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My take on Rajan’s “True Lessons of the Financial Crisis”

May 14, 2012

A lot of economists have made a big deal of Raghuram Rajan’s piece “The True Lessons of the Recession: The West Can’t Borrow and Spend Its Way to Recovery”. Despite the risk of shedding more ink over an already over-covered topic, my take on it is that it is just bad. Not “I disagree with it” or anything like that, just that it is so poorly written and put together that I would be embarrassed if my name were on it. The work is thoroughly confused. His economic history section is full of overly broad and misleading just-so stories. For example, his account of the post-war era includes high profits, high wages and high government spending. Well, something has to give, because with a lower total GDP, all components of GDP can’t be larger. The theory sections are poorly worded and poorly thought out. In one paragraph, he bemoans the loss of jobs to trade and technology, and then as a palliative, says countries should “reduce inefficient jobs”. In another, he complains that real wages are declining, but says it’s ok, because prices have fallen since the 1970s.

I can’t honestly figure out if he things more demand would be good or bad, and when it comes to suggestions, he pretty much comes up with “let’s make the supply side better”. Well, ok, but how? Is anyone opposed to that? The essay does have some good points, but they’re garbled so that people are likely to miss them.

Bottom line: Despite all the talk, don’t read it.

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