After reading two articles by Willem Buiter today I realized that I did not have his blog in my blogroll. Well, can do! And did. The articles that I recommend are Useless finance, harmful finance and useful finance and Ruminations on banking. The first article explains finance in a very nice, structured way leaving out all those complicated phrases while focussing on what really is important. The second article is a plan of how to deal with the financial crisis part of a huge depression that is looming (the US is now in deflation, world trade is falling off a cliff and the financial sector is a mess). That looks pretty much like a good plan and would be step 1 of 2. Step 2 is the expansion of fiscal policy to increase aggregate demand in order to break up the apparent coordination failure in the private sector. When I say fiscal policy, I mean good old government spending – not tax cuts, not nationalization of firms. Otherwise, people who do not trust the private sector will hoard there money at home and starve us to death – the paradox of thrift.
After the crisis is over, economists will have enough time to find the optimal size of the government sector. And I would suggest not to talk about size only. What matters is that the governments take over those tasks which the private sector is bad at, while leaving everything else to private firms. Whether this leads to more or less government depends on the country.