(With Stephen S. Golub) This long-awaited book, coauthored by Nobel laureate and Yale University emeritus professor Tobin, is the essential guide to monetary theory for those who need the best available, most authoritative economic explanations. This fundamental introduction includes authoritative coverage of the mechanisms of the Federal Reserve and how its policies affect investment activity via interest rates and the credit offered to private borrowers.
NAIRU and NATURAL RATE are not synonymous. NAIRU is a macro outcome of an economy with many labor markets in diverse states of excess demand and excess supply. NAIRU represents an overall balance between the inflation-increasing pressures from excess-demand markets and the inflation-decreasing pressures from excess-supply markets. The natural rate, as described by Friedman, is a feature of walrasian market-clearing general equilibrium. While the NAIRU fits into a Keynesian model, the natural rate is an aspect of a New Classical model. The determinants of the two are theoretically different, and so are their implications for policy. The NAIRU varies from time to time as the relationships between unemployment, vacancies, and wage changes vary, and as the dispersion of excess demands and supplies across markets changes. In this decade, these developments appear to be reducing the NAIRU, in contrast to the unfavorable circumstances of the 1970s
It is essential to distinguish between limits on national output and limits on its rate of growth. In the short run if output is below potential, demand stimulus can temporarily increase output and employment, with growth rates that cannot be sustained once the economy reaches full employment, potential output. This barrier is commonly called the NAIRU. The paper discusses the possibility that the economy can reach lower unemployment rates than previously thought, without increasing inflation. As to raising the sustainable rate of growth of potential output, the paper discusses skeptically various proposals: fiscal austerity, tax cuts, downsizing government. Many proposals can at best raise the level of output, not its sustainable growth; many can do neither; some are perverse. Government policies to raise national saving, private and public investment in tangible and human capital, science and technology are the best hopes, but the payoffs are likely to be slow
It is essential to distinguish between limits on national output and limits on its rate of growth. In the short run if output is below potential, demand stimulus can temporarily increase output and employment, with growth rates that cannot be sustained once the economy reaches full employment, potential output. This barrier is commonly called the NAIRU. The paper discusses the possibility that the economy can reach lower unemployment rates than previously thought, without increasing inflation. As to raising the sustainable rate of growth of potential output, the paper discusses skeptically various proposals: fiscal austerity, tax cuts, downsizing government. Many proposals can at best raise the level of output, not its sustainable growth; many can do neither; some are perverse. Government policies to raise national saving, private and public investment in tangible and human capital, science and technology are the best hopes, but the payoffs are likely to be slow.
NAIRU and NATURAL RATE are not synonymous. NAIRU is a macro outcome of an economy with many labor markets in diverse states of excess demand and excess supply. NAIRU represents an overall balance between the inflation-increasing pressures from excess-demand markets and the inflation-decreasing pressures from excess-supply markets. The natural rate, as described by Friedman, is a feature of walrasian market-clearing general equilibrium. While the NAIRU fits into a Keynesian model, the natural rate is an aspect of a New Classical model. The determinants of the two are theoretically different, and so are their implications for policy. The NAIRU varies from time to time as the relationships between unemployment, vacancies, and wage changes vary, and as the dispersion of excess demands and supplies across markets changes. In this decade, these developments appear to be reducing the NAIRU, in contrast to the unfavorable circumstances of the 1970s.
Full Employment and Growth presents James Tobin’s unique modern Keynesian slant on the major monetary, fiscal, and international policy issues of the 1990s.
More than twenty recent essays collected together in this volume address the major contemporary issues of macroeconomic policy, especially in America. Usually dissenting from the orthodoxies of the day, both liberal and conservative, Professor Tobin offers a common sense, unhysterical view of public deficits and debt, speaks for pragmatic monetary policies, argues against protectionism and favors slowing down the speculative movement of funds between currencies. He also presents his own suggestions for reform of social security and health care.
Again and again, Professor Tobin warns against blind faith that the markets will always produce optimal results. All those interested in the application of economic analysis and argument to the salient policy issues of our time will find these essays eminently readable and will appreciate the clear ways in which the power of economic analysis is explained and used.
This paper is intended to be a chapter in a forthcoming “Second Edition” of John Maynard Keynes, The General Theory of Employment, Interest and Money, published in one single edition in 1936. The Second Edition is being edited by Geoffrey Harcourt and Peter Riach and will contain contributions by 30 or 40 authors. It is to be published by Routledge, it is hoped in 1996, the 60th birthday of the great book. Most of the contributions correspond to the chapters of the original book, and others are essays about the book or natural extensions of it. The chapter of the Second Edition I was asked to write might be regarded as a revision of Keynes’s Chapter 18, “The General Theory of Employment Restated,” but it is meant to be more inclusive and may appear as a preface or conclusion to the Second Edition.
Each of the proposed revised chapters of The General Theory is meant to be what the 1994 author thinks Keynes would have written if he had had the time and health to prepare a revised edition by 1946. This revision, written as if by Keynes some fifty years ago, is Part I of a Second Edition chapter. In part II the modern author gives his or her own view of the state of the topic in the 1990s. Those are the functions of Parts I and II of my paper.
It is a daunting task to take on the role of Keynes. It’s presumptuous too. I know I can’t write, either in content or style, as Keynes would have done. I have not tried to be a close scholar of the Keynes papers, inferring from them what his own second edition in the 1940s would have said. Although I have stuck close to the essential themes of 1936, as I understand them, I am sure that much of what I have written is colored by what I would like a second edition prepared by Keynes himself to have said. In Part II I discuss changes in Keynesian theory suggested by events in the world and in professional macroeconomics since World War II, and I argue that Keynes still has the better of the big debate.
This paper is intended to be a chapter in a forthcoming “Second Edition” of John Maynard Keynes, The General Theory of Employment, Interest and Money, published in one single edition in 1936. The Second Edition is being edited by Geoffrey Harcourt and Peter Riach and will contain contributions by 30 or 40 authors. It is to be published by Routledge, it is hoped in 1996, the 60th birthday of the great book. Most of the contributions correspond to the chapters of the original book, and others are essays about the book or natural extensions of it. The chapter of the Second Edition I was asked to write might be regarded as a revision of Keynes’s Chapter 18, “The General Theory of Employment Restated,” but it is meant to be more inclusive and may appear as a preface or conclusion to the Second Edition.
Each of the proposed revised chapters of The General Theory is meant to be what the 1994 author thinks Keynes would have written if he had had the time and health to prepare a revised edition by 1946. This revision, written as if by Keynes some fifty years ago, is Part I of a Second Edition chapter. In part II the modern author gives his or her own view of the state of the topic in the 1990s. Those are the functions of Parts I and II of my paper.
It is a daunting task to take on the role of Keynes. It’s presumptuous too. I know I can’t write, either in content or style, as Keynes would have done. I have not tried to be a close scholar of the Keynes papers, inferring from them what his own second edition in the 1940s would have said. Although I have stuck close to the essential themes of 1936, as I understand them, I am sure that much of what I have written is colored by what I would like a second edition prepared by Keynes himself to have said. In Part II I discuss changes in Keynesian theory suggested by events in the world and in professional macroeconomics since World War II, and I argue that Keynes still has the better of the big debate.
Universal coverage, it is argued, implies universally required insurance, to avoid adverse selection into last-resort care implicitly guaranteed. It also entails community rating, such that insurers cannot choose among risks. Individual mandate makes more sense than employer mandate. A system is proposed in which individual can choose among a government Medicare-like plan and private insurance offering equivalent services. Means-tested assistance would help individuals pay premiums.
Universal coverage, it is argued, implies universally required insurance, to avoid adverse selection into last-resort care implicitly guaranteed. It also entails community rating, such that insurers cannot choose among risks. Individual mandate makes more sense than employer mandate. A system is proposed in which individual can choose among a government Medicare-like plan and private insurance offering equivalent services. Means-tested assistance would help individuals pay premiums.
Friedman identified his “natural rate” as Walrasian equilibrium. Keynes’s “full employment” is also classical equilibrium: labor markets are clearing at existing real wages. Why is equilibrium unemployment not zero? Keynes and Friedman cite, but do not explain, “frictional” unemployment. They differ on what explains cycles. Friedman and Lucas answer: misperceptions of inflation. Markets clear at wrong prices and quantities. Today New Classicals stress variations in the natural rate itself. In Keynesian cycles markets don’t clear. Excess supplies or demands trigger Phillips-curve movements of wages and prices. Unemployment and vacancies coexist in varying proportions because inter-sectoral shocks always occur. Adjustment dynamics, not representative-agent equilibria, determine the economy’s behavior at NAIRU and other unemployment rates. Money makes a difference, not because of money illusions or misperceptions but because adjustments begin with nominal wage and price responses.
Friedman identified his “natural rate” as Walrasian equilibrium. Keynes’s “full employment” is also classical equilibrium: labor markets are clearing at existing real wages. Why is equilibrium unemployment not zero? Keynes and Friedman cite, but do not explain, “frictional” unemployment. They differ on what explains cycles. Friedman and Lucas answer: misperceptions of inflation. Markets clear at wrong prices and quantities. Today New Classicals stress variations in the natural rate itself. In Keynesian cycles markets don’t clear. Excess supplies or demands trigger Phillips-curve movements of wages and prices. Unemployment and vacancies coexist in varying proportions because inter-sectoral shocks always occur. Adjustment dynamics, not representative-agent equilibria, determine the economy’s behavior at NAIRU and other unemployment rates. Money makes a difference, not because of money illusions or misperceptions but because adjustments begin with nominal wage and price responses.
Both New Classical and New Keynesian macroeconomic theorists misunderstand and distort old Keynesian economics, alleging that its diagnoses and prescriptions depend on the indefensible assumption that money wages and prices are “rigid.” Here it is argued that all Keynesian macro requires is that labor and product markets are not instantaneously and continuously cleared by perfectly flexible prices. Assuming imperfect flexibility, not necessarily rigidity, suffices to open the door for involuntary unemployment. Moreover, once the economy is displaced from full employment, it is far from clear that economy-wide movements of money wages and prices will, in the absence of Keynesian demand policies, restore equilibrium. The real balance effect is too feeble, and may be overcome by debt burdens. The processes of deflation and disinflation can be inherently destabilizing. These problems, stressed by Irving Fisher as well as by Keynes and Keynesians, are ignored in “new” macroeconomics.