THE TRUE LESSONS OF THE RECESSION

The West Cant Borrow and Spend Its Way to Recovery

ByRaghuram G. Rajan
SCOPE

Conventional Interpretation of Global Recession

The End of Easy Growth
Disrupting the Status Quo
The Politicians Respond
What Can be Done?
 CONVENTIONAL INTERPRETATION OF GLOBAL
RECESSION

Growth stalled :
Demand collapsed and accumulated Debt.

The standard Keynesian line, modified for a debt crisis :

Governments that still can should run up even larger
deficits, and central banks should push interest rates
even lower to encourage thrifty households to buy rather
than save
 THE END OF EASY GROWTH

The 1950s - 1960s :Time of rapid economic expansion.

1970s: Standstill of rapid growth:
o Unemployment and Inflation
o OPEC increasing Oil prices
UK and US :Deregulation of many industries, such as aviation,
electric power, trucking, and finance.
Europe: Cosmetic reforms, partial deregulation.
 DISRUPTING THE STATUS QUO
Effects of Deregulation: Mixed bag
o Cheap Goods for consumers.
o Increase the difference between rich and poor.
o ever-widening income gap on skewed corporate incentives
and misguided tax policies.
Upgrade in technology led to unemployment of unskilled labor.
1980s - 1990s : Dismantling of regulations and trade barriers
put an end to this cozy life.
 QUOTE: INCOME & EQUALITY

The difference between median incomes and incomes of

the bottom ten percent has barely budged. The top is
running away from the middle, and the middle is merging
with the bottom
- Raghuram Rajan
(The True Lessons of The Recession)
 THE POLITICIANS RESPOND
U.S. leaders encouraged the financial sector to lend more to
lower-middle-class.
Inequality in Spending vs. Earning rose.
The Federal Reserve abetted these shortsighted policies.
In 2001, in response to the dot-com bust, the Fed cut short-term
interest rates
o Expansion in housing construction and created jobs
for unskilled labor.
 WHAT CAN BE DONE?
Address the underlying flaws -
1. For US:
o Educating or retraining the workers.(Skilled labor)
o Encouraging Entrepreneurship and Innovation.
o Harnessing the power of the financial sector
2. In Europe:
o Removing the regulations that protect firms and workers
from competition.
o Expanding government's presence.
o Eliminating unnecessary, unproductive jobs.