Tuesday, 6 August 2013

India’s next central bank governor spouts nonsense on Keynsianism.

Raghuram Rajan, India’s next central bank governor, questions Keynsianism in this FT article.
He makes the obvious point that in a recession some geographical areas and industries will be harder hit than others, thus, so he claims, we might be better off concentrating on the hard hit areas / industries than spending money on general Keynsian stimulus.
The flaw in that idea is that there will ALWAYS BE areas and industries doing better than others. That doesn’t disprove the idea that given a GENERAL lack of demand, the solution is a GENERAL i.e. non-targeted rise in demand.
As to the “hard hit” areas and industries, that’s an entirely different point and a total can of worms. E.g. government CAN INTERVENE and help the “hard hit”, but does government have more wisdom than the market? Should we subsidise rust belt industries? The British government poured millions into declining industries like British Leyland and shipbuilding over the last four decades or so. That didn’t stop their ultimate demise.
Or perhaps we could ignore the declining industries and do more to bring employment to the AREAS where those industries exist. But too much of that sort of thing stops labour moving to other geographical areas where labour is in demand.
Like I said: a can of worms. And it’s a can of worms which in no way detracts (to repeat) from Keynes’s point, namely that given a GENERAL deficiency in demand, the solution is a GENERAL or “non-targeted” rise in demand.

H/t to Mike Norman and Ramanan.


  1. Has any government tried to allow wages to fall in poorer areas so that new industries are attracted to those areas? They could help with improved infrastructure and then maybe taxing train journeys in rich areas rather than subsidising them (Like London). They could also allow for regional pay bargaining - especially in the public sector.
    I mention this because the infrastructure building for Burnley, my home town, was very late in coming and the economic damage had already been done by the time the M65 had been built. I believe Burnley could become the fracking centre of the country as no government gives a s*** about the town so frack away.
    On Keynes, I think even he would accept a 10% deficit to GDP is quite enough going forward. (To coin a phrase). And it clearly has been because we've just had a recession that hasn't had a whiff of increased unemployment or bankrupcy. Yet.

    1. Francis, Re cutting wages in poor or high unemployment areas, the answer is “yes”: numerous governments have tried to do this, including the present one, and they’ve succeeded to a limited extent. But when it comes to large trade union dominated scenarios like the civil service, governments always run into union opposition on this subject.

      As to whether the deficit should be more than 10% of GDP, the MMT answer to that (which I’d agree with) is that the actual size of the deficit is a complete and total irrelevance: it should simply be enough to raise employment to the maximum that is consistent with acceptable inflation. Keynes actually expressed the same sentiment when he said “Look after unemployment, and the budget will look after itself”.


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