But she’s only clueless because she takes mainstream economic theory seriously, like all the others. This speech was delivered way back in October but only reached me today: Macroeconomic Research After the Crisis. The first heading is, “The Influence of Demand on Aggregate Supply” for which I can give you the definitive answer. There is NO INFLUENCE WHATSOEVER of demand on aggregate supply. Not in the long term and not in the short term. There is none, which is why trying to explain recessions and unemployment by using fluctuations in aggregate demand will get you nowhere in just the same way that trying to induce recovery in an economy in recession by increasing aggregate demand will NEVER work. You want evidence? Just look everywhere around you. Now back to Janet, who wrote:
The first question I would like to pose concerns the distinction between aggregate supply and aggregate demand: Are there circumstances in which changes in aggregate demand can have an appreciable, persistent effect on aggregate supply?
Her answer is “blah, blah, blah, hysteresis, and more blah, blah blah. She grapples with the possibility that demand deficiency may be more than a passing storm and then, ever so gently, suggests that perhaps aggregate demand has nothing to do with it.
More research is needed, however, to better understand the influence of movements in aggregate demand on aggregate supply. From a policy perspective, we of course need to bear in mind that an accommodative monetary stance, if maintained too long, could have costs that exceed the benefits by increasing the risk of financial instability or undermining price stability. More generally, the benefits and potential costs of pursuing such a strategy remain hard to quantify, and other policies might be better suited to address damage to the supply side of the economy.
You know, we are heading back to Say’s Law. They are never going to acknowledge that I might have been right, because being right too soon never gets you credit. It takes time, but we shall see because there is now nowhere else for economic theory to go.