At the end of June, 2012, Nobel Laureate Paul Krugman and Richard Layard, a distinguished British economist launched a manifesto calling for a more rational policy dialogue with respect to the economic crisis and plans for crisis recovery across the major economies.
In the two weeks that the manifesto has been in existence, it has been endorsed by economists from across academia in the US, Europe, and Canada, and from such established institutions as Cambridge, Yale, Oxford, Columbia, LSE, Sorbonne, Dartmouth, and Harvard. Economists from the IMF, World Bank, and several of the world's stock exchanges have also signed. With over 7700 signatures spanning 180 pages thus far, a large number of ordinary citizens from various walks of life have also endorsed the Krugman-Layard Manifesto for Economic Sense.
Let's Avoid Repeating the Mistakes of the 1930s
The Manifesto calls for an end to the focus on austerity, asserting that in the case of most countries - but not Greece- public borrowing was not at the source of the crisis, nor the subsequent ballooning of public deficits across the OECD. Rather, the source of our massive public deficits was actually the collapse of output and then revenue, which followed the onset of the crisis. It would therefore be a mistake to try to address the problem by dismantling the part of the economy that isn't broken. The manifesto calls this failed policy a repeat of the the mistakes of the 1930s, when reductions in public spending lead to economic contraction in many of the world's largest economies, thereby exacerbating the crisis. In fact, the IMF has individually studied the national-level economic effects of budget cuts in 173 cases, and found that the consistent result is economic contraction.
What is called for according to the manifesto, is counter-cyclical fiscal policy that would dampen then economic shock rather than exacerbate it. At the moment, the private sector is simultaneously trying to cuts its spending, lower its leverage levels, and reduce its borrowing. The manifesto also calls on governments to focus more attention on unemployment figures and loss on borrowing costs. At the moment, most major economies face high unemployment levels compared to the recent past, while borrowing costs are near all time lows for most major economies.
The Manifesto concludes by saying that in order to be able to address our economic problems correctly, correct analysis of the problems will be necessary and indispensable.
About the Author:
Max Berre is a financial-regulatory economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) and economic correspondent for Capital-Life, who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.