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On Instability

di - 22 Dicembre 2009
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On the real side, the contraction which started several quarters ago has been halted by expansionary monetary and fiscal policies. On the basis of the more recent indicators a timid recovery seems under way in a world economy whose main engine of growth remains located in Asia, particularly in China (11% of world GNP). Nonetheless, demand policies have not prevented the contraction, especially profound in Japan, Europe, and the U.S. There have been delays, with the ECB still raising interest rates in July last year fearing a non existing inflation. The effects of fiscal policy have been lagged and less than proportional to the 4,5% of GDP average increase in the G-20’s budgetary deficits. Governments relied more an automatic stabilizers than on discretionary measures, more on transfers and tax cuts than on capital expenditures. Lower-than-one multipliers have also been limited by a marginal propensity to consume weaker than econometrically forecast.
Aggregate demand should continue to be supported in 2010, notwithstanding the higher levels of public debt emerging in many countries, especially where huge amounts of public money have been spent to bail out weak financial intermediaries.

10. At least one lesson can be drawn from a crisis which is among the worst, but not the worst, in the history of capitalism. The sheer facts of the crisis are at odds with any idea of laisser faire, of efficient markets, and even of market failures always inferior to the failures of the State. We should not forsake  stabilization policies. The problem is to render those policies more timely and effective, at the same time minimising both their intrusiveness on individual choices and the probability of generating moral hazard.


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