Recession

Task 1

Keynesian explanation of recession

The British economist John Maynard Keynes argued in 1936 that there were many reasons why the self-correcting mechanisms during a recession might not work in practice. In his "General Theory of Employment, Interest and Money, Keynes introduced concepts that were intended to explain the Great Depression.

For most of the first three decades after World War II, Keynesian orthodoxy reigned. The Keynesian view that periodic slumps in the economy could and should be offset by government efforts to stimulate the demand for goods went virtually unquestioned, and many economists began to think and act as though fluctuations in business activity were only a feature of the past, pie-Keynesian era (Tymoigne 2003). With the new economic logic maintaining that depressions were unnecessary and could always be headed off by appropriate use of public policy, a good many Americans came to believe in the 1960s that we were now “depression-proof.” However, events in the mid-1970s prompted a reexamination of the New Economics. Although no depression developed, the economy did suffer through stagflation as economic growth slowed, unemployment rates rose, and price inflation gnawed deep into the economy. Modern Keynesian Liberals have accepted more modest countercyclical targets, no longer arguing so vigorously that the economy can be sustained on a permanent expansionary course by simply fine-tuning levels of aggregate demand. For conservatives, the stagflationary epoch provided first visibility (which had all but disappeared during the era of “High Keynesianism”) and then a high degree of respectability. In the new economic setting, it was appropriate to challenge the Keynesian explanation of the Great Depression as well as Keynesian policy making in general. For Radicals, the stagflationary crises of the 1970s and early 1980s were seen, at least in the short run, as a vindication. They had always viewed the 1930s as proof that unregulated capitalist economies were inherently self-destructive, and the economic problems of the 1970s had shown that regulated capitalism did not work either.

Then, along came the economic boom of the 1990s. Its durability was such that a great many ordinary citizens became inclined to believe that the Great Depression and its consequences should be consigned to the trash bin of “forgettable historical events.” Of course, nor many thoughtful economists believed that the good times of the nineties were proof that the business cycle had been repeated.

By early September 2001, the evidence indicated that the boom was over and the nation had descended into recession—but a recession of ordinary and tolerable dimensions. However, the terrorist attacks on the World Trade Center arid the Pentagon on September 11, 2001, and the resulting commitment of the United States to a “war on terrorism” caused considerable professional reconsideration about the prospect of a “norm al recession.” The New York Stock Exchange's biggest one-day loss of value in its history (although the loss was overcome in the following three weeks), the particularly heavy blow to transportation and entertainment industries, the American consumer's decision to reduce current spending, and the resulting cut back on ...