As I see it, Keynes is suggesting that when an economy goes
into recession, government spending can offset the loss in private consumption.
To show this Keynesians use multipliers that turn one dollar of government
spending into more than one dollar of consumption and subsequent production.
While at the same time, those that oppose the Keynesian theory have their own
multipliers, showing that a deleveraging cycle that usually accompanies a
recession, will negate some of the intended effects of the spending, which then
filters through to consumption and subsequent production. And, furthermore adds
the burden of government spending which can lead to higher taxes to fund the
spending or the risk of inflation if the government borrows externally or is
financed by the central bank. The effects of which are made worse when the
government starts off with a budget deficit.
The monetarists suggest an alternative view of how a
stalling economy can be revived. They look at production as a function of the
monetary base, the rate at which money is spent or its velocity, and inflation.
Their view suggests that through central bank action, changes in the monetary
base can offset the slowing of the velocity of money that usually accompanies a
recession. With special consideration being paid to inflation and inflation
expectations of course. This approach starts to face headwinds however, when
the transmission mechanism experiences disconnects between central bank
intentions and real world supply-demand dynamics of money and credit. Banks
have little financial incentives to lend in the way interest rates and
inflation expectations, while most would-be borrowers don’t meet stricter
credit standards anyway.
Seems like the one thing that might actually be working, is
time. Score one for classical liaises-faire
economics.
