Rules Versus Discretion in Post Keynesian Fiscal Policy

SummaryIn this paper we investigate whether a Keynesian fiscal policy rule or an orthodox (Classical) one is more successful in stabilizing the dynamics of a complete Keynesian model of monetary growth with an elaborate wage-price sector (and an endogenously determined natural rate of employment). The tendencial result is that both fiscal policy rules can be successfully applied (within certain limits) in cases, where the steady state of the economy’s private sector is already locally asymptotically stable. In the opposite case of an unstable private sector — where instability is caused by a very high adjustment speed of prices — only a Keynesian fiscal policy is capable of bringing stability to the economy.

Stability analysis of the Kaldor model with time delays: monetary policy and government budget constraint

For many years Keynesian fiscal policy became very popular and was used by governments to fight slowdowns and recessions. In the 1980s and in the next three decades, this policy lost much appeal among economists in academia, though less among governments. The financial crisis of 2007–2008 and the following Great Recession brought a sudden revival of interest in and use of fiscal policies. This paper outlines the main criticisms that were directed at the Keynesian fiscal policy from the beginning. Some of these criticisms are less-known than others.

This paper first summarises Japan's fiscal policies in the 1990s. Then, we investigate the macroeconomic impact of government debt and the sustainability problem. We find that the Keynesian fiscal policy in the 1990s was not effective and fiscal sustainability may therefore become a serious issue. We also estimate the optimal level of deficits and evaluate fiscal reconstruction movements. It is shown that the actual deficit exceeded the optimal level in the late 1990s. We then inspect fiscal reconstruction movements in the Hashimoto Administration in 1997 and find that the major factor of recession in 1997 was not fiscal consolidation. An important lesson from Japan's fiscal policies in the 1990s is that long‐run structural reform is more important than short‐run Keynesian policy.

Adam Smith being its founder, in the Classical School, which gives prominence to supply and adopts an approach of unbiased finance, the economy is always in a state of full employment equilibrium. In this system of thought, the main philosophy of which is budget balance, that asserts that there is flexibility between prices and wages and regards public debt as an extraordinary instrument, the interference of the state with the economic and social life is frowned upon. In line with the views of the classical thought, the classical fiscal policy is based on three basic assumptions. These are the "Consumer State Assumption", the assumption accepting that "Public Expenditures are Always Ineffectual" and the assumption concerning the "Impartiality of the Taxes and Expenditure Policies Implemented by the State". On the other hand, the Keynesian School founded by John Maynard Keynes, gives prominence to demand, adopts the approach of functional finance, and asserts that cases of underemployment equilibrium and over-employment equilibrium exist in the economy as well as the full employment equilibrium, that problems cannot be solved through the invisible hand, that prices and wages are strict, the interference of the state is essential and at this point fiscal policies have to be utilized effectively.Keynesian fiscal policy depends on three primary assumptions. These are the assumption of "Filter State", the assumption that "public expenditures are sometimes effective and sometimes ineffective or neutral" and the assumption that "the tax, debt and expenditure policies of the state can never be impartial".

We shall start with a discussion of whether Keynesian fiscal policy can still be used to promote an economic expansion in the countries in crisis, given the precarious fiscal situation of many of those that are still experiencing high unemployment, economic slowdown, or even recessions. The use of discretionary, or active, fiscal policy, to counter the economic and social effects of recessions, as proposed by Lord Keynes three-quarters of a century ago, has been widely debated, especially since the start of the Great Recession in 2008. Some of the participants in the debate — which has involved economists, policymakers, civil servants, financial operators, reporters, union leaders, and even normal citizens — advocated, and have continued to advocate, a relaxed fiscal stance, one that in their view would maintain or even increase, in the short run, the high fiscal deficits that many countries have been experiencing. These individuals have continued to argue that such a fiscal policy (which would require higher fiscal deficits) would help sustain a higher aggregate demand (as Keynes had theorized, during the “Great Depression” of the 1930s). They see the current economic difficulties of countries mainly in terms of lack of sufficient aggregate demand, in spite of very high current fiscal deficits that for sure must be contributing to aggregate demand. The high fiscal deficits are too high to be attributed to the falls in the countries’ GDPs.

The Monetary Theory and Policy of Henry Simons

Global financial crisis of 2008 and the Covid 19 led slowdown have brought Keynesian fiscal stabilization policies back to the forefront of all academic debates. But what the world is experiencing should be treated as an exceptional situation that should not be used to advance the case to fine-tune the economy every time using discretionary fiscal measures. The pre-crisis broad macroeconomic consensus still holds, and stabilization should first be left to monetary policy. On the fiscal front government should rely more on rule-based inbuilt stabilizers for short-term management of cyclical fluctuations in case of demand shocks and long-run fiscal policy should focus more on growth and developing enabling factors to attract more investment. Fiscal stabilizers on the expenditure side should be strengthened to provide an adequate safety net to economically vulnerable sections of the society.

In the wake of the global financial crisis, Keynesianism has had something of a revival. In practice, governments have turned to Keynesian policy measures to avert economic collapse. In the theoretical area, mainstream economists have started to give grudging attention to Keynesian perspectives previously dismissed in favor of New Classical theories. This theoretical and practical shift is taking place at the same time that environmental issues, in particular global climate change, are compelling attention to alternative development paths. Significant potential now exists for “Green Keynesianism†-- combining Keynesian fiscal policies with environmental goals. But there are also tensions between the two perspectives of Keynesianism and ecological economics. Traditional Keynesianism is growth-oriented, while ecological economics stresses limits to growth. Expansionary policies needed to deal with recession may be in conflict with goals of reducing resource and energy use and carbon emissions. In addition, long-term deficit and debt problems pose a threat to implementation of expansionary fiscal policies. This paper explores the possibilities for Green Keynesianism in theory and practice, and suggests that these apparent contradictions can be resolved, and that Green Keynesian policies offer a solution to both economic stagnation and global environmental threats.

Consumption and Keynesian Fiscal Policy

In this chapter we discuss some reasons why unemployment rates tend to remain high for a long time after the bursting of bubbles and why fiscal stimulus packages often tend to be disappointing in terms of job creation. This has clearly been the case in the most recent years in the countries that have experienced the Great Recession. The reason is mainly that labor is much less fungible than Keynesian fiscal policy has assumed it to be and that workers find it much more difficult to change jobs than assumed by Keynesian economics. Furthermore, it can be theorized that the difficulties described in this chapter are likely to grow as the countries’ economies become more advanced and complex.

ABSTRACTFinancialization can be partially attributed to the decline in the US manufacturing profit rate since the 1970s. However, scholars have not reached a consensus regarding the factors responsible for stagnation in manufacturing. This paper employs an Auto-regressive Distributed Lag (ARDL) model to test the impact of both national defense and government consumption expenditure on manufacturing profitability in the United States from 1973, the onset of stagnation, to 2015. Its goal is two-fold: to determine whether stagnation is associated with a decline in Keynesian policies, and to examine the potential for state fiscal programs to reverse this trend and facilitate a shift of private investment away from the financial sector and into manufacturing. The paper finds that the impact of government consumption expenditure on the manufacturing profit rate is positive and significant in both the short-term and long-term (from 1973–2015 and 1973–1993), while the long-term impact becomes negative from 1983 to 2015, when the financial sector profit rate began its upward trend. This casts doubt on whether Keynesian fiscal policies could be employed to restore a healthy profit rate in the manufacturing sector and lower unemployment.

This is a major study of economic policy making in Britain between the wars. It provided the first full-length analysis of the early development of fiscal policy as a tool of modern economic management. The central question addressed is how Keynesian fiscal policies came to be adopted by the British government, with particular attention paid to the role of the Treasury and to that of Keynes himself. Drawing extensively on unpublished documents hitherto untapped by economists or historians, Roger Middleton challenges the widely held view of official economic thinking as an ill-informed group of people holding ‘the Treasury view’ in opposition to Keynes’s prescriptions for deficient demand and mass unemployment. Instead he argues that acceptance of Keynesian economics during the Second World War resulted from political and administrative factors as much as a conversion to Keynesian theory. He investigates the form and impact of fiscal policy during the 1930s and, through a constant employment budget analysis, shows convincingly that at times of rising unemployment governments ignore at their peril the effects of automatic stabilizers upon budgetary stability. Historians and economists welcomed this fresh perspective on a debate of historical as well as contemporary importance. Towards the Managed Economy is essential reading for all those interested in the rise and fall of Keynesian demand management. This classic text was first published in 1985.

In this article we shall try to establish the guidelines of the Keynesian fiscal and monetary policies. In order to better understand the Keynesian macroeconomic system it is necessary to go briefly over the Classical economics in the pre-Keynesian period and the fiscal and monetary policies based on those analyses. While principally dwelling on the Keynesian macroeconomic system and the fiscal and monetary policies based on this system, we think we have some grounds about the significance of the subject. Firstly, the Keynesian analyses keep holding the balance of power in the theoretical field even in the post-Keynes era, and constitute the foundation of the macroeconomic textbooks. Secondly, despite the economic conditions of these days which have gone through many changes, and the emergence of anti-Keynesian views, the governments and monetary authorities (Central Banks) both in Europe and in the States, still implement – cautiously– fiscal and monetary policies in accordance with the Keynesian principles. In effect during Reagan era in the States and M. Thatcher in Britain, policies under the influence of Monetarism had been applied, however, since inflation was not prevented and there was an increase in unemployment, these policies were forsaken and moderate Keynesian policies were implemented low-key. But criticisms coming from both Monetarists and particularly New Classical economists forced fundamental methodological and assumptive changes in Keynesianism since the ‘80s; the school that emerged in the USA is called the New Keynesian Economics, in England the Post-Keynesian Economics.

Keynes's thought on public intervention in the economic system has been rediscovered during the economic crisis that is devastating the world economy. Many opinion makers have appealed to go back to Keynesian monetary and fiscal policy. But who was John Maynard Keynes, and what is his legacy? Moreover up to which extent this latter may be useful in dealing with economic crisis in an era when, paraphrasing Keynes, «the development of a country becomes the by-product of the activities of a casino»?