Why Spending Won’t Solve the Crisis

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 spend—governments 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.

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