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Dr. Tyler Cowen, Holbert Harris Professor of Economics at George Mason University, discusses the relationship between aggregate demand and structural problems in the Spanish economic crisis.  When there is a shortfall in aggregate demand all unemployment problems are made worse, and when unemployment is high structural and cyclical problems interact. Wages are sticky, and as a result companies must fire workers.  Spain is suffering from the aggregate demand problem in addition to other structural problems, which are in turn made worse by the aggregate demand problem. 

Fiscal policy and monetary policy provide potential remedies.  Fiscal policy approaches have a limited effectiveness as modern economies cannot increase their spending rapidly enough to have a meaningful impact.  Monetary policy offers another potential remedy, but part of Spain’s problem is its position in the Euro Zone. The Euro Zone imposes the same monetary policy on high productivity countries that it imposes on low productivity countries. A looser monetary policy for low productivity countries would make their wage stickiness problems less severe.  Countries could get people back to work by inflating rather than lowering nominal wages.  A higher rate of inflation would also lower the value of the outstanding debt thereby decreasing the debt overhang problem.  In addition, monetary policy would allow the banks to be bailed out quickly without having to go through a series of rounds of self-defeating austerity.        

Dr. Tyler Cowen is an American economist, academic, and writer. He occupies the Holbert C. Harris Chair of economics as a professor at George Mason University and is co-author, with Alex Tabarrok, of the popular economics blog Marginal Revolution. He currently writes the "Economic Scene" column for the New York Times, and he also writes for such publications as The New Republic, The Wall Street Journal, Forbes, Newsweek, and The Wilson Quarterly. Cowen is also general director of the Mercatus Center at George Mason University. In February 2011, Cowen received a nomination as one of the most influential economists in the last decade through a survey by the Economist. He was placed #72 as the most influential Thinkers of 2011 by Foreign Policy Magazine.