Created: Jan 2013 by Jim Luke. Current Challenges & Research If something cannot go on forever, it will stop. -- Stein's Law (Herbert Stein) ‏ We have met the enemy and he is us. -- comic strip character Pogo

Classical Theory Assumptions: Competitive markets Quick adjustment to equilibrium Say’s Law Rx: Small govt, balanced budget Laissez faire Supply-side focus Predictions: Self-regulating economy Short recessions / inflations Inflation OR recession Problems: Big business & big govt Public goods/externalities Expectations & AD Fiat money Poor Empirical track record

Keynesian Theory Assumptions: Monopolistic markets Sticky prices/wages “Animal Spirits” Expectations Financial and asset markets especially prone to crises and boom-bust cycles without ‘real’ economic reasons Rx: Counter-cyclical fiscal policy Monetary policy to lower interest rates Not effective in liquidity trap Balanced budget over cycle Demand-side focus Predictions: Mild recessions / inflations if recommendations followed Deep, long depressions if recommendations NOT followed Inflation OR recession Govt manages macroeconomic conditions Problems: Practicality: Lag times on policy Size of response

Monetarist Theory (QTM) Assumptions: Competitive markets Can measure money & inflation Velocity is stable Rx: Constant money growth “Wise” central bank Predictions: Central bank manages recessions / inflations Excess money growth = inflation Low interest rates = growth Problems: Liquidity trap Bubbles Open economy Unstable velocity Bias toward inflation-fighting, tends to ignore unemployment Limited “real” impact

Heterodox Theories (Post-Keynesian, MMT) Similar to Keynesian Theory but with: Industrial and financial capitalism tends to be unstable Financial and banking crises are an inherent feature of capitalism Government fiscal policy and strict financial regulation is needed Fiat money systems as actually practiced Rx: Aggressive fiscal policy to assure full employment Increase deficits until full employment achieved Monetary policy should accommodate fiscal policy Strict financial and banking regulation to avoid crises

Policy Challenges Today  Austerity and deficit-cutting or fight unemployment?  Limits or goals of monetary policy  Regulation of banking to prevent crises  Distribution of income