Janet suffer the Delusion about equilibrium

 We have a summary of Janet's economic theory from Gavyn Davies.  Here is an excerpt, and my comments below the fold:

Ms Yellen and her Nobel laureate husband George Akerlof, both professors at UC Berkeley, helped to construct answers to this attack. They developed“efficiency” or “fair wage” models [3], which explained why profit maximising firms (in imperfectly competitive markets) would choose to set wages higher than the marginal product of labour, and would not rapidly adjust these wages downwards in a recession. They also explained the stickiness of prices by pointing to the “menu costs” associated with making changes in selling prices.
These deviations from flexible wages and prices became major planks in “New Keynesian” economics, in which the economy would return to equilibrium only slowly after shocks, leaving room for monetary policy to play a role in smoothing output fluctuations. The enduring importance of this work is that Ms Yellen is probably no longer plagued by doubts that her entire intellectual ediface may be built on shaky foundations. Although other economic schools remain unpersuaded, she is a conviction New Keynesian. The second highly relevant theme of her work concerns the formation of expectations, and its links with the macro-economics of deep and prolonged recessions. Ms Yellen has always preferred to incorporate near-rational expectations into her models, but her definition of “rational” is a fairly wide one, encompassing modes of behaviour which human beings can be shown to adopt in practice, rather than those which are assumed to exist in economic theory [4].

She makes the mistake that all Keynesians do, a mistake of categorization. They claim the state we are in, 2.1% Real GDP, is not an equilibrium. They are of the belief that we keep only one equilibrium, and other states of the economy are an illness. They get this way because none of the Keynesian's today have ever seen a real economic expansion in the USA, except possibly Bubba Clinton's presidency.

This economy will equilibriate with a growth about 1.6, 2.3, and 3.4; or something like that. We are equilibriators, but have a sparse set of equilibiums. That is the outcome of stickiness, mainly because we follow a trading norm not a DGSE norm.  In other words, we take large jumps between states, not smooth landings or takoffs.

Keynesians think stickiness is a temporary malady occurring during 'recessions' No, it is the fundamental result of deliberate illiquidity in a positive definite norm, we always grow positive.  Negative losses are taken at the expansions or contractions between sates. So we end up with a situation that Keynesians think there should be a cure to kick us out of a contracted state.  The cure for contraction is contraction.  The cure for expansion is expansion.  Keynesian theory only holds for the short six months it takes us to stabilize.

Liberal economists have to be careful.  The trading theory  about positive definite normative behavior alternating with free floating account correction at the break points, this theory, is widely reported and read.  It is very likely that Janet has done her homework, and her theories may have been modified by the new results.  She is not as dumb as we might think.