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Keynesiean Theory to Restore The Economic System

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Introducción

The selected theory is the Keynesian theory which is articulated in a news article published in The Washington Post. The news article published by Carter (2020) is titled ‘the $1 trillion stimuli isn’t about cash. It’s about restoring faith in the system’. It was published on March 18 to analyze the explanation of the Keynesian theory in the era of coronavirus. Zachary D. Carter is a senior reporter at Huff Post. He is also an author of the forthcoming biography “The Price of Peace: Money, Democracy and the Life of John Maynard Keynes.

Key Points

The article argues that the global economy is headed for an irreversible recession. It argues that the question is how severe the recession will affect the economy with millions losing their jobs, revenues disrupted and companies shutting down. The article leans on John Maynard Keynes’ argument that the government should spend more money to counter recession even if their budget deficits will lead to extra borrowing (Carter, 2020). Currently, the world including the American economy will need a huge amount of money to help those under enormous stress. It also focuses on the argument of Keynes that economics is a large-scale therapy to calm anxious minds (Krugman et al., 2017). The world needs calming therapy today in the era of the coronavirus pandemic.

Carter (2020) continues to emphasize that Keynes was a prophet of numbers who explained that during the world war, businesses were not ready for a sudden change. They did not know what time the war would end to resume normal businesses. Similarly, businesses today cannot estimate the impact the coronavirus pandemic will have on their businesses and for how long. Carter (2020) also argues that people cannot calculate their advantage or value if they do not see beyond the horizon. As such, the current pandemic requires the government to make various efforts to boost or restart the economy.

Macroeconomic Concepts

Carter (2020) presents various macroeconomic concepts in the article by articulating the arguments of Keynes. One of the concepts is that the government needs to spend more money to jumpstart the economy. It also identifies that the expenditure of the government should be in a way that will restore peace of mind among citizens (Sebastiani, 2016). The article argues that while businesses are in a panic mood, it is only the political class that can drive people out of the crisis. One of their tactics would be to convince people that the situation will get better soon (Krugman et al., 2017). A reduction or elimination of anxiety would ensure people do not make decisions based on fear. Another macroeconomic concept is that the government should increase its expenditure by supporting needy families and companies on the brink of collapsing. The purpose is to increase the expenditure and thus allow companies to continue operating, reduce the rate of unemployment, and increase the circulation of money in the economy (Krugman et al., 2017). Carter (2020) argues that the private sector cannot lift the economy out of distress and thus the government has to step forward to relieve the economic stress.

The article indicates that the pandemic has led to a disruption of supply and demand. Supply chains have been disrupted while the demand continues to rise. Carter (2020) argues that it is the role of the government to restore the balance between supply and demand. One of the issues identified is the dwindling shortage of medical supplies necessary to tackle the pandemic. The article argues that it is the role of the government to boost the confidence of the people even if they run into a huge debt. Carter (2020) argues that a surge in confidence will ultimately take care of the economy’s debt and budget deficits. For example, according to Keynes, the government should spend more money to salvage struggling companies from total collapse (Michie, 2018). The focus is to ensure the distribution lines have not been affected and the supply of critical products is sufficient.

According to the article by Carter (2020), government intervention remains critical to boosting the slow economy. Keynes argued that active government intervention is important during a recession. Carter (2020) states that wages and employment opportunities cannot sustain the economy and thus the need for further intervention. He also states that no matter how governments may be corrupt, they need to create employment opportunities and share prosperity with everyone. According to Murakami (2019), Keynesian theory indicates that if a government fails to create job opportunities or restore its ability to purchase products and boost the supply.

Application

The American government is working according to the Keynes argument by ordering meat companies to keep their facilities open to avoid a shortage of meat. The order is despite the high rate of infection among the meat companies that have recorded thousands of infections. Another attempt by the government is to reopen the economy to avoid further loss of jobs and the collapse of companies (Carter, 2020). States have outlined reopening strategies even if the risk of infection is still high in states such as New York. The focus is to restore the confidence that Keynes indicated was crucial to keep an economy from a recession.

Critique

The article articulates various decisions that political leaders should be taking to restore the confidence of the people. However, some of the arguments of Keynes do not auger well with the current pandemic. In the 1920s when over one million Britons were laid off, it was important for the politicians to urge the people to remain hopeful (Murakami, 2019). However, Carter (2020) does not present an argument that can be applied in the current situation. The reason is that governments across states are pushing for reopening while the risk is still high. Therefore, the risk could lead to the second wave of infection which could trigger a severe effect on people and the economy. It is also controversial since it argues that it is the politicians who can deliver people from the turmoil (Datta, 2020). However, most of the politicians are acting in a manner to suggest they are preferable candidates in the coming elections. The decisions of the political leaders are still embroiled by the desire for reelection and thus cannot be effective.

In the last paragraph, the article is controversial since it does not offer hope for tomorrow. The argument of Carter (2020) is that the government should be working to restore the confidence of citizens. However, it ends by indicating that in the long run, we are all dead and that anything is possible. It is a weakness to conclude an article on the Keynesian theory that would, however, offer hope to the world during the pandemic. Indicating that we would all be dead eventually is a way of showing that the death toll could continue climbing and the economy could deteriorate further (Sebastiani, 2016). Therefore, it is a weakness since ending the article with words of hope would be better. It is also important for the author to avoid borrowing the words of Keynes since some do not apply to the current pandemic (Scott, 2018). While in the early 1900s the issue was a recession, today, the risk of death due to respiratory disease. Therefore, the approach needs to be customized for the current pandemic to avoid replicating the information yet the dynamics are different.

Compare and Contrast

The fear of a rising number of infections prompted the United States to call for lockdown in various states. Different states are not implementing a reopening strategy to cushion the economy from further negative effects (Carter, 2020). Reopening is also a move to boost the confidence of the citizens that the situation will get better eventually. Conversely, for a country such as Sweden, the country did not call for lockdown and allowed companies, schools, and people to continue with their normal lives. In Sweden, there was surging confidence that the economy would not be hurt by the lockdown. Interestingly, with a lockdown, Sweden has recorded a few cases compared to the United States. Currently, there is an ongoing discussion about whether Sweden will experience a surge in its economic performance due to the lack of a lockdown. However, their companies will not be affected since the investors are confident and companies have not laid people off.

Sweden and the United States have various similarities in their approach to handling the pandemic. One of the common approaches according to Keynes is to boost the confidence of the people during the crisis (Krugman et al., 2017). Top government officials including President Trump and Prime Minister Stefan Löfven and health experts have held regular briefings to convey a message of hope. The briefings comprise information to demonstrate the drastic measures that every government is taking to curb the crisis. It is also an avenue to lower the risk of loss of confidence which can affect individual citizens, companies, and investors. The two countries have taken different measures to curb the spread of the virus and boost confidence and economic growth.

Conclusion

Coronavirus pandemic is an unprecedented eventuality that has caught many countries unawares. Governments including the United States and Sweden have taken different measures to communicate hope to the citizens and also increase their expenditure to stabilize the economy. According to Keynes, the government should spend more money to stabilize the economy but more so to eliminate the fear that would lead to bad economic decisions (Krugman et al., 2017). One of the weaknesses of the article by Carter is that it does not offer that Keynes ascribes is important during a crisis. It indicates that ‘eventually we would all die’ which is against the theory Carter uses to pitch his argument. Sweden and the United States continue to make different approaches such as on their issue of a lockdown. However, their approaches are similar since they continue to offer hope that the situation will get better in the future in accordance with Keynesian theory.

References

  • Carter, Z, D. (2020). The $1 trillion stimuli isn’t about cash. It’s about restoring faith in the system. The Washington Post. Retrieved from https://www.washingtonpost.com/outlook/sending-1000-checks-the-lessons-of-john-maynard-keynes/2020/03/18/cae8f6e6-68bf-11ea-b313-df458622c2cc_story.html
  • Datta, J. S. (2020). Keynesian Theory and its application in the Current Economic World of Developing Countries. Purakala with ISSN 0971-2143 is an UGC CARE Journal, 31(4), 2608-2613.
  • Krugman, P., Obstfeld, M., & Melitz, M. (2017). International Economics: Theory and Policy, the latest edition. Addison-Wesley.
  • Michie, J. (2018). Keynesian theory and policy. International Review of Applied Economics, 32(5), 567-568.
  • Murakami, H. (2019). A note on the “unique” business cycle in the Keynesian theory. Metroeconomica, 70(3), 384-404.
  • Scott, S. M. (2018). Crises, confidence, and animal spirits: exploring subjectivity in the dualism of Descartes and Keynes. Journal of Philosophical Economics, 11(2), 1-28.
  • Sebastiani, M. (Ed.). (2016). The Notion of Equilibrium in the Keynesian Theory. Springer.

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