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Fallout: The Financial Crisis

It’s time to ask what Pigou would do

Marketplace Staff Dec 26, 2008


KAI RYSSDAL: A lot of the talk about this financial crisis being the worst since the Great Depression has usually included a reference to an economist named John Maynard Keynes. Keynes was a classical macro guy. He believed in government intervention — manipulation of interest rates, and lots of deficit spending in a slowing economy.

Franklin Roosevelt helped prove him right. But commentator Todd Buchholz says Keynes’ teacher might be the one who steers the way out of this economic debacle.

TODD BUCHHOLZ: Arthur Cecil Pigou has been dead 50 years, and this is his last chance.

During the Great Depression this Cambridge professor was slapped about by his pupil John Maynard Keynes. To Keynes, Pigou was a fuddy-duddy who wouldn’t change his models even though Britain was ripped apart in the economic equivalent of Gallipoli.

Today’s meltdown was ignited by Wall Street banks drunk on leverage and equipped with all the foresight of a palm reader in a circus tent.

Headlines blare: “Falling oil and food prices.” “Economists warn of a greater Depression.”

But Pigou argued falling prices make us wealthier. If, when we go shopping, we feel as if we’ve got more buying power, consumers can lead us out of the dumps.

“Balderdash!” thought Keynes. Better for the government to whip out its checkbook and hire workers to dig tunnels, even if they went nowhere.

Pigou’s idea flopped during the Great Depression because the Fed let the amount of money in circulation shrink 30 percent. No cash, no jobs.

Now, Pigou and Ben Bernanke have a second chance. If the Fed can buy bonds and force more money into circulation, the Pigou factor can revive the economy.

We are witnessing a furious battle. On one side, the frightened shopper. She has more buying power — turkeys were 89 cents a pound at Costco — but she is fighting the fear of new job losses. Will the 90 percent who avoid layoffs deploy their new spending power?

President-elect Obama, Tim Geithner and Larry Summers can help. Cutting payroll taxes, keeping capital taxes down could boost confidence and spark hiring. That’s better than bailouts and Keynesian make-work bridges to nowhere.

Early in my career, I taught with Summers at Harvard. He and Bernanke are masters of Pigou and Keynes. Now they must use the wisdom of the last hundred years, not to settle a decrepit academic dispute, but to save our standard of living.

It’s not just Pigou’s last chance.

RYSSDAL: Todd Buchholz used to be an economic adviser to the first President Bush. His most recent book is called “New Ideas From Dead CEOs.”

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