Coronavirus crisis: Keynesian insights
- A-Level, IB
- AQA, Edexcel, OCR, IB, Eduqas, WJEC
Last updated 30 Mar 2020
In this video we look at some key Keynesian insights into how a fiscal stimulus can help support income, demand and jobs during the crisis.
- Monetary policy has a role to play but can become ineffective in supporting demand at very low nominal interest rates because of the liquidity trap
- Animal spirits drive consumer spending, saving and investment and fears of a slump can become a self-fulfilling prophecy
- The state has a key role in supporting the economy and not just relying on automatic stabilisers
- When private sector demand collapses, the public sector – mainly via a fiscal policy stimulus – needs to intervene (free market forces do not equilibrate)
- Escaping from old ideas is difficult – policy-makers need to be bold and maybe challenge conventional wisdom
Keynesian economics in a crisis – policy is about “keeping the lights on”
- Immediate injections of extra spending into public health care
- Wage subsidies to maintain employment (including the self-employed)
- Deferral of VAT for businesses and income tax for self-employed deferred too
- Germany government is jettisoning a long-held commitment to a balanced budget
- USA stimulus package injects money directly into millions of household budgets
- How large will the fiscal deficit reach and with what consequences for the National Debt?
- Who will pay the higher taxes needed to control thenational debt?
- Are there risks of a surge in inflation if a fiscal stimulus is financed largely by central bank purchases of new government debt?
- Will the chosen tools of fiscal policy work? How large will the stimulus have to be? (Much depends on resolving the public health issue)
- Will the stimulus be followed by a period of austerity or have lessons been learned from austerity post 2009?