Rediscovering keynes

Abstract

We used to think that you could spend your way out of recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that the option no longer exists, and that insofar as it ever did exist it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step” James Callaghan, British Labour Prime Minister (BBC –TV 1967)

“Much of what Keynes wrote still makes sense. You will see us switching our spending priorities to areas that make a difference - housing and energy are classic examples where people are feeling squeezed. What I want to avoid is getting ourselves in a position governments have done in the past, where you face an immediate problem and cut back on the things the country will need in the future ... we can allow borrowing to rise” Alistair Darling, Chancellor of the Exchequer (The Guardian – Oct 20, 2008)

“..Barro says that Keynesian thinking on using government spending as stimulus won't yield the results advertised. While supporters of Mr. Obama's stimulus assume that government spending will be amplified via a multiplier effect -- government money spent to build a bridge will also provide wages for workers -- Barro's research suggests otherwise..” PBS NewsHour. Feb 23, 2009

At a time when the world is reeling through one of its worst economic crises, we see that there are contrasting opinions on how to combat the meltdown; the debate on the relevance of Keynesian philosophy in an increasingly flat world continues to rage as different governments choose starkly different policies in the aftermath of the meltdown. We feel the need to understand both the schools of thought – by comparing the arguments of advocates of Keynesianism and its dissidents, in the backdrop of different economies where contrasting policies are being followed.

Most Keynesians argue that Keynes wanted the stimuli to be temporary and cyclical in nature, so that the accumulated debt remains within payable limits. With several countries like the US forecasting a decade of debt to the tune to $9 billion stretching up to 2018, it would be worthwhile to understand if governments are misunderstanding Keynesian principles regarding recession spending. Are stimulus packages really contributing to decreasing unemployment rather than increasing aggregate demand? How should the deficit spending be distributed between welfare schemes through transfer payments and employment-generating investment activities? How long should the stimulus last? These are some of the questions the current recession has raised which we would like to pursue.

Through this study, we have attempted to obtain a thorough understanding of Keynesian principles and compare the policies and actions of governments around the world. We would like to rediscover Keynesianism in the context of the current economic situation.