Can Pigou Refute the (Keynesian) Liquidity Trap?

by Jaime Bravo + (A spanish version of this article can be found here)

Keynesian economists believes that, in the presence of a liquidity trap, a competitive economy may lack automatic market mechanisms that tend to eliminate excess supplies of labor. So, in a liquidity trap, if the interest-rates are so low, there must be some public spending in order to "rebuild" the economic activity. Although Keynes made great points on this issue, the classical economists have something to say. Here enters the Pigou Effect and its relation with the Liquidity Trap. As Paul Krugman said (not exactly quoted): there might be a moment for every economy when markets cannot do anything by themselves as the interest-rates are so low - it means that there is no investment in the country - and, as you can have less than a 0% - in a negative interest rate, the Government would have to pay the investors to invest - you have to make something. The answer for Keynesians is, yes, public spending. The logic behind this asseveration is surprisingly simple: a country - say, Spain - has a lot of people with money, but they do not invest it, they save it because, for example, there's high unemployment and a big uncertainty in the future - the risk of losing all the money is here.  If a Government expands its public spending, it will raise the number of jobs. Considering that Spain - the example taken - has a lot of unemployed people (which is actually true), they will be employed and therefore, they will be less resistant to spending. So debt will increase, yes. But the problem with the debt-obsession - I'm nowadays reading to Reinhart and Rogoff on this issue - is that it is not quite relevant sometimes: if you have 7 million unemployed in a country, debt doesn't matter: the high unemployment rate does.

Youth Unemployment in Europe - What are the effects and how can we solve it?

by Karina Shooter


Photo Courtesy of gkardashev.com

In July, Angela Merkel announced that youth unemployment was a priority in the Eurozone. Many people believe that this decision was far overdue - the youth unemployment rate is now at 58.7% in Greece and 56.1% in Spain. But what is the effect of youth unemployment and what can we do to reduce it? 

The first question which needs to be addressed is why youth unemployment is more dangerous than unemployment in general. The main reason for this is that jobs become easier to get the more experience you have - it is important for young people to get on the 'job ladder' quickly, so they can gain experience and progress to better jobs. If youth unemployment is rife, then a generation of young people gain no experience, so even when the economy stabilises and employers are willing to hire workers again, they are too inexperienced to be offered a job - hence they become 'the jobless generation'. This is a massive waste of skills and resources. The second issue which arises from mass youth unemployment is an ageing population. When youth unemployment is high in a particular country, young people tend to move abroad in order to find work. This means that countries such as Spain and Greece, have lots of older retired people in their country but not enough young working people who pay their taxes so the government can support the citizens - this may, at an extreme, result in poorer quality state education which would lead to under qualified youth and may cause a youth unemployment spiral. 

Redundancy at 17... Yes that's me!

By Krupa Popat

Writing about economics and reading articles as to what is happening to the people around me because of the decisions of others really made me think about how privileged and grateful I should be.

However now, I’m in the position of experiencing the downfalls of the decisions and being on the receiving end… And I can definitely confirm it is not nice!

I worked for a retail company, which is a very large multinational but worked in a very small store, within a store. I worked there for over a year and thoroughly enjoyed it. I met new people and learnt many skills but especially developed my patience and ability to be quick on my feet with customer problems. Something you don’t do on a regular basis without a job.

This has disappointed me in the fact that our economy as been flat lining which made me think that the economy was going to get better and this would increase our confidence as consumers and the confidence of companies to invest. This would then hopefully kick start the growth and rebuild the economy.

Would an Increase of Wages in Bangladesh Destroy Their Economy?

by Jaime Bravo

 Since a lot of factories in Bangladesh were destroyed, many people wondered whether an increase of wages would destroy the (fragile) economy of Bangladesh. Many people are employed every day in the sweatshops, the factories where they are being turned to slaves by an economic paradigm that does not fit for them. As I argued in my last piece, they are poor but they are not stupid. In fact, since that happened, many people started saying that the benefits from the sweatshops are incredibly great because they provide of higher wages (considering that, if they do not work in factories (with increasing-returns) they will work in the agricultural sector (with constant-returns) and because they let them to save little by little so that they can provide their children with a better education and, in the long-term, with a better future. This is the theory. But the reality isn’t so sweet. Again, economists have something to say about this issue.