Wednesday, February 06, 2008

U.S. Government Demands That Others Copy Its Keynesianism

As is illustrated by the combination of the aggressive Fed rate cuts in combination with the massive fiscal stimulus package, the U.S. government is arguably the most Keynesian of all governments (at least among relatively rich countries).

I now see not just one, but two interesting articles in The Financial Times discussing this. The first one is a column by the economics editor Martin Wolf who points out that these policies can only "work" to the extent it worsens the imbalances that caused the recession (or more correctly, are associated with the real root cause, namely excessive money creation) in the first place, namely America's high level of inflation and massive current account deficit.

To the extent it causes the dollar to fall, it will worsen price inflation. To the extent the dollar doesn't fall, it will aggravate America's external deficits.

The second article is about how the U.S. government calls on the EU and Japan to undertake similar Keynesian measures to increase demand there. These calls were immediately rejected, but had they been implemented it would have a similar effect on America as a falling dollar. It will reduce America's external deficits but increase price inflation. As bad as America's unilateral Keynesianism is, it would only make the state of the world economy worse if other countries copied the policies that are the root cause of America's economic problems.


Anonymous newson said...

"To the extent it causes the dollar to fall, it will worsen price inflation."

this sounds trivial and petty, but isn't using the term "price inflation" risky for an austrian? (given the popular confusion re: rising prices vs. inflation). what you mean is clear to those of us who see the distinction.

11:33 PM  
Blogger stefankarlsson said...

Newson, that is why I used the term price inflation instead of simply inflation. Since inflation can mean two things, I make sure to specify what I mean by saying price inflation or monetary inflation.

11:51 PM  

Post a Comment

<< Home