Responses to a Globalization Paradox

Question 1

The 2008 financial crisis and the great recession were caused by various factors relating to interest rates on houses and real estate (Crisci, 2021). Various economists have, over time, evaluated the factors leading up to the great recession. Some vital economic policymakers at the time concluded that there was no need for alarm and that though there would be a financial recession, fewer costs would be incurred compared to dealing with the issue before the recession became a national alarm (Crisci, 2021). Credit extensions to unworthy people led to the great recession. Additionally, with low-interest rates, most of the population could easily access credit facilities without the burden of the amount of money they would have to repay at the end of their interest terms.

Identification of interventions that would have managed the recession would be essential in reducing the chance of a repeat of the same in the future. Citizens could take credit that they could invest in projects with possible returns to manage recessions and reduce their probability of occurrence. Additionally, people could be educated to live within their means, that is, take credit whose repayment they are sure of. As seen in the great recession, people's creditworthiness was influenced by the interest rates instead of their capacity to repay these loans in the future (Crisci, 2021). Also, creating emergency funds for states, nations and individuals could reduce recessions since a financial crisis in such situations would be controlled. Using these techniques, among others, the great recession in 2008 could have been controlled, and so could other future recessions.

Question 2

Economists have developed theories that can be applied in economic frameworks to deal with great recessions, such as the 2008 financial recession. According to Keynesian economics, the solution to the global financial crisis is through the expansionary fiscal policy, which deals with the government's investment in country projects that ensure that there's money inflow into a country's economy. The government can control the amount of money in an economy's circulation through tax cuts, improvement of infrastructural projects, and transfer payments. Through transfer payments, governments make payments such as pension payments without the purchase of goods and services (Rodrik, 2012). According to Hayekian economics, without shared pricing values between economic policymakers and citizens of a state or a nation, the policymakers (planners) set a universal price for the goods and services within their influence domain.

Using Keynesian economics, there is a logical explanation for the probability of price changes as opposed to Hayekian economics, where Hayek argues that people's actions are controlled without their intent or choosing (Pennington, 2021). There's logical reasoning, and there can be subsequent planning for economic policymakers to set some infrastructural innovations in a state or nation in Keynesian economics. In contrast, in Hayekian economics, the psychological component of the key players in an economic framework is considered, that is, the policymakers and the citizens. During periods of recession, the demand for goods and services is low. Therefore, people save more, which is still a financial hazard for the economy (Rodrik, 2012). However, if the government can set up strategies to manage this economic state by increasing the demand for goods and services, then the economic state can be fixed (Pennington, 2021). In contrast, Hayekian economics suggests the importance of recession because policymakers can alter the new prices of goods and services, creating a balance in the economic state (Pennington, 2021).

References

Crisci, M. (2021). The impact of the real estate crisis on a south European metropolis: from urban diffusion to Reurbanisation. Applied Spatial Analysis and Policy, 1-24. https://doi.org/10.1007/s12061-021-09420-4.

Pennington, M. (2021). Hayek on complexity, uncertainty, and pandemic response. The Review of Austrian Economics, 34(2), 203-220. https://doi.org/10.1007/s11138-020-00522-9.

Rodrik, D. (2012). The globalization paradox. W.W. Norton & Co.