Economics RecessionAlternative Solutions

September 7th, 2014

Prepared by Ivan F Rodriguez

MBA & MEng

Slow Global Recovery

2001 - 2015

Objective #1: Fight Unemployment

•GD=C+I+P+E

Where:

GD=Global Demand

C=Consumption

I=Investment

P=Public Expenditure

E=Exports

Solution:

Use Keynes’ Model

Objective #1: (cont.):Fight Unemployment

Applying Keynes’ Model, Unemployment is Minimized by:

Maximizing Global Demand [GD] which implies:

1) Reduced Taxes to Promote Consumption [C]

2) Reduce Interest Rates to Promote Investment [I]

3) Increase Public Expenditure to assist Population needs [P]

4) Reduce Exchange Rate to Stimulate Exports [E]

Solution:

Use Keynes’ Model

Perverse Demand Effect and Unemployment (Carlin & Soskice Model, 2007)

Since the debate between Keynes and Pigou, Keynesian economics were always quite skeptical that supply creates it own demand in a smooth less way.

Therefore economists “invented” monetary and fiscal stabilization policy and in an open economy setting external demand can of course be helpful in stabilizing the economy.

However, under certain circumstances and even under stable aggregate demand schedules, the demand curve can be very steep in the unemployment/ real wage space — even negative under reasonable assumptions.

Objective #2: Reduce Public Deficit

Reducing Unemployment is some times against reducing Public Deficit.

Unfortunately this path is not helping those countries with high unemployment rates (e.g. Greece [27.2%], Spain [25.6%], Portugal [15.3%], Italy [13%])

Germany is following this path and forcing the Euro Zone to shadow this route.

Solution:

Increase Taxes and Reduce Public Expenditure

GD=C+I+P+E

Optimal Monetary Zone

Mundell Model

[1999]

Optimal Monetary Zone (cont.)

Robert Mundell´s Model

[1999]

Mundell´s optimal monetary zone model calls for two mandatory requirements:

1] Convergence of the macroeconomic magnitudes (e.g., Maastricht Agreement: Similar Inflation Rates, Similar Interest Rates, Public Debt below 60% of the GDP, and Public Deficit below 3% of the GDP).

2] Productive factors free movement (particularly, labor force and capital).

This second obligatory requirement is the what mostly the Euro Zone is lacking of, economic reality differs between member countries (e.g., Spain with more than 25% of unemployment vs. Germany with lest than 5% as of June 2014).

Conclusion:

Fight UnemploymentUnder the Keynesian model, when unemployment rate domains the economy, increasing taxes and reducing public expenditure is simply against economic recovery.

This solution paired with Salary Flexibility can yield the best results. By salary flexibility we meant linking salary to productivity rates and not to inflation.

This is key to keep competitiveness without invisible or visible hands from government or any other economic actor. Employees must be inspired to reach higher productivity by the continuously applying their knowledge and deliver the highest quality in their respective jobs. This is by creating value.

Solution:

Use Keynes’ Model + Implement Salary Flexibility