Good point ;-) Unfortunately most theories are written in a book or in a paper. I hope you agree that once they are written in a book we’re able to look for evidence in the real world.

Now my impression was that Josh asked about “How do you know that in recessions, unemployment results from a temporary fall in aggregate demand?” The question wasn’t what caused the recession, but what happens to employment while a recession is causing havoc. But I might be mistaken on that?

And I think there’s lot of evidence available that in a recession unemployment increases due to deficient effective demand. You can plot Okun’s Law for the ongoing malaise and it will fit nicely with the developing output gap. I think the Freakonomics guys did a nice job on that a while ago. Good for Okun bad for the economy.

Now because you lauding Robert Barro in a previous blog entry for his ridiculous WSJ article I’ve to assume you are a neo-classical cheerleader. So I do understand your objections, because for your ilk there’s no such thing as “involuntary unemployment”. In this regard it might be worth a try to leave academia and talk to real people.

More generally, if the standard for advancing an argument is to simply quote an untested hypothesis, you may as well quote Marx and argue that the revolution of the proletariat is on the horizon.

Sorry for the late answer. I’m sitting on the other side of the pond. Anyhow your question is a good reason to dig out the General Theory again ;-)

“If the propensity to consume and the rate of new investment result in a deficient effective demand, the actual level of employment will fall short of the supply of labour potentially available at the existing real wage, and the equilibrium real wage will be greater than the marginal disutility of the equilibrium level of employment … The insufficiency of effective demand will inhibit the process of production in spite of the fact that the marginal product of labour still exceeds in value the marginal disutility of employment.” (GT, Chapter 3)

Is there a output gap? The CBO certainly says so. Of course if you subscribe to the Austrian business cycle (better credit-cycle) then this is all very unfortunate, but ultimately nothing can be done about it. The only thing we can hope for is that the invisible hand is doing the math quickly and recalculating and reswitching the economy, causing resources to be reallocated back towards more efficient uses. And “employment benefits” will only hamper Mister Market in doing his calculations properly and swiftly.

I’m genuinely interested in the answer to that question, and you appear to be certain of the answer. Could you please enlighten all of us? Thanks!

But well. I must say I was astonished to read: “How do you know that in recessions, unemployment results from a temporary fall in aggregate demand?” This is only embarrassing. Sorry!

First: You keep talking about “money removed from the economy”. I don’t know what that means. The goal here is to get to rich people to consume less, which will leave more resources available to fund the entreprises that make workers more productive. The estate tax encourages rich people to consume more, and therefore runs counter to that goal.

Second, you are, of course, absolutely right that changes in the estate tax policy cannot retroactively change the consumption behavior of rich people who are dying today. And you are therefore absolutely right that there are no immediate benefits.

Third, however, those changes certainly *can* change the behavior of rich people who are still around making consumption decisions. Therefore there are considerable future benefits. Most people seem to care about the world their children will live in. Of course, if you care only about the present, then you’ll have very different priorities—presumably you’ll be more likely to favor a high estate tax and less likely to care about things like environmental conservation.