dr3642c.jpg Dean Rohrer

A Global "New Deal"?

For domestic demand to act as an engine of growth, policies should shift resources from investment to consumption. While the magnitudes involved are huge, they must be attained if an extended period of low growth, high unemployment, and declining living standards among the world’s poorest is to be avoided.

ATHENS – The International Monetary Fund’s belated admission that it significantly underestimated the damage that austerity would do to European Union growth rates highlights the self-defeating character of “orthodox” recipes to address the causes of the debt crisis that followed the financial crash of 2008-2009.

Conventional theory suggests that a single country (or group of countries) consolidating its finances can expect lower interest rates, a weaker currency, and an improved trade position. But, because this cannot happen for all major economies simultaneously – one country’s (or group of countries’) austerity implies less demand for other countries’ products – such policies eventually lead to beggar-thy-neighbor situations. Indeed, it was this dynamic – against which John Maynard Keynes fought – that made the Great Depression of the 1930’s so grim.

Today’s problems are compounded by a lack of sufficient private demand – particularly household consumption – in the advanced economies to compensate for demand losses stemming from austerity. During the last two decades, consumption drove these countries’ economic growth, reaching historically high GDP shares.

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