Monday, November 17, 2008

A Short Post On The Role of Government in Recessions

Short, sweet and Keynesian: Recessions are times of economic shrinkage, of drawing back, of waiting to spend money, of deciding not to spend it. The more consumers do exactly that, the more firms are going to find their sales dropping, their profits evaporating and their employees excess baggage that should be unloaded. Add to that the current financial situation of local and state governments: Their tax revenues are down and so they are cutting back on spending, laying off workers and so on.

That exacerbates the spiral of shrinkages. As John Maynard Keynes pointed out, the government could work to counteract the business cycles, not to exacerbate them. This means that recessions are not the time for government belt-tightening, but the time for governments to actually spend more by taking out loans (if possible). The time to repay the loans is during the upswings of the business cycle. That would mean taxing people more then.

Why this doesn't work in practice is because voters will vote the high-taxing politicians out of office during booms. In a sense it's our own immaturity that is the biggest problem.