Elgar Debates: How to Promote a Global Economic Recovery? “The worst infliction we can impose on our economies is to leave them to the tyranny of the markets”



What are the best economic policies to promote global recovery? In the first letter of our Elgar Debates series, Steve Kates presented the Free Market view of the current economic crisis.   In this second letter Louis-Philippe Rochon gives his reply, setting out what he sees as the problems with reliance on the market and suggesting four practical steps to promote economic recovery. "Samuel Johnson by Joshua Reynolds 2" by Joshua Reynolds - Originally in English Wikipedia, uploaded 21:07, 2005 June 14 by w:User:GeogreScanned from: Rogers, Pat (2001). The Oxford Illustrated History of English Dear Steven,

Thank you for your letter, which I was happy to read. I must confess, however, that we seem to have very different memories of this crisis (a word, by the way, that never appears in your letter) and an extremely different interpretation of the history of macroeconomics. I also don’t quite understand your passion against anything Keynesian. My recollection of Keynesian policies is quite different: they contributed to 3 wonderful decades of growth following WWII – what we fondly call the Golden Years of capitalism. Keynes is quite evidently the greatest economist of the 20th century who saved capitalism from self-destruction. For that, he is remembered as one of the greatest thinkers. By contrast, starting from the 1980s, with the monetarist debacle and the real business cycle shenanigans, we ended up with less average growth and higher average unemployment rates. As you say, ‘you be the judge’.

You also suggest that Keynesians were wrong in their predictions of the duration of the crisis and you are undoubtedly right about Akerlof. But many other Keynesians were also predicting a long and worrisome recovery. And may I add, virtually no one in the mainstream of the profession, including Austrians, Libertarians and neoclassical economists, predicted this crisis. They were too busy with their badly-designed models to pay any attention to the real world. So, yes, I point a finger to neoclassical economists who believe in the Efficient Market Hypothesis which even denies such a crisis can occur. For that reason, they could not even see the crisis until it was right under their noses. Funny enough, at conferences a few years after the crisis began, those same economists were back to business as usual as if the crisis never happened. Surely, you are not asking me to have faith in the same theories that directly contributed to the greatest crisis in over 75 years.

As a “post”-Keynesian (not to be confused with ’Keynesian’ new, neo or other), I too predicted at a talk I gave at UNAM in Mexico in 2009 that this was going to be a long, dragged-out crisis, and even stated at the time that it was going to take at least a decade to recover. Many of my colleagues on the left made the same arguments. And, here we are seven years later. But now, I think I may have been wrong: I think it will take much longer.

But the reasons I gave then are even truer today: while governments did put into place Keynesian aggregate demand policies in 2009, they quickly abandoned these policies in 2010 in favour of austerity measures. You say, “we had the stimulus” but forget to mention that the stimulus policies were completely reversed a mere year after they were introduced. And make no mistake: that stimulus was working. We were well on our way to recovery until governments got spooked by those who were warning against high deficits and debt levels, and who bought into the fear-mongering propagated by the right that governments were going to go bankrupt if they spent beyond their means. Well, we know what happened, don’t we?

First, the embarrassing gaffe (to put it mildly) by Carmen Reinhart and Kenneth Rogoff, whose paper, ”Growth in a time of Debt”, was widely cited as empirical proof that too much debt can harm growth. Well they were quickly defrocked and their research exposed for what it truly was by an honest doctoral student from University of Massachusetts, Amherst, Thomas Herndon, who took the time to properly dot the i’s and cross the t’s. So that myth was clearly debunked.   In fact, UNCTAD just released a new report indicating that among the top 7 countries with the worse austerity measures are Italy, Spain, Portugal, Greece and Ireland – all countries facing a dire economic situation. You be the judge.

Second, we now know that any country with a sovereign currency can never go bankrupt since a sovereign central bank can always buy all the required government debt.. And financial markets and speculators know this. The proof is in the pudding: while the US, the UK and Japan’s debt levels were much higher than many other countries, their interest rates were much lower. Clearly, financial markets know exactly this to be the truth and did not turn away from the US when the debt levels were climbing.

The worst infliction we can impose on our economies is to leave them to the tyranny of the markets. We now know with conviction that markets are by their very nature unstable and prone to crises, and must be regulated. Unfettered markets only lead to recessions and crises at which time governments must swoop in and clean up the mess.

The driving force behind economic growth both in the short run and the long run is aggregate demand, pure and simple. When the private sector is not spending, governments have the moral responsibility to intervene and ensure the spending is sufficient to encourage investment. Yes, that’s right: more government spending leads to more investment. It’s a crowding-in effect!   When you look at aggregate demand today, it is at best anemic. Consumers are saddled with debt, and private investment has flatlined; austerity measures are being imposed everywhere. There is no room for growth. That leaves only exports to ensure a recovery. But with Europe on the verge of deflation, the BRIC countries slowing down, the prospects for exports are dimming. So where will growth come from? I am afraid that without aggressive fiscal deficit spending, we are dooming future generations and ourselves to another decade or more of weak economic growth. This secular stagnation is the direct result of a lack of fiscal spending advocated by austerity voodoo doctors and charlatans.


Louis-Philippe Rochon is a Founding Co-Editor of the Review Of Keynesian Economics

So what do we need to get the world economy back to prosperity? Here is my four-prong solution:

First, we must replace private debt with public debt. This can only occur with a well coordinated fiscal stimulus among the leading economies. Here in Canada, our infrastructure is crumbling and in desperate need of massive public investment. I can think of a number of places that need investment: our health care system, our education, our national parks, our roads and bridges, and why not create national day care to help struggling families. In the US and elsewhere around the world, there are plenty of examples of much needed infrastructure spending and public investment projects. If there is ever a good time to borrow, now is the time as interest rates are at historically-low levels. Governments engaging in austerity should be held criminally negligent for their actions.

Second, we must put job creation above all other goals. Work offers dignity, which every person deserves. This requires governments to adopt a policy of full employment. This would require as well a prolonged period of low interest rates, with an injection of fiscal cash. I am always in disbelief when I witness the cavalier-indifference policy makers have towards the unemployed. This must end.

Third, we must deal head on with the problem of income inequality, which is at the very core of the crisis in aggregate demand. Interestingly enough, income inequality was as pronounced right before the crash of 1929 as it was right before the crisis began in 2007. This leads me to suggest that income inequality is one of the causes of the financial and economic crisis. If governments do not address this problem, we are doomed to repeat the problems of 2007 before long. For starters, we need to have a higher marginal tax rate on the rich, a high wealth tax, an important increase in the minimum wage; we must also at all cost reign in corporate bonuses and inflated CEO paychecks, eliminate practices such as buy backs, and raise the corporate tax.

Fourth, with respect to Europe, well that’s a mess of a different colour. Yes, austerity has veered its ugly head there as well, but they also have to deal with the shackles of a common currency. They must either adopt the proper federal institutions to deal with the problems facing the Southern countries, or get rid of the Euro all together. This will undoubtedly create some short-term angst, but the consequences of the status quo are a few decades of deflation. The Euro was an ill-planned policy: you cannot have a monetary union without a political union.

So I end here by staying that had we had more Keynesian aggregate demand policies, we would probably not be in this mess today, which is entirely the result of anti-Keynesian, short-sighted policies designed to benefit the very few rather than the masses.

So my dear Steven, we disagree on many issues. I look forward to your reply.


Steve Kates’ reply will be published next week.  Read Steve’s first letter in this series here.

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2 Comments on “Elgar Debates: How to Promote a Global Economic Recovery? “The worst infliction we can impose on our economies is to leave them to the tyranny of the markets””

  1. Eric Tymoigne Says:

    I would also note that the obama stimulus was implemented very slowly and that from 2009 to 2011 the contribution of government spending to the growth of aggregate demand was 0%. So much for a stimulus.
    For prediction that the crisis would be long and deep, here is a sample: http://afee.net/?page=heterodox_economics&side=got_it_right_project


  2. Maria Alejandra Madi Says:

    As Louis-Philiphe Rochon pointed out, many relevant questions have long been ignored in the competitive market paradigm of neo-classic economics. From the mainstream perspective, the financial crises would be the result of wrong economic policy options. As a result, it does not consider the active role of money and financial institutions and their speculative and destabilizing behaviors. Under this view, financial market imperfections might be avoided and, eventually, corrected, since adequate monetary and financial policies would be implemented. Mainstream economists assume that financial markets efficaciously transfer funds; and furthermore that financial deregulation was necessary to increase efficiency and the supply of loanable funds. The financial crisis is a monetary phenomenon: expansionary monetary policies do not favor domestic and external equilibrium.

    Our understanding is that the current financial crisis has been, as Minsky warned, an endogenous process. From the Keynesian tradition, the financial crises are explained in a context of uncertainty where global investors’ portfolio decisions are not submitted to stochastic behavior, that is to say, they are not predictable. Global investors’ portfolio decision making is based, as Keynes warned, on precarious conventions.

    Considering this scenario, the evolution of investment, consumption, output and employment, is not independent of the global financial cycle that strongly relies on conventional market opinions. The outcomes of the recent global financial crisis have revealed that the global financial integration has augmented the possibilities of the international monetary transmission mechanisms being destabilizing. Hence, current social vulnerability is not independent of the end of the global financial cycle.

    In the aftermath of the crisis, the labor market has become a key variable in macroeconomic policies based on austerity programs. The employability perspectives are conditioned to private strategies that aim cost reductions, labor flexibility and efficiency targets. Longer working hours, job destruction, turnover, outsourcing, workforce displacement and loss of rights could also be part of the spectrum of management alternatives aimed at cost reduction. This scenario, characterized by precarious jobs, has enhanced the vulnerability of workers, mainly young people. In the current global context, in truth, youth employment challenges have been deepened by the management of the financial crisis (The Economist, 2011). As a matter of fact, the impacts of the austerity programs have also been affecting the access to work conditions of young people -between 15 and 24 years old.

    There are social and political tensions inherent to the current crisis: the impacts on livelihood conditions, the loss of social cohesion and the subordination of society to the bailout of the financial system. Taking into account this background, the cutting question related to the policy-making process is, a Minsky warned, “Who will benefit?”
    Maria Alejandra Madi (alejandra_madi@yahoo.com.br)


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