Keynes — more important than ever

4 Nov, 2014 at 13:41 | Posted in Economics | 1 Comment

Central banks have moved to stimulate spending in the face of this attempt to increase savings by lowering interest rates. They lowered them to the zero lower bound without having much effect; the fall in desired savings was too large. We are in a Keynesian liquidity trap. Central banks have tried to stimulate spending by actively increasing the money supply, raising fears of inflation in many circles. But no inflation has resulted as the cash sits idle in corporate coffers. Even at zero interest rates, business firms are reluctant to spend!

9780262028318What to do? Many pundits say we must simply endure what they call secular stagnation. This is an unhappy prediction. Much better is the Keynesian insight that this is the perfect time for fiscal policy. In the U.S. again, there are immediate needs to repair roads and bridges, rebuild the energy grid, and modernize other means of travel. Keynesian fiscal policy expansion will benefit the economy in both the short and long run.

We argue in our new book, Keynes, Useful Economics for the World Economy, that these recommendations can be seen as inferences from a simple and effective model of the short-run economy. We show how hard it was for Keynes to break away from previous theories that work well for individual people and companies—and even for the economy as a whole in the long run—to define the short run in which we all live. We also stress Keynes’ interest in the world economy, not just in isolated economies. After all, the IMF is perhaps the most enduring remnant of Keynesian thought left today.

Peter Temin & David Vines

1 Comment

  1. Applying Keynes ideas to USA and Europe economies will bring stability and wellbeing to each country, and help to discourage finance moguls that had fourty years making bussiness with dictatorships like China or slums as Bangladesh where obtains big profits with bad consequences for all.

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