What monetary/fiscal policies are being used to combat recession?

Question

I need a few questions answered about the recession:

What monetary/fiscal policies are being used to combat recession?

Is this a Classical or Keynesian approach, and why?

Answer 1

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Both expansionary monetary policy and expansionary fiscal policy are being used to counter the recession.

Expansionary monetary policy is basically just lending more money to people, people borrow that money and spend it creating demand in the process. The United States has been using expansionary monetary policy for about 20 years straight now which has directly lead to massive increases in the levels of debt in the economy. Debt levels are so high now that no one can actually borrow any more so monetary policy has stopped working. Monetary policy is at the most expansionary setting possible right now and it is having effectively no expansionary impact on the economy as a consequence of excessive debt levels.

Fiscal policy thus is the only option left available to actually rectify the situation, basically all you are doing is spending money through the government thus creating demand in the economy. Measures being taken include tax cuts (which I personally disagree with under the circumstances as a greater demand impact could be achieved by spending elsewhere like unemployment benefits without the cost of reducing revenue, increased unemployment benefits actually increases govt revenue), other measures being taken include infrastructure spending and extending the length of unemployment benefits.

This is basically a Keynesian approach. Keynesian economics revolves around the concept of 'aggregate demand' the government can increase the amount of aggregate demand through government spending. A Keynesian approach is fundamentally the right way to go under the circumstances that exist as this crisis is basically a crisis of demand.

Answer 2

The classical approach is to do nothing and to rely on the natural robustness of the macroeconomy to solve the problem. Most macroeconomists agree that this is ineffective if not stupid, but it was first thought to be the solution to the 1929 market crash.

The Keynesian approach takes several forms but all of them are supposed to result in the so called "multiplier effect" causing the economy to grow once it has been stimulated by making more money available at some place in the social system. Unfortunately it doesn't work due to this money having to be borrowed or taken from some other part of the system. Keynesian economics is only a partial model and is unable to really show how it might grow.

The current Keynesian methods in use are to borrow money from the public and increase the national debt. Also to print more money and use it to reduce this debt, but this means inflation, and it is no more effective that that of the greater loans. Inflation is also dishonnest because it makes the debt owed by the government of smaller value in terms of what its money can buy. Money is only a representitive of wealth, not wealth itself. If the system were one of barter and in the present crisis then more money does not mean more wealth, except for the printers of course.

To reduce the rate of interest on the national debt does help to reduce the budget deficit for the next year, but it is not very effective and will not solve the problem at anything like the speed needed. So I find that with present methods there is no way to get out of the recession.

P.S. There is one way not yet considered, for which some essential reading is due (see references). It necessitates a reform of taxes so that land speculation is stopped and greater opportunities for work are created by the unrestricted acces to land.

Source(s):

"Progress and Poverty" (1879) by Henry George, published by the Schelinbach Foundation today. Also check the web for "Ask Henry" and www.progress.org etc.

Answer 3

hey.. shot in the dark here..
but are you taking econ 103a with mahalingam??
cuz im in it.. lol..