Friday, September 19, 2008

Economic crisis: Call Keynes!

Jayati Ghosh opines that the current economic slowdown, triggered by the crisis in the Wall Sts starting last year, would affect the poor people in the developing countries. So, what can we do to prop up demand? Well, get back to the Keynesian policies to stimulate aggregate demand, mainly through fiscal policy. Would the impact of current crisis in economies around the globe resurrect the Keynesian ideas, which were like hot potatoes after the Great Depression until when the crisis in the 1970s gave rise to Friedman’s camp?

…fiscal policy and public expenditure must be brought back to centre stage. Across the world, we need significantly increased public expenditure to revive demand in flagging economies, to manage the effects of climate change and bring in widespread use of green technologies, to fulfill the promise of achieving minimally acceptable standards of living for everyone in the developing world.

And, some words on reducing inequality:

Reducing inequalities is not going to be easy. It will require the north to reduce its consumption of scarce resources and carbon emissions, which means some reduction of average consumption generally. It will require the global elite, spread across both developed and developing worlds, to curb extravagant lifestyles. It will require wage shares of national income to rise from their current very low proportions, with corresponding declines in the shares of profits and interest. And it will require governments in the powerful developed countries to recognise that they can no longer call the shots in all important international decision

I don’t exactly understand how curbing “extravagant lifestyles” by global elites would reduce inequality. Is this voluntary or involuntary? I guess income redistribution through progressive taxes and employment opportunities for the poor would be more effective than hoping for the global elite to give up their lifestyles!

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