Thursday, May 3, 2012

The Backlash Against The Backlash To Austeriy

This article, which is a bit technical, is in response to an article in The Financial Times which argues that austerity is a necessary response to the eurozone crisis. It is the only way to get investors to purchase the sovereign debt of the most troubled countries. Moreover, there is a limit to what the better off economies of The Netherlands and Germany can do without destroying their credit worthiness. Fiscal stimulus is out of the question.

Brad DeLong is puzzled by that argument because he still believes that Milton Friedman was in favor of using vigorous monetary policy during the Great Depression. He can't understand why economists at the University of Chicago, who have great respect for Friedman, are not saying the same thing. Paul Krugman responded by arguing that political pressure from conservatives has caused otherwise good economists to say things, that they do not really believe, against more aggressive monetary and fiscal policies. He deferred to another economist who took the time to respond to the article in The Financial Times. He took the position that less austerity would be equivalent to stimulus in the eurozone. He also argued that German fear of domestic inflation keeps the ECB from using more aggressive monetary policies. His view is that wage inflation in Germany, and more flexible migration policies, should be part of the solution to fix the problems in the troubled economies. The largest and strongest economy in the eurozone should take a more active role in stimulating demand in the eurozone. A eurozone in recession is not good for any of its member countries.

The complexity of the financial and political issues in the eurozone has made it difficult for even out best economists to agree upon the best solution.


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