Tuesday, January 26, 2010

Lord Keynes on the State of the Union

The political pressure for deficit reduction is also seen as an anti-stimulus by some economists, suggesting a difficult trade off (jobs vs. deficits). So here is President Obama's policy solution:
Over the weekend, Obama endorsed legislation that would set up a bipartisan budget commission, to make recommendations on tax hikes and spending cuts later this year. One appeal of this approach is that it offers the promise of deficit reduction, while postponing any hard decisions until the economy is on more solid ground — or at least until after the November election.

How would Lord Keynes view this policy?
Organized public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle.

UPDATE: The recently announced spending freeze seems too small to make much difference, but some economists are worried.
Prominent economist Brad DeLong of the University of California at Berkeley took to his blog to express fear that Obama was repeating the missteps of President Hebert Hoover, widely blamed in academic circles for not aggressively trying to fight the forces that caused the worldwide economic collapse that lasted from 1929 until the start of the World War II.

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