Sunday, April 17, 2011

From Pleasant Deficit Spending to Unpleasant Sovereign Debt Crises | Mercatus

Economists have long disagreed seriously about the costs and benefits of government budget deficits and debt. Following the Second World War, a clash between Keynesian and―orthodox‖ fiscal policy views arose. The debate waned as fiscal Keynesianism won the day, then resumed as monetarist and new classical economists challenged Keynesian thinking in the 1970s. Economists became largely skeptical about the potential for actively using deficit spending to improve macroeconomic outcomes. With the sharp recession of 2007–09 the Keynesian side of the debate suddenly revived, and today the clash continues. On the side of greater deficit spending in the recession are the intellectual progeny of John Maynard Keynes and his interpreters Alvin Hansen and Abba Lerner, contemporary fiscal Keynesians, who worry that government spending and debt growth must be too small when there are high rates of unemployment. On the opposite side are the intellectual progeny of David Ricardo, Milton Friedman, and F. A. Hayek, contemporary new classical and Austrian economists, who dispute the Keynesian arguments and worry about rapidly growing government financed by rapidly mounting public-sector debts.

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