The Macroeconomic Reversal

Link is broken, you need a http:// instead of http//

[Fixed. Thanks!--Econlib Ed.]

Year on year percent change of final sales of domestic purchase had gone negative for 5 straight quarters beginning in the 4th Q of 2008. Prior to this, there had only been one negative quarter prior to this in the FRED database starting from 1947 and that was in 2nd Q of 1954. If monetary policy is ineffective in mitigating a drop in aggregate demand, how do you account for the lack of decline in aggregate demand during the previous 50 years or more? Luck?

I would suggest monetary policy can be and is effective when it is tried. The problem during this recession is that the Fed screwed up by letting aggregate demand fall because it was so focused on one sector of the economy only, banking, and not the economy as a whole. It got away from the traditional tools of using open market operations to increase demand and instead got involved with bailing out the banking sector.

So, completely contrary to what you are saying, bailing out the banks did not matter, did not prevent a fall in aggregate demand, and did not prevent the worst downturn since the great depression. The bank bailout proved to be a failure.

What concerns me, in terms of aggregate demand, is the time needed to actually come out of the Great Depression. Sure, the government was able to create make work projects, but by the time the economy was actually humming along, the total economy was practically unrecognizable to the one that existed in 1929. Is that what one might actually expect in the present? Perhaps a growing economy might not be measured until people are living in ways that do not even require automotive transportation. Ouch!

Rowe: "If we had better regulation and/or supervision of financial markets and institutions, we wouldn't have gotten into this mess in the first place". That's probably true..."

No it ain't! Machlup wrote a book back in 1935 proving it. Even back in the 1920s the Feds wanted to flood the country with money and have regulation channel it into "productive" enterprise instead of the stock market. But regulation has never been able to control the flow of new money created by the Feds. In the latest crisis, regulation that limited the leverage of investment banks might have kept them from going bust, but the new money has to go somewhere so we would have been talking about something besides investment banks failing, but something would have failed.

Changing from irrational faith in monetary policy to irrational faith in regulation doesn't make them any less irrational.

What are the aggregate demand figures for, say, 2000 to 2009? I would like to see that graph.

Andrew,

Click on the link to see the year-on-year change in aggregate demand.

To Tom Dougherty,

You provided a link to a stand-alone graph, and it seems to me that you produced that graph at http://research.stlouisfed.org/fred2/graph/

That page allows plotting any specified series, it seems. So, what is the series and how did you produce that graph?

It does not seem to be a series of "aggregate demand". Maybe it is something that you suggest is a proxy for aggregate demand?

Andrew,

The graph is the year on year percent change of Final Sales to Domestic Purchasers (FSDP). FSDP is the market value of goods and services purchased by domestic residents less changes in private inventories.

This only proves my point that macroeconomic orthodoxy follows political power.

This only proves my point that macroeconomic orthodoxy follows political power.

No way, and I will prove it just as soon as the NEA funds my grant proposal.

ROFL Yancey.