Thursday, 9 June 2011

Lessons from the financial crisis for teaching economics

John Taylor discuses this topic at his blog Economics One. He writes,
I emphasized that one’s view of how economics teaching should change depends greatly on one’s view of the crisis. For example, Alan Blinder and I have different views of the crisis and the policy response, so naturally we have different views about how the crisis should affect teaching.

In my view the problem was that economic policy deviated from basic economic principles which had worked well. The result was a great recession, a financial panic, and now a very weak, nearly nonexistent, recovery. The deviations included a monetary policy which set interest rates too low for too long and a regulatory policy which failed to enforce existing rules. The deviations from sound principles continued when government responded with an ad hoc bailout process and temporary fiscal stimulus programs. The good news for the economy is that economic growth and stability can be restored by adopting policies consistent with basic economic principles.
Taylor goes on the argue that the good news for teaching from the financial crisis is that we now have many more examples to illustrate basic economic principles including that incentives matter, the permanent income hypothesis, regulatory capture, and the money multiplier. And you can never have too many examples to drive home the importance of basic economics.

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