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Fareed's conclusions from the Krugman/Ferguson debate
Krugman part 2
Discussion Questions:
1. Why did the one third of the US stimulus package consisting of tax cuts do little to increase employment?
2. What is "austerity" and why does Krugman think that austerity measures are a bad idea in the UK and the US right now?
3. Does Krugman think the US economy should be back at the level it was at in 2004/2005? If not to return to the level of spending of the pre-recession era, then what is his argument for continuing fiscal stimulus now?
Krugman's side of the fiscal stimulus debate
Discussion Questions:
1. What are the two "profoundly different views of economics" that are being tested as governments begin rolling back the fiscal stimulus packages of the last two years?
2. What are three characteristics of an economy in a "depression" according to Krugman?
3. What is "budget austerity" and why does Krugman think this should not be the first priority of policymakers in the G20 nations?
4. Why is deflation dangerous according to Krugman?
5.What is the additional annual cost to the US government of borrowing and spending an additional trillion dollars now? What is the potential additional benefit of more stimulus?
Ferguson part 2
Discussion Questions:
1. What happens to interest rates in the US when international investors become scared of continuing to lend the US government money?
2. American companies have the money to invest. Why aren't they doing it? What does Ferguson think should be done to encourage private companies to begin investing and thereby create a "way out" of recession?
3. "Our biggest obstacle is not economic, it's political." Explain.
Niall Ferguson argues against additional stimulus and for increased "austerity" in the US economy.
Discussion Questions:
1. Why might the US have to pass spending cuts and tax increases to maintain its "credibility in international bond markets"?
2. Why would fiscal tightening "choke off the recovery"?
3. How is the financial crisis in Europe a warning to the US?
4. How could the "costs" exceed the "benefits" of deficit financed expansionary fiscal policy.
5. Ferguson proposes a new type of policy that "boosts confidence". Why will expansionary fiscal and monetary policies fail if private sector confidence remains depressed?
Paul Krugman explains why the US fiscal stimulus package was not enough and also why another $1 trillion is necessary and not a huge concern.
AP Macro and IB teachers should read this review of George Akerlof and Robert Schiller's book "Animal Spirits". There are some great points in this piece that can be brought into the AP or IB classroom with regards to the assumption of rational behavior and more importantly the Keynesian/Classical debate on Macroeconomic policy issues.
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The last two years, in which capitalism has suffered one of its periodic shocks, have given John Maynard Keynes a new lease of life. Events have demonstrated the limits of the theory that economies can be relied on to be stable if they are lightly regulated and otherwise left to themselves. There is now much talk of the paradox of thrift, whereby the rational choices of individuals can prove collectively ruinous, and of the need for government to counteract the inherently anarchic tendencies of markets. Keynes has been revived because he understood that markets are very often irrational. Unfortunately, few of those who urge that we go back to him seem to have understood why he believed this.
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Apart from a brief postscript to one of the chapters and a few remarks in the preface, George Akerlof and Robert Shiller’s Animal Spirits was written before the current crisis. Yet, based on research undertaken over many years, it can be read as prefiguring the current disillusionment with economics. The trouble with prevailing theories, in Akerlof and Shiller’s view, is that they assume human beings are more rational than they actually are. ‘This book, which draws on an emerging field called behavioural economics, describes how the economy really works,’ they claim. ‘It accounts for how it works when people really are human, that is, possessed of all-too-human animal spirits.’
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"I believe that we are already in a recession," Buffet was quoted as saying. "Perhaps not in the sense as defined by economists. ... But people are already feeling the effects of a recession."
"It will be deeper and longer than what many think," he added.
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