Debt, deleveraging, and the liquidity trap
Paul Krugman 18 November 2010
Debt is the crux of advanced economies’ current policy debates. Some argue for fiscal expansion to avoid recession and deflation. Others claim that you can’t solve a debt-created problem with more debt. This column explains the core logic of a new model by Eggertsson and Krugman in which debt shocks and policy reactions can be examined. Relying on heterogeneous agents, the model naturally produces the paradox of thrift but also finds new supply-side paradoxes, those of toil and flexibility. The model suggests that most economists have been misthinking the issues and that actual policy in the US and EU is misguided.
If there is a single word that appears most frequently in discussions of the economic problems now afflicting both the US and Europe, that word is surely “debt.” Between 2000 and 2008, household debt rose from 96% of US personal income to 128%; meanwhile, in Britain it rose from 105% to 160%, and in Spain from 69% to 130%. Sharply rising debt, it’s widely argued, set the stage for the crisis, and the overhang of debt continues to act as a drag on recovery.
global crisis, debt, fiscal deficits
A new watchdog would guard us from debt
Tim Besley, Andrew Scott 25 February 2010
The financial crisis has brought large fiscal deficits and soaring public debt. A switch to tight fiscal policy risks throttling the recovery, but continuing deficits are spooking markets. This column argues the obvious solution is to promise future fiscal rectitude and stick with the current expansionary policies in the near term. This requires independent fiscal policy committees to institutionalise fiscal transparency and restore credibility to governments’ long-term public finances.
A legacy of the financial crisis and subsequent government intervention has been large fiscal deficits and soaring public debt. The UK’s position is worse than most, as it entered the recession with a significant structural deficit, but Portugal, Ireland, Greece, and Spain are also facing growing concerns over their government debt.
Global crisis Macroeconomic policy
public debt, fiscal deficits