I selected the French economist Jacques Attali because he is a man of many facets. Founder and former President of the European Bank of Reconstruction and Development, author of more than 40 books, advisor to President Francois Mitterrand from 1981 to 1991, once minister of finances, J. Attali now specializes on micro-finance and new technology. He recently presided the CLCF - the Commission forthe Liberation of Growth created by Nicolas Sarkozy to study specific issues and offer suggestions and recommendations about the economic crisis. I chose the following articles because they illustrate basic economic concepts. The first one, Get Down to Business, deals with the economic crisis and the different economic stimulus plans launched by the governments. The second one, The Vain G-20 waspublished the day before the G-20 Pittsburgh summit.
J. Attali explains in the first article that governments should strongly stimulate consumption and investment to respond to the crisis. I will try to explain J. Attali’s position by illustrating those two economic concepts (consumption and investment).
As Keynes’ consumption equation states (C = a Y + b, with Y = revenue), households’consumption depends on their current revenue. By decreasing the revenue, the rising of the unemployment rate leads to a decrease in consumption. However, other reasons can explain this decrease. Indeed, households’ choice between consuming and saving depends on the amount of their current revenue but also on their future revenue (M. Friedman, A. Modigliani). Thus the pessimistic economic forecasts and thedecrease of households’ confidence lead households to increase their savings by reducing their consumption. The decrease of the households’ consumption can also be explained by their impoverishment: Modigliani’s consumption equation (C = a (W/P) + b Y with W = wealth and P = prices) takes into account the wealth of households. The collapse of the stock exchange and the real estate market lead to adecrease of households’ wealth (W) and thus contributes to the decrease of the consumption.
The decrease of the demand explains the problem of “surplus of capacity in key sectors” stressed in the first article. Companies don’t invest because the anticipated demand is too low. Investment is also linked to interest rates. To stimulate investment, Central Banks decreased their interest rates. Butaccording to Attali, this is not enough. In the article Get Down to Business, he condemns the European low economic stimulus plans. Governments should invest “massively” in leading sectors; “they should accept temporarily targeted deficits to fund these expenditures of the future”. Graph 1 and graph 2 illustrate this basic concept: by increasing public expenditures (G), the general demand (D) isstimulated which leads to an increase in production and investment and thus to an increase in employment.
Large budget deficits are needed, short-term, to help create demand and pull the economy out of its pronounced recession. Attali stresses in The Vain G-20 the risks of public debts that “keep on growing everywhere”. To stimulate investments, Central Banks have lowered their interest rates. Thehuge amount of public debts make it impossible for the Central Banks to increase their rates again, which deprives them of the power to fight against inflation. Increases in tax and social charges or severe spending cuts to reduce public debts are also unlikely since most participants of the Pittsburg summit have electoral deadlines.
As a conclusion, I would say that Attali’s expectations aboutthe G-20 were confirmed. Indeed, there were no plans to implement some declarations of intent promising to overcome the causes of the crisis; nothing either on the regulation of non-banking financial professions; no progress, towards the establishment of a Worldwide organization of Finance; nothing on the public deficits, neither on unemployment, nor on the balance of currencies, nor on the...
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