American Economic Policy, as told by Martin Feldstein at Harvard University: Lecture 3, Keynesian Economics: Retreat and Return

Emerson Hall Side Entrance
The path to economics class is through a door called philosophy. Emerson Hall, side entrance.

[In this third lecture of his American Economic Policy class at Harvard given on January 29th, Martin Feldstein explains how he and the profession turned away from Keynesian economics, and how he made his way back.]

This morning the Department of Commerce published preliminary estimates of what happened to GDP in the fourth quarter of last year. These estimates will be repeatedly revised, “but you’re a policy maker and you know only what you know, and this is what you know.”

The estimates are seasonally adjusted and expressed as annual rate after controlling for price changes. Growth was pretty crummy at an annual rate of 0.7%, down from an annual rate of 2.0% during the previous quarter. Should we be worried? Are we slipping into a new recession?

Consumer spending was growing at 2.2%, contributing 1.5% to GDP growth, and residential construction was good. But fixed investment in structures and equipment was negative and pulled growth down, as did exports and changes in inventories. These negatives added up to 1.2, the pluses to 1.8, so we are left with about 0.7% for overall growth.

This gives you a picture of what was going on. The folks at the Fed have to ask if they will keep raising interest rates.

This is the great thing about being in economics: there is always new stuff happening and new information being released to help you figure it out.

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