John Maynard Keynes, Influencing the Economy

Between late 2007 and 2009, the U.S. economy was in free fall. Plunging stock markets, rising unemployment, a housing and banking crisis, all symptoms of a global economic downturn called the Great Recession. Good evening. This is an extraordinary period for America's economy. Hoping to jumpstart a recovery, President George W. Bush and his successor, Barack Obama, enacted large stimulus packages that pumped nearly $1 trillion into the U.S. economy. From the day we walked into the White House, we knew that the crisis we faced was so severe that it was going to take months and maybe even years to fully heal. The mastermind of these plans of using government spending to heal an ailing economy was a British economist who had died more than 60 years earlier, John Maynard Keynes. Keynes became one of the most influential economists of the 20th century because of his role in fighting an even worse economic calamity, the Great Depression. Starting with the October 1929 stock market crash, the Great Depression crippled the world economy. In the U.S., thousands of banks failed, industrial output dropped more than 30 percent, and unemployment spiked to 25 percent. Traditional economists at the time believed the economy, if left alone, would eventually heal itself. But in his 1936 book, The General Theory of Employment, Interest, and Money, Keynes argued for action. It may well be that the classical theory represents the way in which we should like our economy to behave, but to assume that it actually does so is to assume our difficulties away. Keynes urged governments to cut taxes and increase spending, even if it meant creating or adding to a budget deficit. By putting more money in the hands of the people, Keynes believed it was possible to drive demand up to the level of supply. This nation is asking for action, and action now. The U.S. proved to be a good testing ground for Keynes' theory. President Franklin Delano Roosevelt's New Deal funded large public works projects aimed at getting people back to work again. The New Deal didn't end the Great Depression. It took World War II and far greater amounts of government spending to do that. But Keynesian economics was here to stay. Keynes was an optimist and believer in the power of governments to do economic good. In a 1925 essay, he wrote, The important thing for government is not do things which individuals are doing already and to do them a little better or a little worse, but to do those things which at present are not done at all. His theories became so widely accepted that the period from the 1930s to the 1970s is known in economics as the Age of Keynes. In the 1970s, critics of Keynes, such as economist Milton Friedman, gained prominence with a counter-theory, monetarism. It urged governments to promote economic stability not through fiscal policies like cutting taxes, but with monetary policies like lowering interest rates. Friedman also argued for less government. The origin of the problem is too much government spending, The debate between monetarism and Keynesian economics wasn't settled by the Great Recession, especially after the stimulus plans failed to spur a strong recovery. But economics itself has been forever changed because of the ideas of John Maynard Keynes.