Roger Farmer’s Main Points

Hey everyone I hope you all had a nice spring break! Real quick here are some notes that I took on Roger Farmer’s Prosperity for All book. There is a chance I might have missed some important ideas and topics but I wanted to keep it relatively concise so that it would fit in a blog post. Because we have presented and learned about the the major schools of thoughts, I figured I would write this post as a refresher and to serve as a reference for when we contrast what Farmer has proposed.

Roger Farmer’s Prosperity for All: How to Prevent a Financial Crises

Farmer’s 5 Main Points:

  1. Stock market and financial assets are important for economic growth
  2. Stock market fluctuations influence the unemployment rate
  3. Central Bank and Fed should target the inflation rate under monetary policy

Government should target the unemployment rate under fiscal/financial policy

  1. Unemployment can be permanently above natural rate
  2. Self-fulfilling prophecies and expectations are important

Confidence in markets are key to market efficiency

“Animal Spirits” influence markets

  • Central Bank should buy & sell shares each month depending on the unemployment rate (Farmer, Page 18)
  • Great Recession was a result of a deviation in the Natural Rate of Unemployment

Dismisses the Phillips Curve and Natural Rate Hypothesis

  • Neoclassical + Keynesian Economics = basis of Roger Farmer’s model and theories
  • Economics should be changed over time

With the introduction of new data and random anomalies comes the response of fixing models and modifying theories

  1. There is a continuum of possible equilibrium unemployment rates
  2. The unemployment rate that prevails is determined by the “Animal Spirits” of investors

The stock market influences the unemployment rate and expectations influence decisions

  • Natural Rate of Unemployment: the sum of structural and frictional unemployment is referred Is the average level of unemployment that is expected to prevail in an equilibrium economy, with the absence of cyclical unemployment.

Dismisses wage and price stickiness in terms of prevailing unemployment

  • Aggregate Demand depends on wealth not income
  • Keynes Search Theory + Belief Function = Explanation for GDP, Price Level, and Employment
  • Beliefs should be fundamental in models
  • Deviations in “Animal Spirits” cause recessions and business-cycles

Restore confidence in consumers and investors through government asset purchases to prevent market crashes causing recessions

US government can buy & sell shares in the stock market, which are paid by issuing short-term Treasury securities, to cushion economic crises.

  • Notes that DSGE models are partially wrong and should be modified rather than fully dismissed out of economics
  • Proposes the US should invest in domestic infrastructure

Investment in infrastructure will help lower the unemployment rate and stimulate economic growth