As we know most modern or neoclassical economists argue against combating stagflation with higher interest rates: Milton Friedman was the first one to point out that once the markets adjusted to higher inflation rates, unemployment would rise again unless the underlying cause of unemployment was addressed; Austrian Friedrich Hayek's has similar views to Friedman; and even Paul Krugman (who is known more as a Keynesian economists
) argues that stagflation can mainly be understood through supply shocks and to overcome it the governments must act to correct the supply shock to ensure that unemployment does not rise during this period.
[Re: A new book about austerity has Keynesian economists
reeling] I enjoyed the article by Professor Tim Congdon on government spending, but I felt it was too simplistic.
generally argue that, as aggregate demand is volatile and unstable, a market economy will often experience inefficient macroeconomic outcomes in the form of economic recessions (when demand is low) and inflation (when demand is high).
First, if New Keynesian economics was "good enough," why didn't New Keynesian economists
urge precautions against the collapse of 2007-2008?
Finally, I will look at how the concept has been carried forward to today by Keynesian economists
, as well as by politicians and pundits.
Some readers may recall that there was much scoffing at predictions from Keynesian economists
, myself included, that interest rates would stay low despite huge budget deficits; that inflation would remain subdued despite huge bond purchases by the Fed; that sharp cuts in government spending, far from unleashing a confidence-driven boom in private spending, would cause private spending to fall further.
They found that contrary to Keynesian doctrine, big cuts in government spending are expansionary, making economies boom rather than decline as predicted by Keynesian economists
. Alesina et al.
WHEN the euro crisis began a half-decade ago, Keynesian economists
predicted that the austerity that was being imposed on Greece and the other crisis-hit countries would fail.
argue, however, that government can use increases in transfer payments to cushion business slumps in the same way that it can use increases in its purchases of final goods and services because increases in transfer payments augment personal income and stimulate greater consumption spending, hence greater investment spending, and therefore, from both sources, an increase in GDP.
To be sure, more liberal, Keynesian economists
, who believe that government spending is a strategic weapon in the fight against unemployment and stagnation, contend that the Obama administration and the Fed have not gone far enough to jumpstart the economy with their stimulus and monetary initiatives.
Initially, both Keynesian economists
and policymakers interpreted the upward shift in the 1970s as evidence of cost-push inflation.
Also, Keynesian economists
widely predicted that a large decline in federal spending after the war, with millions of soldiers returning home and armament industries laying off workers, would result in a return to high unemployment and depression (Nasar 2011: 385-86).