|Question||Economist John Maynard Keynes proposed, in response to the Great Depression of the 1930s, that countries tax their citizens when the economy is strong and save it to have available when the economy is weak. When the economy is weak, Keynes encouraged governments to spend (even to go into debt) to stimulate economic activity. This policy of “counter-cyclical” government expenditures would dampen the good times in the hopes of reducing the pain of the bad times.
(a) Describe a way that a government could spend its money in bad times that would primarily increase current well-being. Also describe a way that a government could spend money to increase future well-being.
(b) Keynes originated the saying, “In the long run, we’re all dead.” He meant in this statement that, if conditions are bad enough in the short run, people might not survive to reach the long run. Does this statement suggest that Keynes would focus government expenditures in bad times on ways to increase current wealth, or on ways to increase future well-being?
(c) Would Keynes advocate for spending to increase future wealth rather than current consumption when the economy is strong or when the economy is weak? Why?
(d) What might go wrong with Keynesian counter-cyclical spending if the timing is wrong? That is, suppose that a government is slow to enact its spending in the face of economic difficulties, and it instead encourages growth when the economy is already recovering. In that case, government spending may compete with private spending for labor and materials. What is likely to happen to prices in the economy? Will this price effect or hurt the economy?
(e) Governments are also often reluctant to increase taxes, even when economies are doing well. What problems might arise from failure to raise government funds?
(f) If Keynesian counter-cyclical spending worked as Keynes sought, would human well-being be more or less sustainable than in the absence of the policy? If Keynesian counter-cyclical spending instead often suffered from the problem of bad timing, would human well-being be more or less sustainable than in the absence of the policy?