Wednesday, July 4, 2012
Partying Like It’s 1934
A while back I read Lionel Robbins’s 1934 book The Great Depression; as I pointed out, it was a Very Serious Person’s book for its era. Its solution was a return to the gold standard — which would have made things worse — and free trade, which was basically irrelevant to the problem of insufficient demand.
So have the VSPs learned anything these past 78 years?
When I read headlines about the call by European leaders for action to stimulate growth, I wondered for just a second whether there was a crack in the austerian consensus. But noooo. The answer of the leaders to a severe shortage of demand — the private sector simply isn’t spending enough — is, wait for it, deregulation and trade liberalization.
This is not so much a bad idea as an irrelevant one. What would it do to reduce the burden of household debt? What would it do to narrow the destructive German surplus?
The beginning of any understanding of macroeconomics is the realization that what’s good from a micro point of view can often be irrelevant or even harmful from a macro point of view when the economy is depressed. But that hard-won insight has now been willfully forgotten.