Robert Lucas developed the rational expectations theory that dominated economic thinking in the US, and apparently in Germany as well. His views are graphically illustrated by a long term trend line that shows the economy sticks close to the trend line over time. External shocks to the economy may lead to small blips below the trend line but market forces will return the economy back to the trend line without government interference which only distorts the market. In fact, the rational agents, that are assumed to exist in his theory will any efforts by government to stimulate the economy. For example, if the government runs a budget deficit they will expect that taxes must rise in the future to reduce the deficit. Therefore, they will reduce their spending and save money to pay for the future taxes that they anticipate.
The US economy is not operating the way Lucas imagines that it should operate. It experienced a deep recession and it has not returned to the Lucas trend line. In fact, most projection of future growth are below the Lucas trend line. The shock from the Great Recession seems to have had a permanent effect on potential growth in the US. The power of the Lucas theory, and the models of the economy that have been developed to reflect his views, have a force in economic thinking that is resistant to empirical reality.
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