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Fernando J. Cardim de Carvalho
Much of the criticism directed at austerity programs implemented after the 2007/2008 financial crisis, more forcefully in the eurozone, have relied on the same arguments Keynes and others raised against the (British) Treasury View developed in the 1920s and 1930s. Austerity, however, has been proposed most insistently in the 2010s by European authorities, led by the German Federal Ministry of Finance, the Bundesfinanzministerium (BMF). While the arguments for austerity then and now share some common elements, there are enough original arguments being presented by the BMF to make many of the criticisms ineffective. The paper reconstructs both views, the Treasury's and the BMF's, to show and evaluate their similarities and their differences.
Thomas Palley and Matías Vernengo
Robert J. Gordon
In the late 1960s the stable negatively sloped Phillips curve was overturned by the Friedman–Phelps natural rate model. Their Phillips curve was vertical in the long run at the natural unemployment rate, and their short-run curve shifted up whenever unemployment was pushed below the natural rate. This paper criticizes the underlying assumption of the Friedman–Phelps approach that the labor market continuously clears and that changes in unemployment down or up occur only in response to ‘fooling’ of workers, firms, or both. A preferable and resolutely Keynesian approach explains quantity rationing by inertia in price and wage setting. The positive correlation of inflation and unemployment in the 1970s and again in the 1990s is explained by joining the negatively sloped Phillips curve with a positively sloped dynamic demand curve. For any given growth of nominal GDP, higher inflation implies slower real GDP growth and higher unemployment. This ‘triangle’ model based on demand, supply, and inertia worked well to explain why inflation and unemployment were both positively and negatively correlated between the 1960s and 1990s, but in the past decade the slope of the short-run Phillips curve has flattened as inflation exhibited a muted response to high unemployment in 2009–2013 and low unemployment in 2016–2018.
Despite a few pockets of relatively fast expansion, overall deficiency of demand characterises the world economy. The external stimulus provided by the US is declining; Europe's net impact is negative because of the emphasis on generating current-account surpluses. While China is already a significant global economic player, it cannot adequately counter the effect of this reduced impetus from the major developed countries. Much of the developing world is relying on unsustainable debt-driven bubbles in the financially liberalised environment to generate economic recovery. Sustaining the development project will require countries to shift from export-oriented growth to more reliance on domestic demand through wage and employment increases.