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It is far from a well established scientific thesis.
I want to offer a bit of pushback against this evils-of-deflation thesis. The other part of the Keynesian story is sticky wages.
How could an otherwise robust, adaptive economy go completely haywire because prices stay flat, or decline for a bit? But have we observed a sufficient rise in real wage rates to explain the horrendous job market? The Keynesian story at least has some microfoundations.
There is no well-established theory that can explain how we got to 10 percent unemployment.
If you are a Yale Keynesian, you would have been able to tell a good story when the S&P 500 stock index was down near 800.
The Fed eventually popped the previous bubble – the tech bubble – not because it was a bubble but because the economy was nearing the overheating stage, and the inflation rate risked eventually rising back to levels of a decade earlier.
In my opinion, the Fed was wrong to pop that bubble.
No economist, from any school of macroeconomics, has a really convincing story of how that recession spread so widely.
One characteristic of this recession is that employment fell more dramatically than output.
If the main story of this recession is going to be “credit crunch,” then it is going to require at least as much theoretical and empirical back-filling as Recalculation.
I think where we are is this: every economist can tell a story of a sectoral recession in housing.