Wednesday, 9 January 2013

What did we learn in 2012?

We learnt again through both Europe and the UK that classical economics is a complete crock!

We found out that Japan in the 90s was a good example to examine.
As Adam Posen showed fiscal policy was quite potent there. When fiscal policy was expansionary the economy expanded and when it was contractionary it contracted.

The IMF have shown us  the full horror story about Europe now.

When I have a bit more time I will  write a little more about this.

Just remember if classical economics worked the world would not have heard of an Adolf Hitler!

POSTSCRIPT
I have a bit more time.
Firstly I mentioned Adam Posen and his thoughts on Japan. This speech is as good as any to get a feel for his analysis.

We can see when interest rates are at zero low bound monetary policy loses potency. QE doesn't do a lot.
Deflation is something central Banks do not know how to overcome. If you start contractionary fiscal policies too early your economy will remain stagnant.
However as was stated above fiscal policy certainly does work. Indeed we first get some idea the multiplier is larger  in these sort of times.

In Europe  where interest rates are at ZLB and there are no flexible exchange rates for each country then contractionary fiscal policies will lead to economic contraction.

In fact in all these cases Austerity policies have lead to continued deficits and higher debt.

You need strong economic growth to reduce both. As Keynes noted in 1936 Austerity is needed in good economic times not bad.