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Wednesday, October 22, 2008

What kind of Keynesian are you?

We are told that everyone is apparently a Keynesian now, but of what sort? Much of what we think of as Keynesian is the product of subsequent attempts to squeeze his General Theory (published in 1936 after the Great Depression) into the old neo-classical system. The General Theory becomes in fact a 'special case'. Such an explanation does not do justice to the General Theory itself but might mean we come to the wrong policy conclusions.

Here are some policy options:
  • cut taxes temporarily
  • cut taxes permanently (at least, assume they will be permanent)
  • bring planned government spending forward
  • increase welfare payments
  • redirect government spending towards investment projects
  • increase government spending on investment
  • focus government spending on creating jobs
Most of the options above require an increase in government borrowing, but the effects may be very different. There may also be unintended consequences. For example, why should consumers spend a temporary tax cut? Surely, knowing it is temporary and with high levels of debt and uncertainty, households are unlikely to splash out with any tax cut; they are more likely to save it or use it to pay down debt.

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