The Triumph of Keynesian Economics
The New American Economy (New York: Palgrave Macmillan, 2009)
25 Pages Posted: 20 Sep 2016
Date Written: September 14, 2016
This essay explains Keynesian economics as essentially an ex post rationale for policies Keynes thought were necessary to deal with deflation. In essence, he wanted inflation to compensate for deflation, but contrary to conservative dogma, Keynes was not a crude inflationist -- he wanted stable money and opposed both inflation and deflation. A key problem, then and now, was that interest rates were so low that the economy was caught in a liquidity trap. Under such circumstances, monetary policy was impotent and needed an expansionary fiscal policy to mobilize sterile cash, raise velocity and thereby to raise prices. This is a problem today as well because a fall in velocity has exactly the same macroeconomic effect as a fall in the money supply. I believe that the economy still needs aggressive fiscal expansion to raise velocity for all the same reasons Keynes advocated such a policy in the 1930s. This appears to be an emerging view among elite economists, as evidenced by the comments at the Federal Reserve Bank of Kansas City's Jackson Hole conference in August 2016.
Keywords: John Maynard Keynes, inflation, deflation, Keynesian economics
JEL Classification: B22, E32, E52, E58, E59, E62, E65, N20
Suggested Citation: Suggested Citation