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Wednesday, June 20, 2012

Recovery : Keynesian Fiscal Policy

Barry, My Liege :

After World War II, most industrialized countries adopted a Keynesian philosophy of fiscal policy. The United States of America has followed this philosophy consistently since before the War.

In its essence, a Keynesian fiscal policy is counter cyclical. That is, the national government should take expansionary measures to raise consumption spending when the economy is in recession and should take contractionary measures to reduce consumption spending when the economy has inflationary pressures.

While these expansionary or contractionary measures may include borrowing to expand spending in a deficit position or paying down debt in an expansion, fiscal measures are not limited to debt management.

Keynesian measures may include tax policy as well as spending and borrowing policy.

Clearly, the difficulty with this approach in a democracy is that political considerations may trump economic policies.

Nowhere is this more evident than in the Republican Party's position on additional borrowing and stimulus in 2012.

So far, they have refused to allow adoption of additional Keynesian fiscal policies in the United States beyond the stimulus of 2008 and 2009.

Nevertheless, that stimulus has resulted in an amelioration of the recession and has made the United States one of the stronger economies in the world.

But we need additional stimulus to reduce our unemployment and to create additional consumption spending.

We see, my Liege, the effects of a non-Keynesian fiscal policy in some European countries today; the results include increasing recession and unemployment.

The economics is clear and convincing.

We pray you success, My Liege, with the politics.

Your faithful servant,

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