John Maynard Keynes’s idea can summarized into one phrase, government intervention. He thinks that government needs to implement fiscal policies to stimulate the economy through bad times. When inflation is weak and unemployment rate are high, people have the tendency to save instead of spending. Less spending means less consumption which later causes job cut. This infinite cycle leads to mass unemployment. In order to get rid of this vicious cycle, Keynes promotes government to intervene and create more demand. Fiscal policies like tax cutting and public spending will give people the incentive to produce more products and hire more people. The basic idea is simple. However, he also mentions that governments should tighten their belts and pay off their debts throughout the good time.
Pro Keynesian idea can be summarized into these points:
1) Ideal solution to unemployment issues: High unemployment rates induce problems not only in the economic sector. It may create further social instability. When bad times come, government intervention especially government spending program will generate ensured demand in the market. While other easing policies like lower interest involves the risk of money flowing into “Wall Street” instead of “Main Street”.
2) Interest moderation: With government implementing stimulus package like infrastructure spending, the nation will not need to lower the interest rate to increase the demand for loans which later may increase consumptions and investments. However, as we know, lower interest rate creates credit bubble which may set up the stage for asset bubble. Government spending program, on the other hand, lowers the overall risk of credit bubble and asset bubble.
3) Improved infrastructure: If the government choose to implement the spending stimulus package, then it is going to invest heavily into public infrastructures. Newly built bridges, high ways, national parks and schools will improve people’s life quality.
4) Higher inflation: When government injects more money into the system, it creates inflation. Inflation encourages people to spend more and invest more. All these result in higher wages for workers and also higher prices of the goods and services. Higher wages induce higher overall demand. Higher demand encourages companies to hire more people and provide more opportunities for employment. Thus, higher inflation results in overall higher GDP and it creates a healthy economy cycle.
Con Keynesian idea can be summarized into these points
1) How to set up the package: It will be hard and almost impossible to create a stimulus package that perfectly solves the recession problem. The stimulus package will either provide excessive stimulus or