Cochrane writes that macroeconomists looking at new ways to explain the slow growth disaster are considering the uncertainty introduced by arbitrary policy changes, large distorting taxes, intrusive regulations, and the “unintended disincentives of social programs.”
If these new approaches are correct, and one’s goal is to inflict maximum economic damage on Americans, ObamaCare is a smashing success. It affects the whole population, generates huge uncertainty from arbitrary policy changes, imposes large distorting taxes, generates exponentially expanding intrusive regulations, and has already resulted in a veritable mother lode of unintended disincentives to work, employ people, provide medical care, start new businesses, and continue to operate existing ones.