MACROECONOMICS UP TO THE MINUTE

6 01 2009

For those of you who don’t have a clue as to what anyone should do about the current worldwide recession, allow me to recommend this article from the Nobel Prize laureate Paul Krugman:

Krugman speaks

Background:

For those who never took economics (which included me, ’til I read up on it on my own a few years ago) the great debate about what to do about recessions has been for the past couple of decades locked in a fight to the death between monetary policy and fiscal policy.

“Monetary policy” refers to how much money the Federal Reserve  makes available to the US economy. The Federal Reserve Bank regulates this in large part by adjusting the interest rate that banks must pay to borrow from it. High interest rates = less money available to American people and businesses to spend and invest. Low interest rates = the opposite. The Federal Reserve recently reduced it’s flagship interest rate to essentially ZERO.

“Fiscal policy” means how much money the federal government spends directly on projects and programs, especially in ways that get the money circulating rapidly, such as public works programs, and any program that gets money preferentially into the hands of poor people, since they normally spend (because they must) every dollar they make.

For the past two or three decades the “Chicago School” of economics has been in the ascendancy among economists.  Economists of that school, notably the late Milton Friedman, believe in the ability of markets to thrive if left alone, so they strongly favor trying to shorten recessions exclusively through the use of monetary policy. Fiscal policy is not to be used for this purpose because it involves government spending–often on things that “The Market” could perfectly well produce if we REALLY needed them.

On the other side of this Great Debate is the older idea that fiscal policy, in the form of spending by the federal government, is the most effective way of fighting recessions because it doesn’t depend upon the intermediary of bank lending to send money into the economy. Money spent by the government on fiscal policy projects goes right into the economy and thereupon experiences that famous multiplier effect (“a dollar spent turns over 7 times”). John Maynard Keynes was the great exponent of this method of enriching an economy, during the Great Depression.

My understanding is that the Keynesian approach was used by President Roosevelt and seemed to work very well at that time. It remained the preferred method of economy-stimuation until the period,–you guessed it–AFTER REAGAN.

Solicitation of Comments:

Do you REALLY know economics? That is, were you actually taught it in school, unlike me? If so, please feel free to correct any error I’ve made in the above.

ADDENDUM:

The link given above was to a single Krugman column. Here is a link to his WHOLE BLOG.

Krugman Blog

Expertise is good!

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2 responses

6 01 2009
Stacey Derbinshire

Nice site. Theres some good information on here. Ill be checking back regularly.

8 01 2009
tsjoencinema

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