Keynesian Economics

• The idea behind keynesian Economics is that the government should spend less during economic prosperity and spend more during economic depression.
• What is another name for keynesian economics?

  Demand Side Economics
• Classical liberals believed that there would be full employment when supply and demand were in balance. That the Natural Law of economics was the good times followed by bad times. Individuals responsible tos ave for bad times during prosperity.
• Keynes believed that the economy was unstable and people reacted in times of uncertainty by hoarding money, thus harming the economy. Since few people could predict the variances in the market, most suffered during times of recessions and depression
• Keynes proposed the solution through the regulation of government spending, taxation, the regulation of the interest rate and production of money. In doing so the government could regulate consumer demand, thus regulating the economy.
• Capitalism tends to move through cycles "Business cycle" keynes was the first to come up with this idea:

  1. Prosperity
  2. Recession
  3. Depression
  4. Recovery
• There should be government intervention to protect citizens from the extreme highs and lows of the business cycle
• Prosperity: The economy is doing well. High employment. Low unemployment. Lots of money being made and spent.
• Recession: Economy begins to slide. Unemployment increases. Smaller profits. Layoffs of workers begin.
• Depression: High unemployment. Spending decreases drastically. Companies are shutting down.
• Recovery: Individuals are starting to spend money again. Unemployment is decreasing.
• What are the 4 specific government actions to prevent a recession to becoming a depression?

  1. Public Works Projects
  2. Social Programs
  3. Cut Taxes
  4. Deficit Financing
• Public works Projects: Massive construction jobs paid for by the government. Hiring workers for these projects will help kickstart the economy. Not privatized-benefits the common good. Usually large infrasturcture projects.
• Social Programs: Unemployment was a problem, when a worker lost their job they had no help. Invention of the social safety net/social programs/welfare state. Employment insurance, retirement plans, welfare programs, workers compensation. Even if a job was lost, those individuals would still have some income and be able to have some spending power.
• Cut Taxes: By cutting taxes, people have more money to buy goods and services. Businesses would be encouraged to reinvest in their businesses and also their workers.
• Deficit Financing: In order to pay for the social programs a government must go into debt. Borrowing from banks and other countries
• Deficit: The yearly number
• Debt: Accumulated deficits over the years.
• Keynes was also concerned with extended prosperity. When Inflation gets high this causes an oversupply of money. Leads to a devolving of currency. Leads to increases in prices for products/inflation.
• During inflationary times, the government should raise interest rates, raise taxes, reduce spending and slow the production of money. This takes money out of the economy; slowing it down.
• During a time of growth the government must save money to prepare for a recession.
• During recessionary times, it is necessary for the government to lower interest rates, decrease taxes, and increase government spending. THis puts money into the economy, thus speeding it up and avoiding depression.
• Avoiding a depression may cause debt, or a deficit, but andy money lost will be recovered during the next expansion phase.
• Monetary policy: Interest rates. Production of money.
• Fiscal Policy: Government spending taxation.
• President Herbert Hoover R (1928) was a follower of Adam Smith. No government intervention. Economic Problems would fix themselves without the government.
• Hoovervilles sprung up in city parts (Tent Cities) where a sign of protest unemployed males would set up to embarrass the government into action. Unsafe places to be.
• President Herbert Hoover R: Economic depression cannot be cured by legislative action or executive pronouncement. Economic wounds must be healed by the action of the cells of the economic body-the producers and consumers themselves.
• President Franklin D Roosevelt (D) (1932) was elected. Follower of Keynesian Economics. Argued that the government needed to help people during economic difficulties. The help he proposed followed the ideas of keynes and became known as the "THE NEW DEAL"
• What are the 3 goals of the New Deal?

  Relief, Recovery and Reform
• The New Deal aimed to 1. Get people back to work: Created Alphabet Agencies. The government agencies were known by their initials that hired the unemployed. 2. Regulate the Economy: laws passed to protect workers and regulate the economy
• What were some agencies which helped the unemployed?

  CCC-Civilian Conservation Corps: National parks. Plant trees.

  WPA-Works Progress Administration: Beautify cities/paint/encourage tourism

  PWA-Public works Administration: Massive infrastructure projects. paid people to rebuild roads.
• Which agencies helped regulate the economy and protect workers?

  SEC-Securities Exchange Commission: Regulate the stock market, created with the new deal

  FDIC-Federal Deposit Insurance Corporation: Protect People's money in banks

  SSA-Social Security Act: For the First time, People over 65 could retire with a pension

  Wagner Act: For the First Time, workers could join a union

  Fair Labour Standards Act: Set a minimum wage, maximum hours worked. Workers'' safety legislation.
• Who opposed Opposition to the New Deal?

  Business Owners and the US Supreme Court
• Business Owners opposition to the new deal: Increasing costs for wages, benefits. Employ less people as many were working for the government. Ultimately they lost profit.
• US Supreme Court opposition to the New Deal: Ruled parts of the new deal unconstitutional, especially price controls. Companies had to get approval from the government to set prices, no longer subject to supply and demand. Prices were set by the government to stop inflation. Fear that FDR was acting as a dictator.
• 1936 Presidential Election: FDR won with a massive majority. Popular because it was believed he was trying to better the lives of citizens.
• The New deal did not get the US out of the Great Depression. It does radically transform the economy.
• 1929 - Followed Adam Smith/classical liberalism
• Mid-1930 - Keynes/Modern LIberalism (progressivism). Social programs are introduced. Progressive/modern liberals ideals