In recent days, there has been some talk here about wealth effects and how they might complicate the interpretation of the multiplier. The claims made about that the multiplier understates the likely expansion as a result of the wealth effects is somewhat misleading but that is another story. The fact is that the inclusion of wealth effects has a long standing in economics. They were initially used as part of the mainstream denial that involuntary unemployment could exist in a market economy with flexible prices. This goes back to the famous Keynes versus Classics debates. In that debate, the mainstream argued that the wealth effects would be sufficient to restore full employment during a recession without any need for government intervention. The problem is that the ideas do not withstand scrutiny – either theoretically and empirically. They certainly do not provide a credible attack on the Modern Monetary Theory (MMT) claim that fiscal policy intervention is required to combat a situation where aggregate demand is deficient relative to the productive capacity of the economy. This spending gap manifests as involuntary unemployment in the absence of an appropriate policy response. Given the ideological position that these “wealth effects” have occupied in the literature I am always suspicious when someone proposes we take them seriously. That is what this blog is about.