Article: "Putting on Weight," The Economist, 12 September 2020
This article discusses the revival of Keynesian economics and its relevance to macroeconomics today. Keynes believed that government borrowing was necessary during recessionary periods to stimulate aggregate demand. Keynes' ideas reigned as macroeconomic orthodoxy from the 1930s until the challenges of inflation, high unemployment, and poor growth in the 1970s dethroned Keynes' ideas in favor focusing on monetary policy and restraining fiscal largesse.
But Keynes' ideas have returned, especially after COVID-19. Governments around the world are borrowing far beyond their tax revenue to stimulate the economy. The author of the article indicates two reasons for why this represents "progress."
The first is that the devastating effects of COVID-19 simply outweigh the costs of incurring debts. Further, demand has been weak in developed nations long before the pandemic began, a trend for which "there is no consensus" explanation. The second is that interest rates have hovered around zero, a trend which was also noticeable in pre-COVID days.
The author does, however, add some caveats to the worldwide enthusiasm for borrowing: that the "quality of deficit spending still matters" and that governments must be prepared for a change in interest rates, much as they should prepare for pandemics.
What do you think? Why has demand been so low? What can governments to prepare for higher interest rates?
I believe that consumer confidence is very low right now. People are afraid to go out and spend money on what they normally do. The stimulus package can only help to a point, but I believe individuals used it to pay of past debt. If people are paying off debt now, they will not want to borrow more.I do not see interest rates rising until more economic growth occurs.
ReplyDeleteI would agree a lot with what Lucas said above. Demand has been so low because of the pandemic and stores/restaraunts being closed. Also, with unemployment as high s it is disposable income has decreased along with consumer confidence. Super low interest rates are very justified in my opinion and for the time being I do not see them rising anytime soon, or atlas until the economy fully reopens.
ReplyDeleteI agree with the other comments. The pandemic has played a large role in the recession and the difficulty of getting the economy back up and running again, as consumer spending stays low due to less interactions being available in order to prevent further spread of the virus.
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