Saturday, October 18, 2008

Keynes, Keynes, Keynes…

Krugman argues that there is not much the Federal Reserve can do right now because despite repeated interest rate cuts, unemployment is rising and credit market is still tight. So, way out of rising unemployment is to go by the Keynesian rules, i.e. in the face of ineffective monetary policies, use fiscal policies to stimulate aggregate demand by public investment in infrastructure, unemployment benefits, and emergency aid. With this comes deficit, which Krugman says can be forgotten for now.

In other words, there’s not much Ben Bernanke can do for the economy. He can and should cut interest rates even more — but nobody expects this to do more than provide a slight economic boost.

On the other hand, there’s a lot the federal government can do for the economy. It can provide extended benefits to the unemployed, which will both help distressed families cope and put money in the hands of people likely to spend it. It can provide emergency aid to state and local governments, so that they aren’t forced into steep spending cuts that both degrade public services and destroy jobs. It can buy up mortgages (but not at face value, as John McCain has proposed) and restructure the terms to help families stay in their homes.

And this is also a good time to engage in some serious infrastructure spending, which the country badly needs in any case. The usual argument against public works as economic stimulus is that they take too long: by the time you get around to repairing that bridge and upgrading that rail line, the slump is over and the stimulus isn’t needed. Well, that argument has no force now, since the chances that this slump will be over anytime soon are virtually nil. So let’s get those projects rolling.

Here is similar call for Keynes by Jayati Ghosh. Here is Keynes and the Crisis by Axel Leijonhufvud.