Thursday, February 4, 2010

Baker is right

The path back to some reasonable sort of prosperity has been effectively blocked by politics.  I would argue it is also blocked by other cultural manifestations.
Roadblocks on the Way to Recovery
No Way Out
Ever since Keynes wrote The General Theory in the 30s economists have understood the mechanism for escaping the sort of slump the economy faced in the Great Depression. The key point was to generate demand. The government had to do something – anything - that would increase demand for goods and services.
This depression problem was the exact opposite of the normal economic problem of scarcity, the problem created by insufficient supply of resources like land, labor and capital. The problem of scarcity is in principle difficult – we have to either take something from someone to make anyone better off or find some way to make the economy as a whole more efficient. However, the problem of lack of demand should be simple: we just have to increase demand in aggregate. This is possible without making anyone worse off.
Remarkably, even though we know how to solve the problem of inadequate demand, the United States appears unable to do it because all the potential routes for increasing demand are blocked politically. As a result, the country seems destined to repeat the suffering of the Great Depression, although on a smaller scale, even though we know better this time around. more

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