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The Keynesian Macroeconomic Policies
The post-Great Depression and World War II-era witnessed the successful implementation of the Keynesian macroeconomic policies, and sequentially, cyclical fluctuations, inflations, and depressions were, to some higher degree, eradicated. Furthermore, through such Keynesian measures, a notable expansion and development within a relatively stable price were ensured (Gaffard et al., 135). Even so, contrary to the propositions by the Keynesian policies, several contrasting trends emerged and sparked perpetual discussions in academic and political circles. During the 1960s and 1970s period, this was the Vietnam War era; countries like the U.S had not increased their taxing to bridge their increasing government expenditures triggered by the war, and this was contrary to the advice by the Keynesian economic experts (Drumond, Carlos & Cleiton, 181). Through this, both the deficits in government expenditure and balance of payments witnessed an increase, with the inflationist trends assuming a continual state. Still, as a consequence, if wrongful incorporation of the Keynesian policies, there was a continual increase in social expenditures in European countries and the U.S. Consequently, such sparked the rise in inflationist trends and marked rates of unemployment secondary to the heightened state expenditures and labor costs.
Conversely, states that instead of employing the Keynesian fiscal models for streamlining the economy, the governments went ahead to increase the taxing rates continually. Contrary to the Keynesian policies’ propositions, the taxing model was never de facto, much of a success. This notable observation was because; lowering the taxes, to later on increasing them was not possible, given the obvious political and social factors.
To this instance, much so in the U.S, several anti-Keynesian ideologies and approaches have risen, gaining ground since the 1970s moving forward. This unique breed of liberals (the likes of Milton Friedman and Classical economists) proposed smaller and balanced state budgets. Furthermore, scholars like Friedman proposed the fixing of taxes, cutting down on fiscal and monetary policies, and increasing the income supply based on a constant rate (Fontana, Giuseppe & Mark, 28). Conversely, trailblazing classical economists operating on rational projections, think that the fiscal and monetary policies would be inefficient as long there is no shock-like effect. Just as Friedman’s conception, the New-Classical economists propose a lower budget and reduction in state interventions.
Notably, a country’s fiscal balance is a significant issue that comes with evaluating the countercyclical monetary interventions during the Great Recession, as witnessed by the U.S and European governments. Case instance, with budget deficits of roughly 8% for multiple fiscal years and publicly held state debts exponentially increasing as a share of Gross Domestic Product, several people have shown concerns of how sustainable the U.S budgetary and monetary policies are (Gaffard et al., 136). Drawing from a long-term perspective, the Great Recession’s debt accumulation was way smaller compared to the imminent flow of yearly imbalances emerging from the advancement in old-age prerogative spending and the minimal current interest rates lower the extra cost of recent debt pile-up. Even so, few continue to convey concerns the likelihood of a fiscal crisis rises substantially as the debt-Gross Domestic Product ratio to advance, precisely as much of the extra expenditure in being overseas; this contrasts the case as witnessed in countries like Japan. Furthermore, this school of thought cites findings in literature suggestive that fiscal contractions might as well be expansionary, once employed at marked levels of the national debt, and focus mainly on cutting the government, instead of increasing the taxing rates.
A comprehensive literature debate that contractionary fiscal policies employed in these eras of budget strains could demonstrate an expansionary impact on output, predominantly through changing the economy’s course away from one that would otherwise be excessively straining for productivity given the marked marginal taxing and economic disturbances. Empirical evidence, drawn from panel information for the Organization of Economic Co-operation and Development, proposes that annual budget consolidations have a lower contractionary impact when employed under fiscal strain, as quantified by marked debt and projected state spending proportionate to Gross Domestic Product (Lopez Bernardo, 15). An in-depth analysis of OECD data illustrates that fiscal contractions are far much expansionary when adopted via cuts in state expenditure, as one would project, considering the possible damage from dependence on increased marginal taxing trends.
Drawing from a monetarist-rational expectation school of thought, Keynesian economics did not perform as expected in the predictive test, as it resulted in inflation, and worse still, stagflation. Back in the 70s, these policies faced contempt for not factoring in the presence of a ‘natural” unemployment rate and concluding that legislators wanted to optimize collective social well-being instead of their utilities (Gaffard et al., 137). Coupled, such contempt provided a noteworthy debate against the application of discretionary fiscal and monetary policies to bridge budget deficits for economic stability.
The application of economics models with nominal rigidity remains general, but whether such is to be adopted as given, draws far more contempt than in the 50s. The 1980s principal “supply-side campaign” aimed at dissolving economic rigidities perceived as institutional through labor market deregulations (Fontana, Giuseppe & Mark, 25). Comparatively, the novel Keynesian approach expounded on the rationality sticky prices given the transactions and information costs and how shocks to demand could sabotage both human and tangible income. Such appeared to both fortify and weaken the idea of Keynesian macroeconomic policies. From one viewpoint, this gave a fresh perspective of thoughtful reputability to stabilization policies, and the other, through entirely proposing inflation into their analyses; they gave in to the actual unemployment rate wherein, unemployment cannot be driven through demand manipulation (Fontana, Giuseppe & Mark, 25). Lastly, contrary to the conventional professional application of Bayesian statistics and decision model to tailor the agent’s conduct, a section of Post-Keynes contends the essential nature of Keynes’s advances on the rationalism of axiom.
Implementing fiscal policies to raise employment and lower unemployment in the Great Depression eras, such as raising government expenditure and lowering taxing, will ultimately generate deficits in the national budget. Despite such policies, there will be an increase in tangible income. Given that this rise in taxing would expand in the second period; therefore, the deficits will be lower in the subsequent periods. Even so, the gap in budget planning takes place for sure. However, neither the deficiencies in budget or rise in the income supply secondary to the monetary policy will not primarily result in stagflation (Lopez Bernardo, 12). An explanation for this is that such systems will be targeting first to raise physical capital or production. This notable advancement will cause a rise in costs and pricing because of the reduced product and rising marginal cost. According to the Keynesian models, and secondary to the implementation of fiscal and monetary policies for preventing unemployment during the depression and recession periods, there would be budget deficits and such will be bridged through domestic borrowing (Drumond, Carlos & Cleiton, 183). Nevertheless, in the subsequent boom eras, during instances of marked inflation, to combat the rise in pricing, there is the implementation of reverse policies, to cut national expenditure, or raise tax rates to create a budget surplus. Herein, the local debt generation during the fiscal constraining periods of depression will be offset with this surplus to create a long-term economic balance throughout the financial cycle.
Works Cited
Drumond, Carlos Eduardo, and Cleiton Silva De Jesus “Monetary and fiscal policy interactions in a post-Keynesian open-economy model” Journal of Post Keynesian Economics 39.2 (2016): 172-186.
Fontana, Giuseppe, and Mark Setterfield, eds. Macroeconomic theory and macroeconomic pedagogy. Springer, 2016.
Gaffard, Jean-Luc, Mauro Napoletano, and Stefano Battiston. “Some reflections on inflation targeting, monetary–fiscal policy interactions, and unconventional monetary policies.” European Journal of Economics and Economic Policies: Intervention 15.2 (2018): 132-138.
Lopez Bernardo, Javier. A post-Keynesian macroeconomic theory for equity markets in stock-flow consistent frameworks. Diss. Kingston University, 2016.