Gallaway and Vedder on Stabilization Policy
The Quarterly Journal of Austrian Economics, Vol. 9, No. 1, Spring 2006
26 Pages Posted: 28 Jul 2011
Date Written: July 27, 2011
In an article in this journal, “The Fraud of Macroeconomic Stabilization Policy,” Gallaway and Vedder (2000; hence G&V) state that their: “arguments can be summarized with the following propositions" (pp. 31–32) (1.) All major macroeconomic paradigms have as their centerpiece the productivity- adjusted real wage rate. (2.) The productivity - adjusted real wage rate has the property of being a trendless stationary time series. (3.) Variations in the productivity - adjusted real wage are of two broad types: (a) Exogenous shocks and (b) an endogenous recoordinating mechanism. (4.) The exogenous shocks are random in character and generate cycles in the productivity - adjusted real wage rate (and unemployment and economic growth) in the fashion suggested by Slutsky (1927 and 1937). (5.) The endogenous recoordinating dampens the amplitude of these cycles, reducing the variance in the productivity - adjusted real wage rate in the United States by 42 percent over the period 1959 through 1996.(6.) Consequently, short-term economic forecasting is a rather dubious proposition. (7.) Ex post attempts at implementing stabilization policy are destabilizing, not stabilizing. (8.) Therefore, the notion of short-run contracyclical macroeconomic policymaking is an exercise in futility.”
Certainly, their propositions 1, properly understood, and 6–8 do not come as a surprise to Austrian economists. However, what sets Austrians apart from mainstream economists is methodology and consequent analyses. The first section contains an analysis of their methods, which are found wanting. Although G&V “tip their hats” to Austrian economics, in section two, “Incompatibility with Austrian Economics,” we challenge their claim that their analysis is compatible there with. In the conclusion we make some final statements.
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