The Debate

There's a live debate going on when I was looking through the Economist.com....

The topic:

This house believes that we are all Keynesians now..

For the proposition is Prof. Brad DeLong; Prof. of Economics, University of California & Research Associate, Nat. Bureau of Economic Research...

Opposing the proposition is Prof Luigi Zingales; Robert C. McCormack Prof, Entrepreneurship & Finance, University of Chicago Booth School of Business...

Quite an interesting debate, followed by numerous comments that were either supporting the motion or against it...

Currently, most of the readers of this debate oppose the motion...

I, however feel that due to the current situation we are in (recession), we are all influenced by the fact that only a fiscal stimulus package would bring US out of recession...in other words...we looked like we are gonna be Keynesians...

How does it actually works? erm...from my understanding...(sorry...I'm merely an A levels student..) Money is being used to stimulate consumers to start buying things again to increase consumption expenditure and also the aggregate demand via the multiplier process..

But there is a catch...Where did the money come from? Foreign reserves? Or is it the future generation's money? Basically speaking..Money is being taken from one side and then shifted to another sector....If that is merely a shifting of resources...how could it lead to economic growth?

I believe that a better way to stabilise the current economic crisis is by increasing the productivity and also create more jobs..Because if we merely use demand side policies to promote growth...it could well lead to inflation...

Another thing to consider is that why consumers aren't spending...basically...they're spooked of this crisis...from extreme consumption to extreme savings....this may lead to a deflation..and worsening the current recession...

Thus....giving the money to those in need may not solve the problem immediately as consumers may be hoping for another drop in prices...Interest rates have to be driven up to attract short term investments to reduce the current account deficit the US is currently facing...I believe this deficit is caused by the withdrawal of foreign investments...Keeping interest rates low may not be the solution because there's a liquidity trap going on...whereby any amount of money supply injected will not incur an equal magnitude of change in interest rates..

However, reducing money supply to drive up interest rates would lead to a crowding out effect on private firms..which could in turn nullify the intended recovery...

In conclusion, I would agree that Keynesian policies should be adopted to address this problem to gain the trust of the people to start spending again...but it should be removed once indicators are showing positive changes...Then perhaps other policies can be implemented to create jobs and also to increase aggregate supply of the nation...Investing on potential industries to increase research and development would be a better option? Or perhaps using the money to save jobs and keep unemployment rates low...

I may not be American...But I do not wish to see this happening to anyone..