Day 5: Fiscal Policy

If Keynes were to take a peek at the economic scenario of the recent past, what would he see?

Most households reduced spending in a bid to repay mortgages which were larger than the values of their houses. Though businesses acquired large amounts, they were hesitant to invest owing to decline in the value of assets. Student debt increased, while consumption decreased. Most importantly, governments reduced their spending in light of austerity policies that aimed to reduce public debt. As a result of an overall decrease in spending, national income decreased and so did jobs, which adversely affected global incomes and employment as well. Central banks increased money supply to stimulate spending, but reluctance to spend was at an all-time high.

We were experiencing a Keynesian liquidity trap.

This situation calls for a fiscal policy rather than a monetary policy. The government's bid to increase money supply rendered ineffective as the policymaker's attempt to influence nominal interest rates in the economy by altering the nominal money supply is frustrated by private agents' willingness to accept any amount of money at the current interest rate. The Keynesian fiscal policy expansion will benefit the economy both in the short run and the long run. For example, President Franklin Roosevelt used such a fiscal policy during the New Deal in 1933, increasing spending through a public works program. The Japanese government also spent 100 trillion yen on public programs over a ten-year period.

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Day 3: In the Long Run, We are All Dead!

Today, I attended quite an interesting Public Economics lecture on government grants. My professor was talking about how the US government had approved $2.2 trillion worth of loans and grants in order to soften the blow of the COVID-19 pandemic on the most affected families and businesses. He then asked a fundamental question that left us pondering: "Do these hefty government grants and packages financed by taxpayers' money which benefits only a select few make good economic sense?" This brings us back to the 20th century, specifically the 1930's, and how Keynes's influential ideas led to aggressive government policies, rescuing the global economy from the Great Depression. Keynes was a staunch proponent of short-term policy interventions and famously believed that, "In the long run, we are all dead." Yes, things might get better in the future, but why wait for when no one will be alive to reap the fruits of the future? In times of economic crisis, the...

Day 4: Keynesian Beauty Contest

Today, as I indulged in a friendly game of poker (with no real money, of course!) with my roommates, I was hyper-aware of the level of wits that this mere card game truly entailed. I couldn't simply make a naïve move, but I had to think about what my opponents would play in order to calculate my move. Deeper into the game, I began thinking about what my opponents thought about what I would do, and I based my move on that. This opened my eyes to how Keynes's popular Beauty Contest theory was so diverse in its applicability. Keynes had come up with this perfect analogy to represent the inner-working of the stock market and to give an explanation for its volatility. "Successful investing is anticipating the anticipations of others." Thus, in the chess game of speculative markets, you win not by picking the soundest investment, but by picking those that are bid up higher by others in the same game. However, bounded rationality of individuals can be a major deterrent to...

Day 12: Sticky Wages

Keynes blames the stickiness of wages for distortions in the job market, which affect employment rates. Looking at the trends exhibited by the economy during the Great Recession of 2008, nominal wages couldn't decrease owing to the sticky nature of wages. Companies responded by increasing lay-offs to cut costs without reducing the wages of the remaining employees. Therefore, the popular sticky wage theory postulates that employee pay tends to respond slowly to changes and exhibits resistance to decline even under deteriorating economic conditions. This can be attributed to the fact that workers will fight against a reduction in pay, so a firm will seek to reduce costs elsewhere. In a case of rising unemployment, wages of those workers who remain employed tend to stay the same or grow at a slower rate instead of decreasing with a decline in labour demand. Thus, wages are "sticky-down" as they can move up easily but experience difficulty moving down. Real wages are inste...

15 Days of Keynes.

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