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How the Law Can Boost Recession Recovery

Knowledge@Wharton – “In the Great Recession, the two key tools for rescuing the economy — fiscal and monetary policy — had big limitations, according to Yair Listokin, author of a new book: Law and Macroeconomics: Legal Remedies to Recessions. The big increases in government spending needed to get the economy cooking again were mostly a non-starter — too many opposed raising the debt, even if, as many economists argued, that could solve most of the immediate problems and be paid back in due course. That put most of the onus on monetary policy. But not much could be done using interest rates once they hit zero or close to it. And that left unconventional monetary policy — quantitative easing and the like. Listokin thinks that probably prevented the Great Recession from getting worse, but “it did not work out that well” and “may have fueled asset price bubbles whose eventual bursting could cause yet more damage.” What’s more, such measures “suffer … from a lack of democratic legitimacy,” he says. Listokin proposes instead a new way of stimulating the economy when it hits the so-called zero-bound level, where standard monetary tools stop working well. His solution: Leverage the law, including rules affecting government departments and even the judiciary…”

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