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Economics Unhinged

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Posted on June 28 2010 8:15 am
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by Robert Samuelson

Almost everyone wants the world’s governments to do more to revive ailing economies. No one wants a “double dip” recession. The G-20 Summit in Toronto was determined to avoid one. In major advanced countries — the 31 members of the Organization for Economic Cooperation and Development — unemployment now stands at 46 million, up about 50 percent since 2007. It’s not just that people lack work. Lengthy unemployment may erode skills, leading to downward mobility or permanent joblessness. But what more can governments do? It’s unclear.

We may be reaching the limits of economics. As Keynes noted, political leaders are hostage to the ideas of economists — living and dead — and economists increasingly disagree about what to do. Granted, the initial response to the crisis (sharp cuts in interest rates, bank bailouts, stimulus spending) probably averted a depression. But the crisis has also battered the logic of all major economic theories: Keynesianism, monetarism and “rational expectations.” The resulting intellectual chaos provides context for today’s policy disputes at home and abroad.

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