Crazy ideas have a habit of re-entering the public policy debate even if they have been comprehensively rejected in theoretical and/or empirical terms. In fact, the whole edifice of neo-liberal thinking, which dominates the public debate now, was discredited by Keynes and others during the Great Depression and fell into irrelevance for most of the Post World War 2 growth period which delivered full employment. There are sub-sets of crazy ideas within the neo-liberal narrative that are in a similar position. In the early 1980s, we started to be barraged with what is known as supply-side economics, which amounted to a categorical rejection of demand-side measures (active fiscal policy intervention). One of the major claims of the supply-side approach was that deregulation and large tax cuts for the high income earners and companies would generate massive increases in real GDP growth (and national income) which would trickle down to the low-income earners. To fit this into the neo-liberal rejection of budget deficits they also had to come up with the claim that the tax cuts would actually generate offsets in tax revenue and improve the budget balance. This was the comedy that became known as the Laffer Curve. The economist who was pushing that line in the 1980s has also maintained an intense opposition to any use of fiscal policy to stimulate real GDP growth. He claims that the recent history shows that fiscal policy expansion damages growth. But when you dig into his argument you realise that the comedian is still trying to make us laugh. The only problem is that he isn’t very funny.

I was reading several older papers from the 1990s today as part of a project I am working on where I track predictions that leading mainstream economists were making at the time about the evolution of national and global economies. It is a very interesting exercise to build the narratives that were popular at an earlier time and then consider how far the economists got things right. I have noted that there has been some debate out in blog-land about who predicted the failure of the Euro. I am less interested in documenting which person was the first or the second – there were many who saw the design flaws from the inception and could extrapolate what they would mean if a negative shock occurred. Modern Monetary Theory (MMT) economists were among them. I am more interested in groupthink (at the paradigm level) and how the failed predictions can be used to demonstrate the inapplicability of a certain body of theory. That is, what can we learn from the failure of mainstream economists in general to see the crisis coming (and being in denial now of what the solution is). In this blog I consider a part of the thinking that explains why my profession proved to be unreliable in this regard. I renamed this blog – appending it with the term redux because on March 23rd, 2009 – I wrote a blog – Budget surpluses are not national saving.