Fiscal policy can reduce unemployment: but there is a less costly and more effective alternative

Prepared for the November 2009 meeting of the Carnegie Rochester Conference on Public Policy, “Fiscal Policy in an Era of Unprecedented Budget Deficits.” I explain the current financial crisis as a shift to a high unemployment equilibrium, induced by the self-fulfilling beliefs of market participants about asset prices. I ask two questions. 1) Can fiscal policy help us out of the crisis? 2) Is there an alternative to fiscal policy that is less costly and more effective? The answer to both questions is yes.  ---by Roger E A Farmer

Roger E.A. Farmer is Professor and Chair of the Economics Department  at UCLA. He has previously held positions at the University of Pennsylvania, the European University Institute and the University of Toronto. He is a fellow of the Econometric Society, Research Associate of the National Bureau of Economic Research, Research Associate of the Centre for Economic Policy Research, Fellow Commoner of Cambridge University, and Coeditor of the International Journal of Economic Theory.  In 2000, he was awarded the University of Helsinki medal. He is a member of the Financial Times Economists Forum, a specialist on macroeconomic theory and the author of five books and numerous scholarly articles in leading economic journals. Professor Farmer is internationally known for his book, the Macroeconomics of  Self-Fulfilling Prophecies which explains how changes in market psychology can cause depressions. His two new books on the current economic crisis, Expectations, Employment and Prices and  Confidence, Crashes and Self-Fulfilling Prophecies are forthcoming with Oxford University Press. These works are the culmination of twenty five years of research on the role of self-fulfilling prophecies in macroeconomics. They integrate Keynesian economics  with classical ideas and provide a new paradigm for macroeconomics in the 21st century.