Since weak demand is at the heart of the recession, governments need to enact not just structural reforms but also stimulus programs, argues Menzie Chinn. Such reforms, moreover, don’t always work out, writes Karl Smith. Raghuram Rajan demurs.
Most experts think the global recession was caused by a collapse in demand -- and so, in good Keynesian fashion, they want governments to ramp up spending to compensate. But the West’s recent growth was dependent on borrowing. Going even further into debt now won’t help; instead, countries need to address the underlying flaws in their economies.
The current debate over quantitative easing overlooks the important question of domestic economic strategy in both the developed and developing world. Put simply, consumers in industrial economies buy too much, and those in developing ones, too little.
Here are two worthwhile books motivated by the financial crisis. Fault Lines argues that an important part of the solution to global financial imbalances is improved provisions for low-income Americans. Meanwhile, Balancing the Banks provides a useful non-American view of the financial system, with lessons from practices in European countries.