Greenspan Paradox on Recovery

by Chidem Kurdas

Alan Greenspan exemplifies an inconsistency that appears to be widespread. He reportedly said that the stimulus has fallen far short of expectations and the government should get out of the way and allow businesses to power the recovery. At the same time, he’s so worried about budget deficits that he supports higher taxes.   

Threatening more taxes is not exactly the way to encourage economic activity. Continue reading

Functional Finance Fantasy

by Mario Rizzo

When people discuss the fiscal stimulus package of the Obama Administration they frequently use the word “Keynesian” to label those theories that support this policy. But the reality is that these theories owe more to the economist Abba P. Lerner than to John Maynard Keynes. Lerner, building on Keynes, called it “functional finance.” Lerner, unlike Keynes, was a socialist. 

According to the theory of functional finance, periods of expansionary fiscal policy to fight recession must be later followed by contractionary (tightening) fiscal policy to prevent inflation, high interest rates and other forms of distortions. So the period of huge spending and deficits we now have must be gradually unwound as the economy recovers. Continue reading

Interesting Idea from Angela Merkel in Swabia

by Mario Rizzo

The German Chancellor Angela Merkel is resisting pressures to follow the stimulative fiscal policy of engaging in deficit spending. The Wall Street Journal in its December 2nd edition says:

The root of the global financial and economic crisis in known to every Swabian housewife, Ms. Merkel said: “You can’t keep on living beyond your means.” A lack of thrift in advanced economies caused the crisis and can’t be its cure, she said.

How interesting indeed. Maybe one of those “Swabian housewives” can be appointed to an informal advisory position in the Obama Administration at least for some balance. Note: Swabia is the region around Stuttgart in Germany.