Regular readers are sick of this, so just take a vacation and come back next week. I keep being told that no one’s interested even as I have record volume of viewers. (Didn’t Yogi Berra say “nobody goes there anymore, it’s too crowded.”) I’m interested, and I’m the one who decides.
In a perfect world I’d lay out a concise logical proof that Simon Wren-Lewis and Paul Krugman are wrong. And number each point. They’d respond saying which of my points were wrong, and why. Then I’d reply. It would be something like this:
1. Wren-Lewis claimed actual C would fall, but would decline less than actual Y-T. I claim that because he said it, and because he assumed consumption smoothing.
2. Point one implies that actual private saving fell, because actual saving equals actual income minus actual consumption.
3. Wren-Lewis was considering the balanced budget multiplier, so if actual private saving fell, then actual national saving fell by an equal amount.
4. Because actual saving fell, actual investment also fell. It might have been less fixed investment, or less inventory accumulation. But actual investment fell. This is because even Wren-Lewis admits that S=I is an identity for actual saving and actual investment (not desired saving and investment.)
5. Then Wren-Lewis said fiscal stimulus with consumption smoothing would work because G would rise more than C fell , and hence AD would rise. But this ignores the fall in investment. He implicitly treated the extra saving [edit: I meant reduced saving] as if it just disappeared. And that’s not just wrong, it’s wrong in a very important way for us non-Keynesians. (Just as the Treasury view drives Keynesians insane.)
I certainly don’t expect Krugman to attempt to refute any of these 5 arguments (how could he?), but lesser lights over in the liberal macroeconomic blogosphere are welcome to take a stab at it. In a few days I’ll report back on the number who took up the challenge.
I now face an unprecedented flood of comments. Some, like the first comment on the previous post, provide comic relief. But I simply don’t have the time to respond to 5,000,000 commenters who say “I’ve never taken a macro course, but I wondered why S=I. Suppose I just put money in the bank?” Go look at all my previous responses, I’ve answered every question.
And no offense readers, I do welcome your interest. And I take partial blame for not doing the 1-5 list earlier. But I have simply run out of time. So take any comments that you think actually address this issue, and bring them over here.
The rules are as follows. In this post you must start your comment: “I disagree with point x.” And then you must tell me why. Otherwise I won’t respond. Let’s do other topics on other posts. This will streamline things and help me save lots of time. I won’t have to repeat the same answer a hundred times.
People are telling me “Please stop, you’ve made your point. You’re right, now just move on.” Glad to hear I’m right, but I won’t stop until I hear that from one particular person, and he doesn’t teach at Oxford.
PS. There’ll be plenty of monetary stuff next week with the big Fed meeting. But I just can’t let this go. I have a personality disorder where I get annoyed when people with big platforms make me look like a fool, even though I know I’m right. And I’m just too busy right now to go to a psychiatrist to get it treated.
PPS. Relevant links are in the previous two posts.