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Thursday, February 24, 2011

Bhagwati: Fallacies of the Crisis

Jagdish  Bhagwati:

Four Fallacies of the Crisis, by Jagdish Bhagwati, Commentary, Project Syndicate: The current twin crises in finance and the real economy..., and the interminable discussions about financial reform and the prospects for economic recovery, have spawned several fallacies that need to be addressed and dismissed. ...
Fallacy 2: Through monetary expansion, the US is manipulating the dollar’s exchange rate in the same way that it accuses China of manipulating the renminbi’s exchange rate.
The two cases are dissimilar. If one grants the premise that there is an insufficiency of aggregate global demand, the alleged Chinese undervaluation of the renminbi can, indeed, be seen as a beggar-thy-neighbor policy, which diverts inadequate world demand to Chinese goods at the expense of other countries.
On the other hand, the dollar’s weakening is a side-effect of US monetary expansion, undertaken after countries like China and Germany refused to spend more to increase world demand, and after no room remained for further fiscal stimulus. This is altogether different from a policy of weakening the dollar to divert inadequate world demand to American goods. ...
Fallacy 4: Forget about Keynesian demand management.
Some critics of Obama’s Keynesian stimulus spending, among them the economist Jeffrey Sachs, claim that what the US needs is “long-term” productivity-enhancing spending. But this is a non sequitur. As a Keynesian, I believe that the state paying people to dig holes and then fill them up would increase aggregate demand and produce more income. But Keynes was no fool. He understood that the government could eventually get huge returns if the money was spent on productivity-enhancing investments rather than on “directly wasteful” expenditure-increasing activities. The question, then, is simple: which investments offer the greatest economic payoffs? ...

When the government is deciding how to spend a given amount of stimulus money, a goal of maximizing long run economic growth would result in a different set of projects than a goal of keeping employment as high as possible until the economy recovers. The projects that increase growth the most five or ten years from now are not necessarily the same as the projects that provide the most employment support in the short-run.

We weighed stimulus projects mainly on their long-run growth potential, and the ability of a project to enhance long-run growth should certainly be part of the decision of which projects to pursue. But short-run employment support is a worthy goal as well, and this did not play a large enough role in the choice 0f how to spend the stimulus money.

    Posted by on Thursday, February 24, 2011 at 01:44 AM in Economics, Fiscal Policy, International Finance | Permalink  Comments (43)


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