We need to have a, at the moment of a recessionary gap
we should have an expansive fiscal policy, and that would be ideal.
But we also mentioned particularly last week in
our discussion that if governments are really thinking
about balancing the budget across the cycle, if
they're acting in a way that's fiscally responsible.
We should have surpluses in moments of inflationary gap, and
then those could be used to repay the deficits that
we have in moments of recessionary gap, and of course
leading up to crisis not very many countries were doing that.
In fact, we talked about Sweden, and I showed you in the book how
Sweden has a rule requiring them to
produce a surplus every year, at potential GDP.
But a lot of countries, and here we can talk about
the U.S., we can talk about the UK, France and Italy who
have not had surpluses since the 70s, we can talk about Greece, Portugal,
countries that were having deficits even in years of inflationary gap.
So when the crisis hit, what happens?
Well, a lot of the notions that we've talked about fit in here.
Markets look at the rising deficit in those countries, which is natural.
Thinking of automatic stabilizers.
They look at the rising deficits and they say wow The
deficit is growing and look at the size of the debt already.
Remember we said this is important when you're thinking of the debt as too large.
How big is it already?
Markets say okay, Italy.
It's okay for Italy to have a deficit during the recessionary gap.
But, look at the size of its debt already.
I don't think they can pay.
And then In that secondary market that we talked
about a lot of bondholders, if there's a lot
of foreign ownership of those bonds, might begin to
sell bonds, and the interest rate would go up.
So the government, facing the economic situation, and
maybe even wanting to to expansive fiscal policy.
Would find the interest rates on borrowing had gone up
so much in the secondary market that at that moment of
asking for new money the interest rates were to high,
and it was simply to expensive for them to keep borrowing.
So if we put these pieces together we say why is
it that countries in a deep recessionary gap are using restrictive policies.
Snd we could blame the Troika, we could blame Germany.
We could blame the IMF, and we know the IMF in the past has often prescribed
very restrictive fiscal policies, Latin America, other countries
that are having debt problems or financing problems.
But the reason they have to do this is not just that they're wrong headed.
Right.
It's that the country has made a lot of fiscal mistakes in the past.
They've been fiscally irresponsible.
So they come to that moment of recessionary
gap, with a debt that's way too big.
All right.
And markets say, I don't think they can pay.
That interest rates rise, as the price of bonds fall.
The borrowing costs rise, and the government itself even
without the IMF, the Troika or whoever, may have
to follow an austere policy, a restrictive policy at
a moment of recessionary gap, because of past fiscal mistakes.
[BLANK_AUDIO]
Finally, there's an interesting question that has lead
to quite long voluminous threads under the title of
aggregates applying government policy, there also were some
questions about aggregate supply here Pete Sabias, Antonio, Mikael.
Giuseppe, Jose, Stanik, Bill from Greece were all very active.
And so, I thought this might be interesting to address
here, because the questions that they're raising are so relevant.
In general, what they're asking is what, could
governments use aggregate supply to stimulate the economy?
Could governments use aggregate supply measures to stimulate the economy?
And, then moving on from that is it fair to use this
aggregate supply measures when they fall so heavily, on workers for example?
So it's a big question.
Let me try to address it in two parts.
The first part of the question is, why would you use aggregate supply measures?
We know that aggregate supply measures that involved deregulation.
Okay, for all of the negative connotations that that now has.
