I was guided towards John Cochrane’s blog, The Grumpy Economist, by a post at Catallaxy and what should greet my eyes Cochrane’s latest post on Three views of consumption and the slow economy. The man, for all his self-description as a free market economist, is a Keynesian. He wonders why consumption growth has failed to recover and provides three possible explanations under the following headings:

• New Keynesian
• Permanent income
• Old Keynesians

Here is Cochrane’s conclusion:

Enough history of thought, though. The relevant choice today is between the first two alternatives. Are we in a situation where the long run is just fine, but the zero bound is forcing us to have too high interest rates, so consumption growth is too high and the level is depressed? Or are we in a situation that consumers doubt the long-run productive capacity of the economy, and are consuming little today because they expect to consume little tomorrow and little 10 years from now?

The answer matters: whether the economy can be stimulated merely by more solemn promises from the Fed about future interest rates and inflation, by broken-window interventions that reduce supply today to engender some inflation, or whether the economy must be stimulated today by ignoring short-run stimulus, fixing the long run, and counting on the permanent income model to increase consumption, and the present value model (q theory) to increase investment today.

The idea that anything is dependent on consumer beliefs about how the future will pan out is a very farfetched way of thinking these problems through. I fear he will never understand how things work so long as he believes that it is the will of demanders that makes the difference when the beliefs about the future makes as close to no difference whatsoever to the level of consumption growth as anything I could possibly imagine.