Joe Stiglitz nicely summarises the current US macroeconomic dilemma. (HT BR). Modern events confirm that monetary policy failings could not have caused the Great Depression. Policies seeking to avoid such failings – policies to expand the money supply to induce private investment did not work then and have evidently not worked now. Enhanced massive fiscal expansions engineered by the need to finance WW2 ultimately lead to recovery from the Great Depression and analogous policies – targeting infrastructure and a restructuring towards an even more predominantly service-based economy – are what is needed now. Particularly in the US but also in Europe where financial austerity arguments are dominating common sense.
There is no short path to economic recovery – it will take a decade or more to address underlying problems of global over-indebtedness – but things will be worse still if current fiscal austerity policies are pursued. The main reform necessary in relation to financial policy is to get the banks back to doing what they do best – simple banking. The emphasis however must be on not engaging in fiscal contractions on the basis of a fallacy of composition argument on getting balance sheets in order. Yes, there do need to be longer-term moves to get public finances into better shape but high unemployment should be the target now.
Similar remarks from Paul Krugman – who repeats well-known views – and our own John Quiggin. I generally agree with Quiggin’s argument for abandoning inflation targeting – abandoning such targeting as a temporary measure will inflate away some of the outstanding global debt issues – but more importantly endorse his view that banks should be goaded to perform their key boring role of accepting deposits and making loans.
Right -wing fanatics in Australia are promoting restrictive macroeconomic policies within Australia which will make a bad situation worse here.