Are we in a ‘liquidity trap’?
Paul Krugman insists that at the present time, the economy is in what Keynesians call a “liquidity trap,” so the ONLY policy that will set the economy back on a boom track is massive government spending. In my Wednesday column for the Freeman Online, take on that point:
Some economists claim the economy is in a Keynesian liquidity trap, which makes it a special case calling for “unorthodox” policies. Paul Krugman writes:
I know that some people find this hard to understand — perhaps because they don’t want to understand — but people like me have never claimed that fiscal expansion is always and everywhere the right policy, even in response to recession…. All of the unorthodox policy recommendations and conclusions are contingent on the economy being in a liquidity trap, in which short-run nominal interest rates are up against the zero lower bound and can’t go lower.
And liquidity-trap conditions are rare; in fact, they’ve only happened twice in US history. Unfortunately, we’re living in one of those episodes right now.
Well, are we in a liquidity trap? And does the present situation require constant bursts of government spending?
Check out the “Krugman in Wonderland” posts here the Disptach – click here
William L. Anderson is an author and an associate professor of economics at Frostburg State University in Maryland. He is also an adjunct scholar with the Mackinac Center for Public Policy as well as for the Ludwig von Mises Institute in Alabama.
Read more at “Krugman-in-Wonderland”
