The Crisis and the Calls for Policy Responses

Abstract

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.