The end of stimulus policy

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In this paper, summarized below, Johnny Munkhammar discusses the effectiveness of recent Keynesian-inspired stimulus programs in both the United States and Europe, drawing on his experience as a Member of Parliament in Sweden. Please click Download PDF for the complete paper.

Summary

The financial crisis and recession of 2008-2009 were countered in many countries with Keynesian-inspired stimulus policies with, among other measures, large increases in public spending. Along with falling tax revenues, a sizeable increase in public spending has produced a serious debt crisis, which has in turn led to lower economic growth and higher unemployment rates. Some explanations for the failure of Keynesian policy include the so-called crowding out effect, unproductive and inefficient government decisions, poor timing, and growing public deficits and debt. By contrast, countries that have cut public expenditure, upheld fiscal policy frameworks for balanced budgets, emphasized tax cuts, and reformed the economy for competitiveness have fared better. This paper explores the crisis-response policies of major developed economies and argues that stimulative policy has intensified the financial crisis, not solved it.