A TRANSFORMATION, NOT A CRISIS:

The most important point to realize is that the problem facing wealthy countries at the moment is not that we are poor, as the stern proponents of austerity insist. The problem is that we are wealthy. We have tens of millions of people unemployed precisely because we can meet current demand without needing their labor.

This was the incredible absurdity of the misery that we and other countries endured during the Great Depression, and which Keynes sought to explain in The General Theory. The world did not suddenly turn poor in 1929, following the collapse of the stock market. Our workers had the ability to produce just as many goods and services the day after the collapse as the day before; the problem was that after the crash, there was a lack of demand for these goods and services.

The result of this lack of demand was a decade of double-digit unemployment in the United States. The spending programs of the New Deal helped to alleviate the impact of the downturn, but because of the deficit hawks of that era, Roosevelt never could spend enough to bring the economy back to full employment - at least until the second world war made deficits irrelevant.

This is the same story we face today. The US and European economies were close to full employment in 2007 due to demand created by housing bubbles in the United States and across much of Europe. These bubbles then burst, substantially reducing demand. As Krugman and Layard point out in their statement, one remedy for this loss of demand is for government to fill the gap. If the private sector is not prepared to spend enough to bring the economy to full employment, then the government can engage in deficit spending to make up the shortfall.

But there is another dimension to this issue. It's great for the government to generate demand insofar as it can productively employ people. This means either providing immediate services, like healthcare and education, or in investing in areas that will provide future dividends, such as modernizing the infrastructure or retrofitting buildings to increase their energy efficiency.

However, it can also employ people by encouraging employers to divide work among more workers. There is nothing natural about the length of the average work week or work year and there are, in fact, large variations across countries. The average worker in Germany and the Netherlands puts in 20% fewer hours in a year than the average worker in the United States. This means that if the US adopted Germany's work patterns tomorrow, it would immediately eliminate unemployment.

Follow @brothersjudd