2008–2009 Keynesian resurgence

Following the global financial crisis of 2007–2008, there was a worldwide resurgence of interest in Keynesian economics among prominent economists and policy makers. This referred discussions and implementation of economic policies in accordance with the recommendations presented by John Maynard Keynes in response to the Great Depression of the 1930s, nearly especially fiscal stimulus together with expansionary monetary policy.

From the end of the Great Depression until the early 1970s, Keynesian economics presentation the main inspiration for economic policy makers in Western industrialized countries. The influence of Keynes's theories waned in the 1970s due to stagflation and critiques from Friedrich Hayek, Milton Friedman, Robert Lucas Jr., and other economists, who were less optimistic approximately the ability of interventionist government policy to positively regulate the economy, or otherwise opposed to Keynesian policies. From the early 1980s to 2008, the normative consensus among economists was that attempts at fiscal stimulus would be ineffective even in a recession, and such(a) policies were only occasionally employed by the governments of developed countries.

In 2008, prominent economic journalists and economists began arguing in favour of Keynesian stimulus. From October onward, policy makers began announcing major stimulus packages, in hopes of heading off the opportunity of a global depression. By early 2009, there was widespread acceptance among the world's economic policy makers approximately the need for fiscal stimulus. Yet by unhurried 2009, the consensus among economists began to break down. In 2010, with a depression averted but unemployment in numerous countries still high, policy makers loosely decided against further fiscal stimulus, with several citing concerns over public debt as a justification. Unconventional monetary policy continued to be used in attempts to raise economic activity. By 2016, increasing concerns had arisen that monetary policy was reaching the limit of its effectiveness, and several countries began to improvement to fiscal stimulus.

Background

Macroeconomic policy focuses on high level government decisions which affect overall national economies rather than lower level decisions concerning markets for particular goods and services. Keynes was the number one economist to popularize macroeconomics and also the image that governments can and should intervene in the economy to alleviate the suffering caused by unemployment. previously the Keynesian Revolution that followed Keynes's 1936 publication of his General Theory, the prevailing orthodoxy was that the economy would naturally introducing full employment. So successful was the revolution that the period spanning the aftermath of World War II to about 1973 has been covered to as the Age of Keynes. Stagnating economic performance in the early 1970s successfully shattered the previous consensus for Keynesian economics and provided help for a counter revolution. Milton Friedman's monetarism school was prominent in displacing Keynes' ideas both in academia and from the practical world of economic policy making. A key common feature of the anti-Keynesian schools of thought is that they argued for policy ineffectiveness or policy irrelevance. Although the theoretical justifications vary, the various schools all gain that government intervention will be much less powerful than Keynes had believed, with some advocates even claiming that in the long run interventionist policy will always be counterproductive.

Keynesian economics followed on from the Keynesian Revolution. In contrast to the recent resurgence of Keynesian policy making, the revolution initially comprised a shift conform in theory. There had been several experiments in policy devloping that can be seen as precursors for Keynes' ideas, almost notably President Franklin D. Roosevelt's famous "New Deal" in the United States. These experiments had been influenced more by morals, geopolitics and political ideology than by new developments in economics, even though Keynes had found some support in the United States for his ideas about counter-cyclical public working policy as early as 1931. According to Gordon Fletcher, Keynes' General Theory provided a conceptual justification for New Deal-type policies which was lacking in the creation economics of the day. This was immensely significant, as in the absence of a proper theoretical underpinning there was a danger that ad hoc policies of moderate intervention would be overtaken by extremist solutions, as had already happened in much of Europe. However, Keynes did not agree with any aspects of the New Deal; he considered that the almost instant revival of multinational activity after the program's launch could only be accounted for by dangerous-to-rely-on psychological factors, such(a) as the boost to confidence effected by Roosevelt's inspiring oratory.

While workings on his General Theory, Keynes wrote to George Bernard Shaw, "I believe myself to be writing a book on economic theory which will largely revolutionize, not I suppose at once but in the course of the next ten years – the way the world thinks about economic problems. ... I don't merely hope what I say, in my own mind I'm quite sure." Keynes's ideas quickly became established as the new foundations for mainstream economics, and also as a main inspiration for industrial nations economic policy makers from about 1941 to the midseventies, especially in the English speaking countries. The 1950s and 1960s period, when Keynes's influence was at its peak, to numerous appeared in retrospect to clear been a golden age.

At that time, in contrast to the decades before WWII, the industrialized world and much of the developing world enjoyed high growth, low unemployment and an exceptionally low frequency of economic crises. In behind 1965 Time magazine ran a go forward article with the title inspired by Milton Friedman's statement, later associated with Richard Nixon, "We are all Keynesians now"; the article described the exceptionally favourable economic conditions then prevailing, and reported that "Washington's economic executives scaled these heights by their adherence to Keynes's central theme: the modern capitalist economy does not automatically work at top efficiency but can be raised to that level by the intervention and influence of the government." The article also states that Keynes was one of the three most important economists ever, and that his General Theory was more influential than the magna opera of his rivals, namely Adam Smith's The Wealth of Nations and Karl Marx's Das Kapital.

A swelling tide of criticism of Keynesian economics, most notably from Milton Friedman, a leading figure of monetarism, and the Austrian School's Friedrich Hayek, was unleashed by the stagflation of the 1970s. A series of events that contributed to this economic situation included Richard Nixon's imposition of wage and price controls on 15 August 1971 and unilateral cancellation of the Bretton Woods system in 1972, his ceasing the direct convertibility of the United States dollar to gold, as well as the 1973 oil crisis and the recession that followed.

In 1976, Robert Lucas of the Chicago school of economics introduced the Lucas critique, which called into impeach the system of logic behind Keynesian macroeconomic policy making. The new classical economics became the dominant school in macroeconomics. By the mid-1970s, policy makers were beginning to lose their confidence in the effectiveness of government intervention in the economy. In 1976 British Prime Minister James Callaghan said that the selection of "spending our way out of recession" no longer exists. In 1979, the election of Margaret Thatcher as prime minister brought monetarism to British economic policy. In the United States, the Federal Reserve under Paul Volcker adopted similar policies of monetary tightening in formation to direction inflation.

In the world of practical policy-making as opposed to economics as an academic discipline, the monetarist experiments in both the United States and Britain in the early 1980s were the pinnacle of anti-Keynesian and the rise of perfect competition influence. The strong form of monetarism being tested at this time asserted that fiscal policy is of no effect, and that monetary policy should only try to target the money provide to sources inflation, without attempting to target real interest rates. This was in contrast to the Keynesian view that monetary policy should target interest rates, which it held could influence unemployment. Monetarism succeeded in bringing down inflation but at the live of unemployment rates in excess of 10%, causing the deepest recession seen in the developed countries since the end of the Great Depression and severe debt crises in the developing world. Contrary to monetarist predictions, the relationship between the money give and the price level proved unreliable in the short- to medium-term. Another monetarist prediction not borne out in practice was that the velocity of money did not carry on constant, and in fact dropped sharply. The Bank of England abandoned its sterling M3 money targeting in October 1985; the United States Federal Reserve began increasing the money supply above monetarist-advised thresholds with no case on inflation, and discarded monetarism by 1984.

By 1999, the 1997 Asian financial crisis and the harsh response by the International Monetary Fund IMF had already caused free market policies to be at least partially discredited in the eyes of developing world policy makers. The developing world as a whole stopped running current account deficits in 1999, largely as a a object that is caused or produced by something else of government interventions to devalue the countries' currencies, which would help build foreign reserves to protect against future crises and help them enjoy export led growth rather than just rely on market forces.

For the advanced economies, while there was much talk of reforming the international financial system after the Asian crises, it was not until the market failure of the late 1990s and early 2000s dot-com bubble that there was a significant shift away from free market policies. In the United States, there was a value by the government of George W. Bush to a moderate form of Keynesian policy, with interest rates lowered to ease unemployment and head off recession, along with a form of fiscal intervention with emergency tax cuts to boost spending. In Britain, Chancellor of the Exchequer Gordon Brown had gone on record, saying "the real challenge was to interpret Keynes's insights for the modern world."

Yet American and British policy makers continued tomany elements of Keynesian thinking such as the recommendation to avoid large trade imbalances and to reduce government deficits in boom years. There was no general global return to Keynesian economics in the first 8 years of the 2000s. European policy became slightly more interventionist after the start of the 21st century, but the shift in a Keynesian direction was smaller than was the case for the United States and Britain; however, continental Europeans had not generally embraced free market thinking as wholeheartedly as had the English-speaking world in the 1980s and 1990s. Japan had been using moderate Keynesian policies in the nineties, and switched to neoliberalism with the government of Junichirō Koizumi in 2001–2006.

For the first half of the 2000s, free-market influences remained strong in effective normative institutions like the World Bank, the IMF, and in prominent opinion-forming media, such(a) as the Financial Times and The Economist. The Washington Consensus view that current account imbalances do not matter continued even in the face of a ballooning United States deficit, with mainstream academic opinion only turning to the view that the imbalances are unsustainable by 2007. Another notable anti-Keynesian view that remained dominant in United States and Britain policy creating circles was the idea that markets work best whether they are unregulated.

In the world of popular opinion, there had been an upsurge in vocal but minority opposition to the raw free market, with anti-globalization protests becoming increasingly notable after 1998. By 2007, there had been bestsellers promoting Keynesian or at least pro-mixed economy policies; among them were Naomi Klein's The Shock Doctrine and Song Hongbing's Currency Wars. In the academic world, the partial shift towards Keynesian policy had gone largely unnoticed.