Английский язык. Практический курс для решения бизнес-задач

Finally, because of fear of capital losses on assets besides money, Keynes suggested that there might be a «liquidity trap» setting a floor under which interest rates cannot fall. (In this trap, bond holders, fearing rises in interest rates (because rates are so low), fear capital losses on their bonds and thus try to sell them to attain money (liquidity).) Even economists who reject this liquidity trap now realize that nominal interest rates cannot fall below zero. The equilibrium suggested by the new I line and the old S line cannot be reached, so that excess saving persists.

Even if this «trap» does not exist, there is a fourth element to Keynes’s critique. Saving involves not spending all of one’s income. It means insufficient demand for business output, unless it is balanced by other sources of demand. Thus, excessive saving corresponds to an unwanted accumulation of inventories. This pile-up of unsold goods and materials encourages businesses to decrease both production and employment. This in turn lowers people’s incomes – and saving, causing a leftward shift in the S line in the diagram. For Keynes, the fall in income did most of the job ending excessive saving and allowing the loanable funds market to attain equilibrium. Instead of interest-rate adjustment solving the problem, a recession does so.

Whereas the classical economists assumed that the level of output and income was constant at any one time (except for short-lived deviations), Keynes saw this as the key variable that adjusted to equate saving and investment.

Finally, a recession undermines the business incentive to engage in fixed investment. With falling incomes and demand for products, the desired demand for factories and equipment (not to mention housing) will fall. This accelerator effect would shift the I line to the left again. This recreates the problem of excessive saving and encourages the recession to continue.

Active Fiscal Policy

The classicals wanted to balance the government budget through slashing expenditures or raising taxes. To Keynes, this would exacerbate the underlying problem: following either policy would raise saving and thus lower the demand for products and labor. Keynes saw H. Hoover’s June 1932 tax hike as making the Great Depression worse.

Keynes’s ideas influenced Franklin D. Roosevelt’s view that insufficient buying power caused the Depression. Something similar to Keynesian expansionary policies had been applied earlier by both social-democratic Sweden and Nazi Germany. But to many the true success of Keynesian policy can be seen at the onset of World War II, which provided a kick to the world economy, removed uncertainty, and forced the rebuilding of destroyed capital. Keynesian ideas became almost official in social-democratic Europe after the war and in the U.S. in the 1960s.

Keynes’s theory suggested that active government policy could be effective in managing the economy. Keynes advocated counter-cyclical fiscal policies, that is policies which acted against the tide of the business cycle: deficit spending when a nation’s economy suffers from recession or when recovery is long-delayed and unemployment is persistently high – and the suppression of inflation in boom times by either increasing taxes or reducing government outlays. He argued that governments should solve short-term problems rather than waiting for market forces to do it.

This contrasted with the classical and neoclassical economic analysis of fiscal policy. Deficit spending could stimulate production. But to these schools, there was no reason to believe that this stimulation would outrun the side-effects that «crowd out» private investment: first, it would increase the demand for labor and raise wages, hurting profitability. Second, a government deficit increases the stock of government bonds, reducing their market price and encouraging high interest rates, making it more expensive for business to finance fixed investment. Thus, efforts to stimulate the economy would be self-defeating. Worse, it would be shifting resources away from productive use by the private sector to wasteful use by the government.

The Keynesian response is that such fiscal policy is only appropriate when unemployment is persistently high. In that case, crowding out is minimal. Further, private investment can be «crowded in»: fiscal stimulus raises the market for business output, raising cash flow and profitability, spurring business optimism. To Keynes, this accelerator effect meant that government and business could be complements rather than substitutes in this situation. Second, as the stimulus occurs, GDP rises, raising the amount of saving, helping to finance the increase in fixed investment. Finally, government outlays need not always be wasteful: government investment in public goods that will not be provided by profit-seekers will encourage the private sector’s growth. That is, government spending on basic research, public health, education, and infrastructure could help the long-term growth of potential output.

In Keynes’ theory, there must be significant slack in the labor market before fiscal expansion is justified. It is important to distinguish between mere deficit spending and Keynesianism. Governments had long used deficits to finance wars. But Keynesian policy is not merely spending: it is the proposition that sometimes the economy needs active fiscal policy. Keynesianism recommends counter-cyclical policies, for example raising taxes when there is abundant demand-side growth to cool the economy and to prevent inflation, even if there is a budget surplus. Classical economics argues that one should cut taxes when there are budget surpluses, to return money to private hands. Because deficits grow during recessions, classicals call for cuts in outlays. Keynes encourages increased deficits during downturns. In the Keynesian view, the classical policy exacerbates the business cycle. In the classical view, Keynesianism is almost literally fiscal madness.

The «Multiplier Effect»

The «Keynesian multiplier» has important implications for policy. The effect on demand of any exogenous increase in spending, such as an increase in government outlays is a multiple of that increase – until potential is reached. Thus, a government could stimulate a great deal of new production with a modest outlay: if the government spends, the people who receive this money then spend most on consumption goods and save the rest. This extra spending allows businesses to hire more people and pay them, which in turn allows a further increase in consumer spending. This process continues. At each step, the increase in spending is smaller than in the previous step, so that the multiplier process tapers off and allows the attainment of equilibrium.

Source: Wikepedia

Essential Vocabulary

1. macro-level – макроуровень

2. micro-level – микроуровень

3. aggregate demand – совокупный спрос

4. goods n – товар, изделие (в основном продукты производства)

5. deflation n – дефляция

6.supply-side economics – экономика предложения

7. gold standard – золотой стандарт

8. treaty n – договор

9. currency n – валюта

10. peg n – база, ориентир, точка отсчета

pegging n – привязка, индексация

peg v – привязывать, индексировать

11. centrally-planned economy – плановая экономика