Tuesday, August 6, 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.

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