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The Causes and Cures of the Economic Crisis Dean Baker, Co-Director Center for Economic and Policy Research September 14-15, 2011
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Key Points on the Economic Crisis 1)The main cause was the collapse of the $8 trillion housing bubble 2)The financial crisis was secondary 3)In the short-term the government must fill demand gap, in the longer term the dollar must fall to reduce the trade deficit.
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Real House Prices Rose by More Than 70 Percent Source: Case-Shiller 20-city index.
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Lost Annual Demand due to the Recession and the Annual Stimulus, 2009-2010
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The Financial System is Not the Problem 1)Homebuyers are able to get mortgages (Mortgage Application Index). 2)Firms can borrow on credit markets at unusually low interest rates (we are not Japan). 3)Even small firms do not consider credit a problem. 4)Investment in equipment and software is close to pre-recession levels.
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Interest rates on Aaa and Baa corporate debt, 1981-2010
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Investment in Equipment and Software as a Share of GDP, 2000-2011
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Budget Deficit as Percentage of GDP, 2002-2010
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Potential Savings from Free-market Drugs, 2011-2020
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Potential Revenue from a Financial Speculation Tax, 2011-2020
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Ways Out of Current Downturn 1)Stimulus – spend money a)youth jobs programs b)aid to state and local governments c)infrastructure projects 2)Federal Reserve Board 3)Work Sharing – fewer hours per job, more jobs 4) Lower valued dollar – move toward balanced trade
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Conclusion: We Must Act Quickly to Restore Economy 1)Long-term unemployment is devastating to workers and families 2)Unemployment is an enormous waste of resources 3)We know how to do it 4)It was not the unemployed who messed up on the job
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