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 15: Goodbye, Keynes!

"The difficulty lies not so much in developing new ideas as in escaping from old ones." As we come to the end of our 15-day journey exploring Keynesian ideologies, I cannot help but to reflect on how much influence Keynes has exerted in not only the global economy, but in our daily lives as well. His revolutionary mind and endless vigor to challenge existing ideas paved way for new opinions and diverse outlooks in the field of Economics. The discipline was extremely rigid, unaccepting, and wary of alien inputs that varied from existing theories. However, Keynes barged in with his sunny optimism and completely revolutionized economic thinking, thus injecting flexibility in Economics and creating space for differing opinions. Though Keynes has attracted cartloads of scrutiny and criticism, it cannot be denied that his contributions to the field of Economics are invaluable and have definitively shaped the course of modern Economics and how the global economy functions. Present-...

Day 8: Keynes the Optimist

For some, Keynes was a messiah who saved the world from the evil clutches of Great Depression, while for others, he is responsible for the mess that the current global economy is in. No matter what you stand by, it is a universal fact that Keynes was a cheery optimist. He was known for his sunny outlook and his ability to see beyond the grim present to better days, even amidst the darkest periods of economic history. He was dedicated to breaking the vicious cycle of economic pessimism that was plaguing his times, constantly reassuring the public that "this too shall pass." He very boldly made claims that when his great-grand children were adults, the world would've solved all its economic problems and the material requisites for a good life would be available to all (in the West). Keynes's positive mindset withstood the storms of the Great Depression and the Second World War. When the Depression failed to respond to monetary policies, he strived to come up with a new ...

Day 13: Multiplier Effect

I am hungry. I buy two huge margherita pizzas. The cost of the pizzas to me is income to the seller. What the seller spends out of this income would be income to someone else. This goes on and on and on. This becomes an economy-wide chain reaction, or the "multiplier effect" as Keynes called it. Thus, consumption rather than thrift promotes economic growth, and the government should stimulate demand. Each unit of money it spends increases economic activity, not by one unit, but by one unit times a multiplier. The expenditure more than pays for itself! This seems like the panacea to all economic evils: the government should just spend and spend and this initial injection will further create waves of spending and thus, reboot the economy. However, this solution of spending more and not worrying about the incoming due bills sounds a bit too idealistic and "too good to be true" to me.

15 Days of Keynes.

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