Friday, April 24, 2009

Why keynes is popular during recession?

With this recession, we again see keynesiasm raising its head vis a vis monetarists and all the major governments including United States, Britain, China taking the path of spending out of this recession. In his landmark thesis, Keynes said that to get out of recession, fiscal measures are critical since that will lead to increase in demand and hence finally getting out of recession. Mr. Roosvelt followed the advice in bits and pieces and the notion of large government took centre stage in American politics. But during times of Regan, Margaret Thatcher, Bush, Clinton and Blair, monetarists took a precedence over Keyneisians and we saw the government taking a back seat letting the invisible hand of market to take care of business cycles. But with this recession , now both the American and British government has announced broad fiscal measures to start public spending and hence increasing the role of government in economy essentially following the prescription of Keynes disregarding the monetarists "who believe that government intervention is going to make the situation worse and the government shall allow the natural business cycle to take its own course".
The question is why keynes becomes popular whenever there is recessionary tendencies in the economy. The answer can be found in what types of government are in power. Britain is currently governed by Labor party whose leader Gordon Brown has distanced the party from "New labor" belonging to era of Tony Blair. The new budget with measures to tax the rich gives the notion that this Labor party wants to capture the imagination of policies using the socialist mantra of old labor with cries of class war etc. Similarly in United States, we have a democratic president who will be regarded as socialist if some of the republicans have their way. Certainly Mr. Obama is not a socialist but his policies are left to the centre where the belief in large government interventions in health care, education etc and taxing the rich being major part of his policies.
So after estabilishing that we have political parties in power in the top two developed countries which are left to centre and hence they are spending and taking fiscal maesures to spur the economy. But underlying this is why these parties become popular during recession. The reason why these parties are in power may be mutifold but I belive one of the reason is their love of keynesiasm during the times of recession. Recession invariably leads to increase in unemployment, worsening of living conditions of people etc. If the government follows the monetarists' advice, then the politicians will be telling their electorate that the misery is part of business cycle and this will pass and we shouldnt intervene because in long term, any measures hence taken will come back to bite us. Instead if the government follows Keynes, the politicians would be giving the impression of doing somethinng to ward away the recession. They will look busy and always announcing spending policies and the electorate will be safe in the notion that the politicians are doing something to get out of this economic condition.
This, I believe, is the major reason that the politicians in power would like to follow Keynes rather than monetarists and do nothing. Keynes make the politicians look powerful and that is what all leaders want. Either prove that they have powers to change the destiny of their followers or "give the impression" that they do have such powers.
Another reason that Keynesiasm works that the government fiscal measures increases the expectation of people that economy will improve since someone is doing something. The confidence in economy is a virtuous circle which has the power to finally bring the economy out of the recessionary cycle. Thats why possibly the talks of "green shoots" by all the politicians and bankers. The argument against this is that people may think that the government spending in long term will lead to higher taxes in future and hence one shouldnt invest now. But people generally are not long sighted and took these short term fiscal measures as confidence building and start investments and spending.

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