Tuesday, October 26, 2004

What we did wrong back then

This piece by Stiglitz speaks for itself:

"Suppose the economy is operating below its potential -- say, because of a
lack of aggregate demand. In that case, an increase in aggregate demand can help
the economy. And deficits normally increase demand. That's because the
government is spending more money, or because low taxes encourage increased
consumer spending -- or both.

Keynes made this point clear a long time ago -- and he is still correct. No
wonder, then, that the IMF's imposition of fiscal stringency in East Asia and
Latin America -- when those countries already faced a downturn -- was a
disaster. The IMF policy had the predictable consequence of making the
economic downturns worse, turning downturns into recessions, and recessions
into depressions. The right prescription for the affected countries was not
balancing the budget, but running a temporary deficit to stimulate the economy --
as Keynes knew."

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