And what would Keynes say on the crisis and policies?

I had just posted what Fisher or his analysis would say on the current crisis and Fed policy. Now it is Keynes’ turn.

Nancy Folbre of University of Massachusetts Amherst writes on economix. She also points to her favorite Keynes expert –James Crotty of the same university (need to read up this person’s works, reading stuff keeps piling on)

Keynes helped explain the Great Depression of the 1930s, and similarities with the Great Recession of 2007-9 are striking. His highly respected biographer, Robert Skidelsky, called his most recent book on Keynes “Return of the Master.”

Opposition to Keynesian ideas remains fierce in many quarters. Mr. Skidelsky himself provides a terrific example of a sharp debate regarding fiscal and monetary explanations of our current economic troubles. But Keynesian ideas are also relevant to a wide range of other issues, including the political stalemate we face in the United States and the growing economic success of China.

Uncertainty makes it difficult for individuals to effectively coordinate their decisions. When deep recessions hit, businesses become reluctant to invest because they already have more capacity than they can use. Households can’t buy much because their incomes are low due to unemployment and reduced wealth.

The government, however, can kick-start the economy through increased spending and investment. The resulting increase in economic growth can make it possible to pay back the debt incurred.

Though current crop of economists would differ on the prescription. You have Krugman who is a fierce proponent and you have Barro as a critic:

Keynes would certainly agree that current unemployment rates reflect a recession-induced shortfall in the demand for labor. The evidence for this claim has been deftly summarized by Paul Krugman, citing studies by the Economic Policy Institute and the Roosevelt Institute. The competing argument that we are simply experiencing a mismatch between employer needs and labor force skills lacks credibility.

Conservative economists like Robert Barro of Harvard University insist that increased government spending will have little positive effect, and that increased deficits will create bigger problems than they solve. Keynes would sharply challenge this view and insist on the need for greater fiscal stimulus.

He would also enthusiastically endorse the prescriptions articulated by my colleague Robert Pollin, who calls for targeted public investments that could expand credit, create jobs and move the United States economy toward more sustainable use of energy.

He would be proud of China but lament on US not doing enough to lower unemployment:

If Keynes were around today, I think he would emphasize a supreme irony of Neoliberalism: No country has taken better advantage of free trade than China, with its controlled currency and strong industrial policies, including huge public investments in renewable energy technologies.

China’s state capitalist regime has borrowed Keynesian theory from the West and garnered huge profits from it.

But I don’t think Keynes would take much pride in this. He would be deeply disappointed that democratic capitalist countries like the United States seem unwilling to commit themselves to policies that could reduce unemployment and promote sustainable economic growth.

He would explain our current shortfall of aggregate demand as the result of a tragic shortfall of national solidarity.

Interesting plunge into history. Actually Keynes passed away long back (1946). It would have been great if Milton Friedman could be alive.  He died in 2006, just one year before the crisis started happening. It would have been mighty interesting to read up his thoughts on the crisis.


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