Keynesian Theory

Theory of Government Spending and Tax Cuts

The theory advocates for more government spending and tax cuts in order to generate demand in the country and bring the economy out of a slump. Keynes suggested that when a country has a downturn, individuals will want to conserve their money rather than spend it, which is presumably bad for the economy (Kates, 13). Money must circulate and exchange from one person or business to another for an economy to be healthy and stable (Barro, 412). According to him, under such circumstances, the government needs to spend more and employ more people; people who have jobs will naturally spend on the things that they want, thus ensuring that money is exchanged.

Potential Short-term Effectiveness

The problem with this model is that it may only work in the short term (Sebastiani, 2). It does nothing to stimulate the economy because for the government to create these jobs, they have to borrow from somewhere else and this incurs debts as well as takes money away from businesses (Janda, 560). These debts in turn result in a future depression for the economy and takes the whole country back to square one.

Private Sector vs Government Intervention

The government should not interfere with any projects which can be handled by the private sector. This is mainly because the people in the private sector will come up with their own capital to run the firms, as opposed to the government which will have to borrow to come up with the funds. When the private sector makes a project successful, both the economy and the people benefit from it, because there would not be any debts which would have to be paid in future.

Planned Termination Date for Government Programs

The government should also have a planned termination date for all their programs. This would be highly effective, especially if a signed contract on the termination is involved. Once the contract expires, the projects should be handed out to other firms to manage them.

Works Cited

Barro, Robert J. Macroeconomics: A Modern Approach. Thomson South-Western, 2008.

Janda, Kenneth. Challenge of Democracy 2008 Update: Government in America. Houghton Mifflin Harcourt, 2007.

Kates, Steven. What’s Wrong with Keynesian Economic Theory? Edward Elgar Pub, 2016.

Sebastiani, Mario. The Notion of Equilibrium in the Keynesian Theory. 2016.