At the end of June, 2012, Nobel Laureate Paul Krugman and Richard Layard, a distinguished British economist launched a manifesto calling for a more rational policy dialogue with respect to the economic crisis and plans for crisis recovery across the major economies.
In the two weeks that the manifesto has been in existence, it has been endorsed by economists from across academia in the US, Europe, and Canada, and from such established institutions as Cambridge, Yale, Oxford, Columbia, LSE, Sorbonne, Dartmouth, and Harvard. Economists from the IMF, World Bank, and several of the world's stock exchanges have also signed. With over 7700 signatures spanning 180 pages thus far, a large number of ordinary citizens from various walks of life have also endorsed the Krugman-Layard Manifesto for Economic Sense.
Let's Avoid Repeating the Mistakes of the 1930s
The Manifesto calls for an end to the focus on austerity, asserting that in the case of most countries - but not Greece- public borrowing was not at the source of the crisis, nor the subsequent ballooning of public deficits across the OECD. Rather, the source of our massive public deficits was actually the collapse of output and then revenue, which followed the onset of the crisis. It would therefore be a mistake to try to address the problem by dismantling the part of the economy that isn't broken. The manifesto calls this failed policy a repeat of the the mistakes of the 1930s, when reductions in public spending lead to economic contraction in many of the world's largest economies, thereby exacerbating the crisis. In fact, the IMF has individually studied the national-level economic effects of budget cuts in 173 cases, and found that the consistent result is economic contraction.
What is called for according to the manifesto, is counter-cyclical fiscal policy that would dampen then economic shock rather than exacerbate it. At the moment, the private sector is simultaneously trying to cuts its spending, lower its leverage levels, and reduce its borrowing. The manifesto also calls on governments to focus more attention on unemployment figures and loss on borrowing costs. At the moment, most major economies face high unemployment levels compared to the recent past, while borrowing costs are near all time lows for most major economies.
The Manifesto concludes by saying that in order to be able to address our economic problems correctly, correct analysis of the problems will be necessary and indispensable.
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About the Author:
Max Berre is a financial-regulatory economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) and economic correspondent for Capital-Life, who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.
Krugman only talks Keynesian counter-cyclical government spending, a solution to short-term inventory-related cycles, but a disastrous policy yielding only growing government debt when the market environment reduces the multiplier on government spending to a very low level.
ReplyDeleteMy understanding is that debt cycle crises don't end till losses are recognized and asset values and ownership allocations are reset properly.
This solution is being avoided at all costs by cabals of elites in all developed economies and in China. While impressed by the length of the road down which cans can be kicked, I am unimpressed by actions taken by democratically elected governments seemingly owned by big campaign contributors looking after their own selfish interests.
Instead of the "Krugman Slide" down the slippery slope of growing federal debt in the US, we need here a way of unlocking the huge cash positions in the private economy in ways that efficiently create jobs with a high multiplier effect, and we need a way this can be done without more federal borrowing.
A "future tax" to be phased in on, say, carbon emissions, seems like the best, cheapest, and most timely and effective way to stimulate business investment now without adding to the federal deficit.
Does any reader have a better idea?