This document discusses alternative solutions to economic recession and slow global recovery from 2001-2015. It analyzes two main objectives: fighting unemployment and reducing public deficit. For the first objective, it recommends using Keynes' model of increasing global demand through reduced taxes, lower interest rates, higher public expenditure, and reduced exchange rates. However, it also notes that under some models, demand can negatively impact unemployment. For the second objective, it suggests increasing taxes and reducing public expenditure. The document also discusses Mundell's optimal currency zone model and concludes that during high unemployment, countries should use Keynes' model combined with salary flexibility linked to productivity rather than inflation.

1. Economics Recession
Alternative Solutions
September 7th, 2014
Prepared by Ivan F Rodriguez
MBA & MEng

3. Slow Global Recovery
2001 - 2015

5. Objective #1:
Fight Unemployment
•GD=C+I+P+E
Where:
GD=Global Demand
C=Consumption
I=Investment
P=Public Expenditure
E=Exports
Solution:
Use Keynes’ Model

7. Objective #1: (cont.):
Fight Unemployment
Applying Keynes’ Model, Unemployment is Minimized by:
Maximizing Global Demand [GD] which implies:
1) Reduced Taxes to Promote Consumption [C]
2) Reduce Interest Rates to Promote Investment [I]
3) Increase Public Expenditure to assist Population needs [P]
4) Reduce Exchange Rate to Stimulate Exports [E]
Solution:
Use Keynes’ Model

8. Perverse Demand Effect and
Unemployment (Carlin &
Soskice Model, 2007) Since the debate between Keynes and Pigou, Keynesian
economics were always quite skeptical that supply creates it
own demand in a smooth less way.
Therefore economists “invented” monetary and fiscal
stabilization policy and in an open economy setting external
demand can of course be helpful in stabilizing the economy.
However, under certain circumstances and even under
stable aggregate demand schedules, the demand curve can
be very steep in the unemployment/ real wage space —
even negative under reasonable assumptions.

9. Objective #2:
Reduce Public Deficit
Reducing Unemployment is some times against reducing
Public Deficit.
Unfortunately this path is not helping those countries with
high unemployment rates (e.g. Greece [27.2%], Spain
[25.6%], Portugal [15.3%], Italy [13%])
Germany is following this path and forcing the Euro Zone to
shadow this route.
Solution:
Increase Taxes and Reduce Public
Expenditure
GD=C+I+P+E

10. Optimal Monetary Zone
Mundell Model
[1999]

11. Optimal Monetary Zone
(cont.)
Robert Mundell´s Model
[1999]
Mundell´s optimal monetary zone model calls for two
mandatory requirements:
1] Convergence of the macroeconomic magnitudes (e.g.,
Maastricht Agreement: Similar Inflation Rates, Similar
Interest Rates, Public Debt below 60% of the GDP, and
Public Deficit below 3% of the GDP).
2] Productive factors free movement (particularly, labor
force and capital).
This second obligatory requirement is the what mostly the
Euro Zone is lacking of, economic reality differs between
member countries (e.g., Spain with more than 25% of
unemployment vs. Germany with lest than 5% as of June
2014).

12. Conclusion:
Fight Unemployment
Under the Keynesian model, when unemployment rate
domains the economy, increasing taxes and reducing public
expenditure is simply against economic recovery.
This solution paired with Salary Flexibility can yield the best
results. By salary flexibility we meant linking salary to
productivity rates and not to inflation.
This is key to keep competitiveness without invisible or visible
hands from government or any other economic actor.
Employees must be inspired to reach higher productivity by the
continuously applying their knowledge and deliver the highest
quality in their respective jobs. This is by creating value.
Solution:
Use Keynes’ Model + Implement Salary
Flexibility