Friday, 24 July 2015

Strange ideas from Brad DeLong on the EZ.

Brad DeLong claims the Eurozone is repeating the mistakes of the 1930s. Wrong. The big mistake in the 1930s was failure to implement Keynsian deficits. Decent size deficits only came with WWII, and of course unemployment then plummeted. In contrast, the big problem in the EZ is that when a country loses competitiveness, it can only regain that competitiveness via internal devaluation, and that involves years of austerity. (Indeed, De Long pretty much makes that point himself.)

That apart, there is no evidence of deficient demand in the EZ in that Germany has hit the EZ inflation target over the last ten years. Inflation has fallen in Germany in the last 12 months, so if that’s not due to temporary factors, then a bit more EZ wide deficit would be in order. But that won’t solve the basic problem in Greece.

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