Page 3

somebody else knows more than they do—and that what they know is that you would be a fool to buy. Here the world’s central banks and finance ministries have been trying a great deal of ingenious and innovative policy moves to try to conduct a stimulative credit policy, but so far without a good deal of success. We don’t know very much about how to conduct a successful stimulative credit policy. This brings us to the fourth tool: fiscal policy. Have the government borrow and spend, and so pull people out of unemployment and push capacity utilization up to normal levels. There are drawbacks: afterwards there is the deadweight loss of financing all the extra government debt incurred, and there is the fear that too-rapid a runup in debt may discourage private investors from building physical assets that are then subject to taxation by the future governments that will have to amortize the extra debt. But when you have only two tools left, neither of which is perfect for the job, the rational thing to do is to try both—both credit policy and fiscal policy. And that is what the Obama administration is right now attempting to do.

References John Maynard Keynes (1919), Economic Consequences of the Peace (London: Macmillan). 857 words


Four Roads to Dealing with Depression  

A piece for voxEU