Keynesian Theory Keynesian economists would suggest that, during a recession, th
ID: 1213965 • Letter: K
Question
Keynesian Theory
Keynesian economists would suggest that, during a recession, the government should use stimulus efforts to help support the economy during that recession. Later, after the recession, Keynesian theory would suggest reducing government spending during a productive economy. Austerity measures, during a recession, operate on the opposite perspective from Keynesian theory in that Austerity promotes the reduction of government spending, and government deficits, in economic downturns.
Read the article "Austerity leads to austerity!" and watch the video, "Risk on, austerity wins in Greece".
Article: Harvey, J.T. (2013, May 1). Austerity leads to…austerity! Forbes. Retrieved from http://www.forbes.com/sites/johntharvey/2013/05/01/austerity-leads-to-austerity/
Video: Forbes. (2012, February 13). Risk on, austerity wins in Greece [Video file]. Retrieved from https://www.youtube.com/watch?v=SyE_J5Ei1dY
Explain which perspective, Keynesian or Austerity, is better policy for government during a recession.
Explanation / Answer
During recession both business as well as consumer sentiments are on their low. Their revival is required for revival of aggregate demand and thereby for elimination of recession. Government spending in such scenario provides the necessary push to aggregate demand in the economy which in turn stimulate production process in the country and leads to creation of jobs and income.
The cumulative effect of this is revival of business and consumer sentiments which then contributes towards further increase in aggregate demand. This increase in aggregate demand then leads to elimination of recession and put the economy once again on normal path where government can reduce its spending and bring it back to normal levels.
This should be the normal role of government during recession that is it should act as per Keynesian principles.
Austerity will only lead to further fall in aggregate demand and will increase the severity and duration of recession. If we look at countries that adopts austerity to fight recession then we can see that these are those countries that already have very high levels of debt and thus borrowing more to support further spending is difficult for them and this compels them to go for spending cuts as there is no other option.
But if we look at average recovery time then increased government spending leads to faster recovery and with less economic pain than recovery through government spending cuts or austerity.
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