Why Spending Won't Solve the Crisis

Increases in government spending, reflected by the ballooning global debt, have only papered over a serious structural problem in the economies of industrial democracies.

What's the Latest Development?

A new narrative is emerging that better explains the profundity and duration of our present economic crisis, says University of Chicago professor Raghuram Rajan. Previously, the dominant point of view was Keynesian: "To revive growth, others must be encouraged to spendgovernments that can still borrow should run larger deficits, and rock-bottom interest rates should discourage thrifty households from saving." Unfortunately, despite massive stimulus projects, growth remains sluggish and further spending may not have immediate pay offs.

What's the Big Idea?

Government spending has been out of control for decades, says Rajan, and pump-priming policies have papered over its ill-effects. Not even the growth spurred by American and British deregulation have been enough to keep these two countries out of the red. Instead, industrialized democracies face a more fundamental problem, one not easily solved by spurring demand. They must encourage innovation in information technology and low-cost alternative energy sources, and hope that developing economies will demand more goods.

Photo credit: shutterstock.com

Related Articles

Wider-faced politicians are seen as more corrupt

New research offers a tip for politicians who don’t want to be seen as corrupt: don’t get a big head.

Researchers at Caltech discovered that wide-faced politicians are seen as more corrupt. (Keystone/Getty Images)

Keep reading Show less
Keep reading Show less

Five foods that increase your psychological well-being

These five main food groups are important for your brain's health and likely to boost the production of feel-good chemicals.

Mind & Brain

We all know eating “healthy” food is good for our physical health and can decrease our risk of developing diabetes, cancer, obesity and heart disease. What is not as well known is that eating healthy food is also good for our mental health and can decrease our risk of depression and anxiety.

Keep reading Show less