Unit 5: Macroeconomic Considerations in Public Finance When market forces were unable to swiftly resolve the economic devastation brought on by the stock market crash in 1929, economists began to look for explanations of why the economy did not behave as the traditional models had predicted. One of the schools of thought that emerged from these debates was the structural Keynesian school. This new school of thought posited that in time of economic crisis, investors do not respond to a fall in interest rates due to an irrational pessimism on their ability to make a profit. This leads to unemployment, which in turn leads to low consumption, which reinforces the investor’s belief that they cannot make a profit. Keynes suggested that active government policy could be used to stimulate demand in times of recession. This became known as countercyclical fiscal policy; that is running deficit spending when a country is in a recession, and repaying the accumulated debt in boom times.
Since the Great Depression and FDR’s New Deal, this school of thought has become a part of American fiscal policy. The first few sections of the reading will introduce the major aspects of this “macro” approach to fiscal policy. This approach is not without limits, however, and countries cannot continually run deficits. Thus, the issue of fiscal sustainability will be the subject of the last sections of this unit.
5.1 Macro-effects of National Policies
- Lecture: Tutor2u’s “Fiscal Policy”
Link: Tutor2u’s “Fiscal
Instructions: Please review the presentation in its entirety.
5.1.1 Keynesianism and Fiscal Stimulus
- Reading: Wikipedia’s “Keynesian Economics”
Link: Wikipedia’s “Keynesian
Instructions: Please complete this reading in its entirety.
- Web Media: YouTube: Professor Ron Wientraub’s “What Would Keynes
Link: YouTube: Professor Ron Wientraub’s “What Would Keynes
Instructions: Please watch the entire video (1:56), which considers how Keynes might respond to current economic conditions.
5.1.2 Fiscal Sustainability - Guest Lecture: TED talks: “John Gerzema: The Post-Crisis Consumer” Link: TED talks: “John Gerzema: The Post-Crisis Consumer” (YouTube)
- Reading: Citizendium’s “Fiscal Policy Tutorial: Fiscal
Link: Citizendium’s “Fiscal Policy Tutorial: Fiscal
Instructions: Please read the entire article. Pay attention, in particular, to the fiscal dilemma.