AS & A2 Economics Revision Workshops

AS & A2 Economics - Intensive Exam Coaching & Revision Workshops: Book Now!

Stratford | Fulham | Bristol | Birmingham | Gateshead | Leeds | Manchester


Economics Resources Popular resources on the {my channel} blogPopular resources on the {my channel} blog Economics revision quizzes Resource tags for the blog RSS Feed for the blog Twitter feed for this blog Teacher Email Resource Newsletter Category listing for this blog Economics Blog home page Economics Blog Home Page


Tracker Pixel for Entry

End Depression Now! Paul Krugman at the LSE

Wednesday, May 30, 2012
Print Tweet This!Save to Favorites

Paul Krugman made an impassioned plea for a reversal of austerity policies in a talk to a packed Peacock Theatre at the LSE in London last night - I was live tweeting the event and I have brought together these tweets and some other comments together with some of the charts in his talk. I have also drawn on the live tweets of Stuart Foster whose excellent twitter feed can be found here: @econbant

The slides from Krugman’s talk at the LSE can be found here

Paul Krugman talks to Evan Davis on the Radio 4 Today programme: Click here Niall Ferguson provides a contrary view here: ‘You can’t solve debt with more debt’ See also: European Commission supports UK deficit-cutting course (BBC news)

 

This slump is different from any other slump so a comminly-used term such as The Great Recession won’t suffice - 30% of US unemployed Is long term - this is unprecedented in the modern economic history of the USA.

You can read extended passages written in the 1930s by John Maynard Keynes and Irving Fisher and assume they are being written about today. This depression was not meant to happen - it and the macro policy response is a huge macro failure.

The depression is largely a north Atlantic crisis, although many criticised them over a decade ago as they struggled to avoid a deflationary depression, Japan is starting to look like a role model in terms of macro policy response.

Policy response in the UK and the USA to the slump has been disastrous - UK has its own currency and single national government but policies designed to inspire renewed private sector confidence have largely failed.

The global financial crisis caused a steep drop in private sector demand. Zero interest rates are not enough to achieve anything like full employment - we are in a classic liquidity trap.

Fundamental cause of the crisis and the resulting slump was an excessive build up of private sector debt, then the Minsky moment as debts are called in, banks engage in large-scale de-leveraging, demand falls and large negative multiplier effects start to bite.

The paradox of thrift: What is individually reasonable (i.e. save more to pay down debt) is collectively disastrous for an economy. The biggest problem now is insufficient spending, a persistently depressed economy, a problem of structural demand deficiency. Looking at jobs, unemployment rates in the US construction sector has doubled but there is an economy wide problem cutting across many industries.

Depression economics - but inflation remains

Low but positive inflation has been stubborn because hourly wages in the USA continue to rise around 2% per year - there has been no systemic wage deflation (yet). 17% of US workers have experienced a nominal pay freeze but the experience of recent years shows that it is hard to cut wages - Keynesian wage stickiness - millions of people in jobs in the USA are getting zero wage rises, the long run Phillips curve is not vertical at low inflation

Fiscal Policy

When it comes to debts and deficits - a strange mania has swept the macro policy makers - the strange doctrine of expansionary austerity. This doctrine was first seen in Ireland but was not as extreme as forced austerity in Greece

“When the current coalition came to power the whole strategy was based around the belief that austerity would be expansionary” and that “it would inspire confidence. But the promised expansion in private spending never happened.”

Fiscal policy policy and government borrowing: Large scale government borrowing will not lead to soaring interest rates, there is no crowding out. Every advanced country with it’s own currency and borrowing in it’s own currency has seen bond yields fall - there has been no visible benefit from austerity.

Debt is higher than we want - it should have been lower in UK before recession struck. History says that high debt can be sustained. Destructive effects of austerity policies are not that dissimilar to the medical skills prevalent in medieval times. Debt levels in the UK are high but Spain and Ireland both entered the recession with lower debt. Look at them now.

Reversing austerity would create an expansionary effect - simply employ more teachers, increase spending on upgrading existing infrastructure. Increasing state spending can help to raise inflation, reducing the real value of national debt

Krugman believes that there is too much focus on Greece and fears that “Country X might become the next Greece” if austerity is not carried through. Greek problems are structural: a single currency and inability to collect taxes.Hungary is another country with a looming debt problem largely caused by high borrowing in Euros

The Costs of Recession

Persistently depressed economy damages long run growth potential, high long-term unemployed, depressed business investment, lost skills. Govts are blasé about the forgone output and employment. The long-term impact of cuts will be a drop in productive potential.

Exotic Monetary Policy

Quantitative Easing is operating on a margin that is probably ineffective in stimulating private sector demand - Krugman argues that we might might consider a higher inflation target to change price expectations. He states that the Euro Zone is only workable with a higher tolerance level for inflation is he suggesting inflating our way out of the debt crisis? A higher inflation target will reduce debt burdens, reduce the incentive to sit on cash. These policies are better than nothing but second-best to policies that promote growth. If there is insufficient demand, no amount of monetary stimulus will create growth. Confidence is king - we keep coming back to the importance of animal spirits.

Internal devaluation and competitiveness

Lower wages and internal devaluation - i.e. to get costs down relative to elsewhere in Europe - turns out to be incredibly hard. Faster wage growth in Germany would help, encouraged by a higher inflation target in Euro Zone

Paul Krugman interviewed by Channel 4 News

 

 

 

 

 


blog comments powered by Disqus

AS & A2 Economics Revision Workshops

AS & A2 Economics - Intensive Exam Coaching & Revision Workshops: Book Now!

Stratford | Fulham | Bristol | Birmingham | Gateshead | Leeds | Manchester

Dates and Locations

AS & A2 Economics - Macroeconomics: National & International Economy (Unit 2),  Global/International Economy (Unit 4)

  • Tuesday 25 March 2014 - London (Stratford City)
  • Wednesday 26 March 2014 - London (Fulham Broadway)
  • Thursday 27 March 2014 - Bristol (Cribbs Causeway)
  • Friday 28 March 2014 - Birmingham (Star City)
  • Tuesday 1 April 2014 - Gateshead (Metro Centre)
  • Wednesday 2 April 2014 - Leeds (The Light)
  • Thursday 3 April 2014 - Manchester (Salford Quays)

Post-Easter (AS Economics Units 1&2 Combined;  Global/International Economy (Unit 4))

  • Monday 28 April 2014 - London (Stratford City)
  • Tuesday 29 April 2014 - London (Fulham Broadway)
  • Wednesday 30 April 2014 - Bristol (Cribbs Causeway)
  • Thursday 1 May 2014 - Birmingham (Star City)
  • Friday 2 May 2014 - Manchester (Salford Quays)

tutor2u online store

PowerPoint Lesson Activities Teacher Conferences & CPD Courses
Exam Coaching & Revision Workshops Pre-release Case Study Toolkits
A Level Economics Teaching Support Resources for Business Studies
Digital Magazines  


Enter your Email


AS Economics (Macroeconomics) Revision Guide

WOW! Economics 2014

50+ New Teaching & Learning Resources for A Level & IB Economics

AS, A2 & IB Economics Revision Notes

Latest resources

Resource categories Blog RSS feed Blog RSS Feed

© Copyright Tutor2u Limited 2013 All Rights Reserved