CRF Blog

Fiscal stimulus

Fiscal stimulus

by David De La Torre

The Economist is publishing a series of six articles on seminal ideas in economics. The fourth article is on fiscal stimulus, an idea promulgated by John Maynard Keynes.

AT THE height of the euro crisis, with government-bond yields soaring in several southern European countries and defaults looming, the European Central Bank and the healthier members of the currency club fended off disaster by offering bail-outs. But these came with conditions, most notably strict fiscal discipline, intended to put government finances back on a sustainable footing. Some economists argued that painful budget cuts were an unfortunate necessity. Others said that the cuts might well prove counterproductive, by lowering growth and therefore government revenues, leaving the affected countries even poorer and more indebted.

In 2013 economists at the IMF rendered their verdict on these austerity programmes: they had done far more economic damage than had been initially predicted, including by the fund itself. What had the IMF got wrong when it made its earlier, more sanguine forecasts? It had dramatically underestimated the fiscal multiplier.

The multiplier is a simple, powerful and hotly debated idea. It is a critical element of Keynesian macroeconomics. Over the past 80 years the significance it has been accorded has fluctuated wildly. It was once seen as a matter of fundamental importance, then as a discredited notion. It is now back in vogue again. [more]

The previous three articles can be found here:

George Akerlof’s 1970 paper, “The Market for Lemons”

Minsky’s moment

The Stolper-Samuelson theorem

For a free classroom lesson on economist John Maynard Keynes, see John Maynard Keynes and the Revolution in Economic Thought from  CRF’s Bill of Rights in Action Archive.