3. Slide 2. Examples of Failure.
• Slow growth with deep recessions.
• Asset bubbles and financial crises.
• Rapid inflation.
4. Slide 3. Can We Blame the Management?
• Only if policymakers have a sound theory to follow.
• And the right policy instruments.
• Today they have neither.
5. Slide 4. One Equilibrium or Several?
• One is the consensus model’s (CM’s) wrongheaded view.
• We have three not one.
• The CM ignores asset bubbles and money supply.
6. Slide 5. The CM’s Logic is Sound – The Errors Lie in
• The CM is based on three key assumptions.
• If they were correct, it would be simple to manage the economy.
• They are wrong – wrong assumptions bring wrong conclusions.
7. Slide 6. Models Must be Tested.
• The CM was invented before it could be tested.
• We now have the data and they show that the CM is wrong.
• It must therefore be replaced by a better model.
8. Slide 7. The CM’s Mistakes.
• Short-term interest rates, bond yields and equity returns are not related.
• Investment does not rise and fall with real short-term interest rates.
• Companies do not “profit maximise”.
9. Slide 8. Always Keep a Hold of Nurse.
• Policy must be based on some theory.
• I propose that we use the Stock Market Model.
• Plus pragmatism on money supply.
14. Slide 13. The Cost of Capital.
• We know, at any time, the cost of equity, short-term debt and long-dated
• We know the proportions of each that companies use.
• So we know the cost of capital.
15. Slide 14. Three Things Can Go Wrong.
• Demand may be too strong or too weak.
• Money supply may grow too fast or too slowly.
• Asset prices may be too high or too low.
16. Slide 15. Three Problems Require Three Separate
• Interest rates controlled by Central Banks.
• Budget deficits controlled by Governments.
• Add Tax Policy controlled by Governments.
18. • Ultra low interest rates cannot stop slumps.
• Budget deficits are then needed.
• But large deficits can’t be permanent.
Slide 17. Keynes’ Incomplete Revolution.
19. • Liquidity traps were assumed to be short-lived (cyclical).
• The 21st Century has shown this is not true.
• An ever-rising debt/GDP is not safe or sensible.
Slide 18. Cyclical and Structural Liquidity Traps.
20. • Subsidising investment boosts it by more than the cost.
• Raising taxes on consumption cuts demand by no more than the rise.
• Tax policy can thus manage demand.
Slide 19. We Need to Manage Demand Another Way.
21. • The CM’s wrong assumptions cause its wrong conclusion.
• We must discard it, both for teaching theory and as a guide to policy.
• We must introduce tax policy as a third policy instrument.
Slide 20. Conclusions.