Term Paper: Keynesian Fiscal Policy

Pages: 4 (1442 words)  ·  Bibliography Sources: 1+  ·  Level: College Senior  ·  Topic: Economics  ·  Buy This Paper


[. . .] On the other hand, if they expect the government to be passive, they may cut their spending, thereby deepening the recession. In the three decades following Keynes's General Theory, economists emphasized the importance of the public's expectations about output and employment. In the past three decades, economists have instead emphasized the public's expectations about inflation and have often neglected the public's expectations about output and employment. Both expectations are important to the stability of the economy: Private behavior will be stabilizing when the public expects the government to act aggressively to combat either inflation or recession." Keynesianism actually achieved a middle ground that conceded little to its political critics: markets work, it claimed, provided there is full employment, but the market itself cannot guarantee that on its own; furthermore, government efforts are not futile but, tended carefully and continuously, they can in fact help sustain a permanently high level of employment and stability.

After the 1940s, the real impact of Keynes's model on public policy began to be felt. Because the government had intervened with by pump priming and a government-led war, people began to look at Keynesian claims about the ability of governments to achieve and maintain full employment.

In the United States, in 1946, the U.S. Congress passed the "Employment Act" emphasizing government's responsibility to seek and maintain "maximum employment" (the word "full" was deleted by some nervous congressmen, and the final text was littered with conservative escape clauses). A Council of Economic Advisors (CEA) was set up around the same time. Even in its early years, it was composed and staffed by economists somewhat sympathetic with the Keynesian Revolution. By the time the Kennedy administration took office, the CEA was composed of prominent Keynesians outright, with Walter Heller, Kermit Gordon and James Tobin the CEA seats and Paul Samuelson, John Kenneth Galbraith, Arthur Okun and Seymour Harris in the background.

In the post-war Western world, fiscal policy became the norm and monetary policy was slowly identified as being an important influence on output and therefore a potentially effective policy tool.

The Gold Standard no longer was revered as the only way to go and was eventually abandoned altogether. Keynes himself was responsible for setting a new international monetary order in 1946.

For the next few decades, political consensus on economic policy was remarkably uniform. By 1970, even Richard Nixon would declare "I am now a Keynesian." The violent business cycle, it was thought, had been tamed - and, in many ways, it actually was. During this period, the Western world achieved an unprecedented period of prosperity and the developing nations of Latin America, Africa and Asia looked forward with confidence. It seemed as if the vision Keynes laid out in his "Economic Possibilities for Our Grandchildren" (1930, Nation and Atheneum) was approaching even faster than he had anticipated. Of course, few predicted the unraveling that would happen in the 1970s.

In summary, the Keynesian theory recommends a simple straightforward solution to the largesse of poor economic conditions and that is an expansionary fiscal policy. Basically, this means that either a cut in taxes, an increase in government cash transfer payments, or a proactive increase in government purchases of goods and services. The government in essence would be artificially stimulating the economy.

Tax cuts and cash transfers would then result in consumer spending, stimulating production of consumer goods and in turn inducing businesses to raise their investment spending in order to develop more capacity for producing additional consumer goods. Government purchases stimulate the production of the goods that the government buys. All of this activity generates income that, in turn, further raises consumer spending.

Keynes's model played a significant role in U.S. economics from the 1930s throughout the 1970s and its evident effects are ongoing as the U.S. economy works through another slump. Does fiscal expansion always work? Perhaps not, but for a period of time, it was the macroeconomic model that would bring the U.S. back from near economic disaster.

Information Sources

Reviving Fiscal Policy." Laurence Seidman. http://www.geocities.com. http://william-king.www.drexel.edu.

Reviving Fiscal Policy." Laurence Seidman. http://www.geocities.com. [END OF PREVIEW]

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