Keynesian stimulus versus classical austerity

Abstract

Keynesians know that if US austerity advocates had received just a few more votes in the November 2008 election, there would have been no fiscal stimulus or financial rescue in 2009 and the Great Recession would have turned into a second great depression. ‘Keynesian’ means recognizing the crucial role of aggregate demand, grasping the paradox of saving, advocating fiscal stimulus (tax cuts as well as government spending) in a recession despite the temporary increase in debt that it generates, and recognizing that monetary stimulus alone is inadequate in a severe recession. Contrary to the claims of austerity advocates, fiscal stimulus in general (and tax cuts in particular) did not fail during the Great Recession, but on the contrary helped avert a depression. The Keynesian multiplier is much larger in recession than in prosperity, but empirical studies often estimate its value in prosperity instead of recession. Keynesians should support austerity in prosperity and stimulus in recession. Unless a second Keynesian revolution is launched and succeeds in persuading both the economics profession and the public, the next severe recession may become a depression.