There are three important lessons from the Great Depression to which our political leaders seem to be oblivious because of what seems to be a collective amnesia. First of all, to kick start an economy stuck in a state of secular stagnation (that is, a situation in which private businesses are unwilling to undertake significant spending), it is up to the state to do so.…
This brings us to a second lesson. In an advanced monetary economy as ours, at the macroeconomic level there must be at least one sector of the economy that spends more than it receives. …
As a corollary, there is a third simple lesson. Let us imagine the economy as being regrouped into two very large sectors, namely the private sector (households and firms representing , say, 3/4 of the economy) and the public sector (all levels of governments representing the remaining 1/4), while abstracting for now the net spending behaviour of foreigners. In this economy, if, say, the consolidated public sector spends more than it receives (that is, a situation in which the government sector runs a deficit), then the private sector will find itself receiving more than it is spending, that is to say, that it will be building up savings that would permit private agents to deleverage if they are in debt. Needless to say, if we also add foreigners who are willing to buy more of our wares than we buy of theirs, then the positive net exports would further compound this deleveraging of the private sector domestically. If, on the other hand, the government sector begins to run surpluses, this would be destroying private saving and increasing household debt.…
The Progressive Economics Forum
Missing in (debate) action: macroeconomic lessons from the Great Depression
Mario Seccareccia, Professor of Economics, University of Ottawa
