Business Cycles Phases, Indicators, And Measures Of Economic

Business Cycles Phases Indicators Measures Economic Evolution Out

Discuss the policies that Keynes and Hayek advocated regarding how the federal government should manage the economy. What are the major differences between each school of thought? Based on your answer to the previous question, which of the two economists would you agree with more? Explain.

Read Case in Point 3: Steering on a Difficult Course in section 17.3 of the online text. Why did people believe the difficulties Asian economies were experiencing in 1997–1998 might bring a recessionary gap to the United States? In dealing with the recession of 2008, why is it important for the Fed and Congress to coordinate monetary and fiscal policy measures? Compare the rationale of the Reagan administration for the 1981 tax reductions with the rationale behind the Kennedy–Johnson tax cut of 1964, the Bush tax cut of 2001, and the Bush tax cut of 2003.

Paper For Above instruction

Understanding the divergent economic philosophies of John Maynard Keynes and Friedrich Hayek provides critical insights into how governments manage economic cycles and respond to crises. Keynesian economics advocates for active government intervention, primarily through fiscal policy, to stabilize economic fluctuations, whereas Hayek's monetarist perspective emphasizes the importance of controlling the money supply and limiting government interference to ensure economic stability.

Keynes championed the idea that during economic downturns, governments should increase public spending and reduce taxes to stimulate demand, thus fostering economic growth and reducing unemployment. He believed in the countercyclical use of fiscal policy, especially during recessions, to mitigate the adverse effects of business cycle fluctuations (Keynes, 1936). Conversely, Hayek argued that market forces should primarily dictate economic outcomes, and excessive government intervention could distort the natural order, leading to inflation and economic instability. Hayek emphasized monetary stability and free markets, cautioning against the expansive fiscal policies advocated by Keynes (Hayek, 1944).

The core difference between the two schools lies in their approach to economic stabilization. Keynesians favor government activism and the use of fiscal policy to smooth out the business cycle, especially during recessions and depressions. Hayek and monetarists, on the other hand, caution against such interventions, believing that market signals and monetary policy should be the primary tools for maintaining economic stability.

In practical policy terms, Keynesian ideas influenced many post-World War II governments, leading to increased public spending during economic downturns, such as during the 2008 financial crisis. In contrast, Hayek's principles underpin the monetarist approach, which favors controlling inflation through steady monetary growth and minimal fiscal interference.

Personally, I lean more toward Keynesian economics, especially in periods of recession or economic downturn. The ability to stimulate demand through government spending can be crucial in preventing deep depressions and fostering recovery, as demonstrated by the successful response to the 2008 financial crisis where fiscal stimulus played a pivotal role (Congressional Budget Office, 2010). However, I also acknowledge the importance of Hayek's emphasis on monetary discipline to prevent inflation and maintain long-term economic stability.

Regarding the Asian financial crisis of 1997–1998, many believed that the economic turbulence in Asian economies could trigger a recessionary gap in the United States through reduced demand for exports and spillover effects in global financial markets (Radelet & Sachs, 1998). As Asian economies contracted, their demand for U.S. goods and services diminished, leading to potential decline in U.S. exports and economic activity.

In managing the 2008 recession, coordination between the Federal Reserve and Congress was vital because monetary and fiscal policies have complementary roles. The Fed’s efforts to lower interest rates and provide liquidity, combined with Congress’s fiscal stimulus measures—such as increased government spending and tax cuts—helped restore confidence, stabilize financial markets, and promote economic recovery (Bernanke, 2009). Without coordination, these measures could work at cross-purposes, weakening recovery efforts or causing inflationary pressures.

The Reagan administration's rationale for the 1981 tax cuts was primarily to stimulate economic growth by incentivizing investment and work, based on supply-side economics. The tax cuts aimed to improve the economy’s productive capacity, increase employment, and reduce inflation in the long run. Similarly, the Kennedy-Johnson tax cuts of the 1960s sought to stimulate economic growth through increased disposable income and investment. The Bush tax cuts of 2001 and 2003 aimed to spur economic activity, promote investment, and address economic downturns, though critics argued they primarily benefited the wealthy and increased the deficit (Gale & Samwick, 2014).

Ultimately, while each set of tax cuts was justified on the basis of promoting growth and stability, the underlying rationale shifted slightly from the Keynesian focus on demand stimulation in the 1960s to supply-side incentives in the 1980s and early 2000s.

References

• Bernanke, B. S. (2009). The Crisis and the Policy Response. Stamping out Financial Turmoil. Princeton University Press.
• Gale, W. G., & Samwick, A. A. (2014). Effects of Income Tax Changes on Economic Growth. Brookings Institution.
• Hayek, F. A. (1944). The Road to Serfdom. Routledge.
• Keynes, J. M. (1936). The General Theory of Employment, Interest and Money. Macmillan.
• Radelet, S., & Sachs, J. (1998). The Asian Financial Crisis: Causes and Lessons. Brookings Papers on Economic Activity, 1998(1), 1-74.
• Congressional Budget Office. (2010). The Effects of the Economic Stimulus Act of 2008. Congressional Budget Office Report.