Should the Government Intervene in the Business Cycle?

Keynesianism

The great depression of the 1930s demonstrated that, at least in the short run, the market system does not automatically lead to full employment. In The General Theory of Employment, Interest and Money (1936), John Maynard Keynes argued that market forces could produce an equilibrium with high unemployment of indefinite duration. For example, if people are worried about the possibility of losing their jobs in the near future they will probably start (1) …… . money and consume less, which will lead to a fall in demand, and consequently in production and employment. In such circumstances, producers will clearly not be interested in making new investments. So people’s savings will remain unused, and the economy will settle into a new (2) …… at a lower level of activity – with fewer goods being produced, fewer people employed, and reduced rates of income and investment. Classical economic theory stated that in the long run, excess savings would cause (3) …… to fall and investment to increase again. Keynes disagreed, arguing that market economies are inherently unstable and without a self-correcting mechanism, except perhaps in the long run – but as he famously put it, ‘in the long run, we are all dead.’ Keynes therefore recommended governmental intervention in the economy, to counter the business cycle. During an inflationary (4) ……, governments could decrease their spending or increase taxation. During a recession, on the contrary, they could increase their expenditure, or decrease taxation, or increase the (5) …… and reduce interest rates, so as to stimulate the economy and increase output, investment, consumption and employment. Keynes also argued that even a small amount of additional government spending or an increase in private investment causes (6) …… to expand by an amount greater than itself, because of the multiplier effect.

Monetarism

In the 1950s and 1960s, monetarists, most notably Milton Friedman, began to argue that Keynesian fiscal policy had negative long-run effects. Unlike Keynesians, monetarists insisted that money is neutral, meaning that in the long run, changes in the money supply will only change the (7) …… level and have no effect on output and employment. They argued that governments should abandon any attempt to manage the level of (8) …… in the economy through fiscal policy. On the contrary, they should try to make sure that there is constant and non-inflationary growth in the money supply.

Monetarists argue that recessions are not caused by long-run market failures but by short-run errors by firms and workers who do not reduce their prices and wages quickly enough when demand falls. When economic agents recognize that prices and wages have to fall, the economy will come back to normal. Since the government will not be able to recognize a coming (9) …… any more quickly than the companies that make up the economy, it will only be able to act at the same time as everyone else is recognizing the need to cut prices and wages. Consequently, its fiscal measures will take effect when the economy is already recovering, and so will merely make the next swing in the business cycle even greater.

Neo-Keynesianism

Whereas classical (and neo-classical) economic theory assumes prices and wages to be flexible enough to eliminate excess supply or demand, Keynesians (today often called neo-Keynesians) argue that wages are inflexible or ‘sticky’ because of labour union contracts, government regulation, and so on. Furthermore, businesses cannot change their prices too frequently, because they do not have perfect information, and because there are many costs involved. These are sometimes known as ‘menu costs’, drawing on the example of restaurateurs who cannot afford to print menus with new prices every day according to small fluctuations in demand.

Neo-Keynesians still maintain that because individuals and firms are unable to find the right prices that would lead the economy to rising output and high or full (10) ……, economies can get locked into disequilibriums for long periods. Thus unlike the monetarists, who insist that free markets and competition are efficient and should be allowed to operate with a minimum of governmental intervention, Keynesians believe there is still a role for either expansionary or deflationary government policies.

Ex. 1. Match up the words from A and B into pairs that mean the same.

A	B
boost (v)	expenses (n)
company (n)	production (n)
costs (n)	c) reduce (v)
error (n)	d) firm (n)
excess (n)	e) variable (a)
flexible (a)	f) raise (v)
output (n)	g) stimulate (v)
increase (v)	h) mistake (n)
lower (v)	i) surplus (n)

Ex. 2. Answer the questions:

1. According to Keynes, what might provoke a high-unemployment equilibrium?

2. According to classical theory, what will happen if people save a lot of money?

3. Keynesian policy is often described as ‘demand management’. What does this mean?

4. According to Keynes, what is the economic effect of even a small increase in government spending?

5. What do monetarists mean by ‘the neutrality of money’?

6. According to classical theory, what will bring about the end of a recession?

7. What is the monetarist or neo-classical objection to government intervention?

8. According to neo-Keynesians, why do prices and wages not adapt as classical theory says they will?

WRITING

Write an essay to express your opinion on government intervention to rescue the financial and real sectors of the economy in the period of world economic crisis. What are the economic arguments against such governmental spending? What arguments for this kind of spending can you give? Express also your views on regulating taxes in the period of contracting industrial output.

You can use the list of discourse connectors that follows:

Expressions for giving opinions

To my way of thinking… It is my (firm)belief/view/conviction (that) … In my opinion/view…/My opinion is that … I am (not) convinced that… I am inclined = склонен to believe that It seems/appears to me… As far as I am concerned…

To introduce points/arguments for or against	One very convincing point/argument in favour of / against is..., Some/many/most people/experts/scientists/ critics claim/suggest/argue/feel that... maintain/believe/point out/agree/hold that...
To make contrasting points	On the other hand, however, still, yet, but, nonetheless, nevertheless, even so It may be said/argued/claimed that… оthers/ many people oppose this viewpoint.. (strongly) disagree.... сlaim/feel/believe this argument is incorrect

TRANSLATION

A. Translate into Russian with a dictionary.

Many nations of the world have enacted fiscal stimulus plans in response to the global, on going recession. These nations have used different combinations of government spending and tax cuts to boost their sagging economies. Most of these plans are based on the Keynesian theory that deficit spending by governments can replace some of the demand lost during a recession and prevent the waste of economic resources idled by a lack of demand. The International Monetary Fund has recommended that countries implement fiscal stimulus measures equal to 2% of their GDP to help offset the global contraction.

The United Kingdom has been one of the major economies leading calls for fiscal action to stimulate aggregate demand. Throughout 2008 a number of fiscal measures were introduced including a tax cut for basic tax payers, a temporary 2.5% cut in Value Added Tax (Sales Tax), £3 billion worth of investment spending brought forward from 2010 and a variety of other measures.

Despite entering the crisis with a low level of public debt (roughly 40% of GDP) and a moderate deficit compared to many European nations, the UK has been limited in its ability to take discretionary fiscal action by the significant burden that bank bail-outs have had on public finances.

B. Translate into English.

Фискальная политика представляет собой меры, которые предпринимает правительство с целью стабилизации экономики с помощью изменения величины доходов и/или расходов государственного бюджета. Целями фискальной политики как любой стабилизационной (антициклической) политики, направленной на сглаживание циклических колебаний экономики, являются обеспечение: 1) стабильного экономического роста; 2) полной занятости ресурсов (прежде всего решение проблемы циклической безработицы); 3) стабильного уровня цен (решение проблемы инфляции).

Фискальная политика – это политика регулирования правительством прежде всего совокупного спроса. Регулирование экономики в этом случае происходит с помощью воздействия на величину совокупных расходов. Фискальную политику проводит правительство. Инструментами фискальной политики выступают расходы и доходы государственного бюджета, а именно: 1) государственные закупки; 2) налоги; 3) трансферты.

LISTENING

Ex. 1. Before listening to the interview with Kate Barker talking about Keynesianism and monetarism, make sure that you understand the following word combinations:

to boost domestic demand a multiplier effect to lift economy out of recession information flows

to dispose of smth. to make a business cycle flatter an interventionist policy to accentuate cycles

Ex. 2. Listen to the interview and decide whether the following statements are true or false (T or F).Give the reasoning.

1. Keynesians believe that if the government borrows and spends more money, economic activity will increase.

2. Keynesians want to boost domestic demand, meaning spending by households rather than businesses.

3. If the government borrows more money, this affects interest rates and business investment.

4. Monetarists say that the only result of increasing the money supply is to raise prices.

5. Keynesians believe that a government can increase the money supply without people noticing it, so that they spend more, and business invest more.

6. The goal of Keynesianism is to eliminate recessions.

7. Monetarists see neither economic advantages nor disadvantages in increasing the amount of money in circulation.

SPEAKING

A. Useful Language: Describing trends.

We can describe trend in English in different ways. For example: