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The Road to Recovery: How and Why Economic Policy Must Change by Andrew Smithers

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15

The Need for Change in Economic Theory and the Resistance to It

Current economic policies seem to me to be both inadequate and dangerous. They are inadequate in that they have not produced a satisfactory recovery and are unlikely to do so. Advocates either of more fiscal or of more monetary stimulus are assuming that the current weakness in demand is cyclical. They assume that the failure of consumers to spend or businesses to invest is due either to deleveraging or to caution and that these inhibitions would be overcome by the same policies of fiscal and monetary stimuli that have tried and so far failed. They are convinced that their medicine is correct and that their patients will recover, provided they take even greater doses. I have argued that this view does not accord with the facts. Corporate buy-backs are inconsistent either with a wish to deleverage or with a cautious and fearful view of the future. If companies were nervous of their prospects they would be seeking to lower debt and conserve cash, rather than spend it on buy-backs. The same lack of attention to data is the root cause of the barrage of bad advice that has been given by many foreign, and some domestic, economists to Japanese policymakers. Arguments are said to be a priori when they depend on theory rather than evidence. But good theory is supported by data rather than being in conflict with them, so the accusation of an aprioristic bias logically requires that the theory on which the argument is based ...

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