Following up on the previous post on the GFC, there is a very interesting article in the Wall Street Journal that makes a very good point on the causes of, and solutions for, the current recession. In a simple table, (about half way down) it makes a very strong point – the depth of each country’s recession has been very strongly linked with the amount of government debt. Those countries that avoided recession had little or no government debt in 2007. Those that had big government debt have had a long recession.

If I remember my university economics properly, a good Keynesian economist would at this point rush in and point out that Keynes himself believed that debt should be net zero over the cycle and, as 2007 was pretty much the peak of the boom debt at that point should have been zero or less than. They would be right.

It does, however, show the importance of fiscal responsibility if you want to avoid prolonged downturns.

A second point that the author makes is that having the US Fed seems to have resulted in more severe and long term downturns than happened before the existence of the Fed. Again, this clear point must be equivocated by pointing out that the economy has changed since 1913 – but it is clear evidence that should be taken into consideraion when we are looking at policy responses to the recent (and now possibly finished) recession.

Hat tip –

Cattalaxy.