Keynesian Economics Modern Economic And Political Theory

凱恩斯主義經濟學的現代經濟和政治理論
 

在政治和經濟的現狀下，政府已經采取重大措施來加強財政政策的框架，實現宏觀經濟目標，即低通貨膨脹率或者是穩定的價格，實現經濟持續增長，降低失業率，達到進口和出口之間的收支平衡。自從1933年以來，凱恩斯主義經濟學對于現代經濟和政策理論產生重大影響，同時也對許多政府的財政政策有著重要影響。他特別提倡政府干預的政策，政府將會利用財政和貨幣措施，來幫助緩解經濟衰退，低迷，和繁榮的不利影響。
 

隨著美國的次貸危機的問題，引發了一個潮汐般的憂慮，它是關于2007年8月的世界周邊的貸款問題。這個是信貸危機的開端，它能夠被倫敦銀行同業拆戒率所測量。英國的房價很快開始下跌，且在2009年四月以后趨于穩定。北巖銀行在2007年九月陷入危機，最終在2008年二月收歸國有。在這個危機的第一個階段中，消費者也感到一種價格擠壓；商品價格在2007年至2008年前六個月快速增長，價格是由繁榮的中國和印度的需求所驅使，增加了石油，食物和其他的基本成本。這一通脹的沖擊阻止了中央銀行降低利率以幫助緩解信貸緊縮問題。
 

最初的反應是中央銀行削減利率。在英國，銀行利率從2008年十月的5%下調到2009年3月的0.5%。這還是不足以抵御衰退的。英格蘭銀行的新的活力是定量寬松的貨幣政策，增加在英國經濟中的貨幣供應量。
 

In the current political and economic scenario, the government has taken significant steps to strengthen the framework of fiscal policy and achieve macro economic objectives viz. low inflation/stable prices, sustained economic growth, low unemployment, balance of payments between imports and exports, and environment. Keynesian economics had a major impact on modern economic and political theory as well as on many governments’ fiscal policies since 1933. He is particularly remembered for advocating interventionist government policy, by which the government would use fiscal and monetary measures to aim to mitigate the adverse effects of economic recessions, depressions, and booms.

 

Problems with the repayment of sub prime mortgages in the US triggered a tidal wave of concern about lending around the world in August 2007. This was the beginning of the credit crunch, which can be measured with Libor. British house prices began falling soon after and only stabilized in April onwards of2009. Northern Rock ran into trouble in September 2007 and was finally nationalized in February 2008. In this first stage of the crisis consumers also felt a price squeeze: commodity prices rose rapidly in 2007 and the first six months of 2008, driven by demand from booming China and India, pushing up petrol, food and other basic costs. This surging inflation prevented central banks from cutting interest rates to help ease the credit crunch.#p#分頁標題#e#

 

The initial reaction was for central banks to slash rates. In the UK, the bank rate was slashed from 5% in October 2008 to 0.5% by March 2009. It wasn't enough to ward off recession. The Bank of England's new firepower was quantitative easing - increasing the supply of money in the UK economy. The Bank created money and bought assets (gilts) from financial companies. That made institutions more likely to buy other assets such as corporate bonds (that makes it cheaper for companies to borrow on bond markets) and shares in the form of rights issues (that makes it cheaper for companies to raise money on equity markets). It all combined to makes companies feel richer and less likely to sack workers.

 

Keynes theory argued that the interaction of aggregate demand and aggregate supply determines the level of output and employment in the economy. He also argued that to boost employment, real wages had to go down: nominal wages would have to fall more than prices. However, doing so would reduce consumer demand, so that the aggregate demand for goods would drop. This would in turn reduce business sales revenues and expected profits. Investment in new plants and equipment—perhaps already discouraged by previous excesses—would then become more risky, less likely. Instead of raising business expectations, wage cuts could make matters much worse.

 

To Keynes, excessive saving, i.e. saving beyond planned investment, was a serious problem, encouraging recession or even depression. Excessive saving results if investment falls, perhaps due to falling consumer demand, over-investment in earlier years, or pessimistic business expectations, and if saving does not immediately fall in step, the economy would decline. Keynes argued that saving and investment are not the main determinants of interest rates, especially in the short run. Instead, the supply of and the demand for the stock of money determine interest rates in the short run. Finally, because of fear of capital losses on assets besides money, Keynes suggested that there may be a "liquidity trap" setting a floor under which interest rates cannot fall. While in this trap, interest rates are so low that any increase in money supply will cause bond-holders to sell their bonds to attain money (liquidity). In sum, to Keynes there is interaction between excess supplies in different markets, as unemployment in labor markets encourages excessive saving—and vice-versa. Rather than prices adjusting to attain equilibrium, the main story is one of quantity adjustment allowing recessions and possible attainment of underemployment equilibrium.

 

Keynes′ theory suggested that active government policy could be effective in managing the economy. Rather than seeing unbalanced government budgets as wrong, Keynes advocated what has been called countercyclical fiscal policies, that is policies which acted against the tide of the business cycle: deficit spending when a nation's economy suffers from recession or when recovery is long-delayed and unemployment is persistently high—and the suppression of inflation in boom times by either increasing taxes or cutting back on government outlays. He argued that governments should solve problems in the short run rather than waiting for market forces to do it in the long run, because "in the long run, we are all dead." Keynesianism recommends counter-cyclical policies to smooth out fluctuations in the business cycle. An example of a counter-cyclical policy is raising taxes to cool the economy and to prevent inflation when there is abundant demand-side growth, and engaging in deficit spending on labor-intensive infrastructure projects to stimulate employment and stabilize wages during economic downturns.#p#分頁標題#e#

 

By the time that Keynesian macroeconomics had reached full maturity, in the 1960s, it was widely agreed that the apparent inconsistency between the structure of macroeconomic models and the kind of economic theory used in other branches of applied economics posed a fundamental challenge to the coherence of modern economics. This problem was referred to as the need for “microfoundations for macroeconomics”.

 

The New classical macroeconomics movement, which began in the late 1960s and early 1970s, criticized Keynesian theories, while New Keynesian economics have sought to base Keynes's idea on more rigorous theoretical foundations.

 

The strength of Keynesianism's influence can be seen by the wave of economists which began in the late 1940s with Milton Friedman. Instead of rejecting macro-measurements and macro-models of the economy, they embraced the techniques of treating the entire economy as having a supply and demand equilibrium.

 

Factors influencing supply of product

 

One of the fundamental concepts of a market economy is the supply of goods necessary to satisfy consumer demand. Supply can be analyzed either from the microeconomic level of a small firm supplying a particular product or to the macroeconomic level of many firms supplying those products as a whole. An industry's supply in this case, will comprise of the supply schedules of all the firms in that industry. The major factor that influences supply is the "cost of production", and includes:

 

Input prices - As the prices of inputs such as labour, raw materials, and capital increase, production tends to be less profitable, and less will be produced. This leads to a decrease in supply.

 

Technology - Technology relates to methods of transforming inputs into outputs. Improvements in technology will reduce the costs of production and make sales more profitable so it tends to increase the supply.

 

Expectations - If firms expect prices to rise in the future, may try to product less now and more later.

 

Relationship between inflation and aggregate demand

 

Increase in the money supply, Decrease in the demand for money, Decrease in the aggregate supply of goods and services, Increase in the aggregate demand for goods and services are factors leading to inflation. The increase in aggregate demand (AD) that causes demand-pull inflation can be the result of various economic dynamics. For example, an increase in government purchases can increase aggregate demand, thus pulling up prices.

 

The AD curve shows the relationship between the general price level and real GDP.

 

Another factor can be the depreciation of local exchange rates, which raises the price of imports and, for foreigners, reduces the price of exports. As a result, the purchasing of imports decreases while the buying of exports by foreigners increases, thereby raising the overall level of aggregate demand (assuming aggregate supply cannot keep up with aggregate demand as a result of full employment in the economy). Finally, if government reduces taxes, households are left with more disposable income in their pockets. This in turn leads to increased consumer spending, thus increasing aggregate demand and eventually causing demand-pull inflation. The results of reduced taxes can lead also to growing consumer confidence in the local economy, which further increases aggregate demand. The expectations of consumers and businesses can have a powerful effect on planned spending in the economy E.g. expected increases in consumer incomes, wealth or company profits encourage households and firms to spend more – boosting AD. Similarly, higher expected inflation encourages spending now before price increases come into effect - a short term boost to AD. An expansionary monetary policy will cause an outward shift of the AD curve. If interest rates fall – this lowers the cost of borrowing and the incentive to save, thereby encouraging consumption. Lower interest rates encourage firms to borrow and invest.#p#分頁標題#e#

 

Changes in Fiscal Policy also plays an important factor. For example, the Government may increase its expenditure e.g. financed by a higher budget deficit, - this directly increasesAD. Income tax affects disposable income e.g. lower rates of income tax raise disposable income and should boost consumption. An increase in transfer payments raises AD – particularly if welfare recipients spend a high % of the benefits they receive.

 

A fall in the value of the pound (￡) (a depreciation) makes imports dearer and exports cheaper thereby discouraging imports and encouraging exports – the net result should be that UK AD rises – the impact depends on the price elasticity of demand for imports and exports and also the elasticity of supply of UK exporters in response to an exchange rate depreciation.

 

An increase in overseas incomes raises demand for exports and therefore UK AD rises. In contrast a recession in a major export market will lead to a fall in UK exports and an inward shift of aggregate demand. The UK is an open economy, meaning that a large and rising share of our national output is linked to exports of goods and services or is open to competition from imports.

 

A rise in house prices or the value of shares increases consumers’ wealth and allow an increase in borrowing to finance consumption increasing AD. In contrast, a fall in the value of share prices will lead to a decline in household financial wealth and a fall in consumer demand.

 

In economics, fiscal policy is the use of government expenditure and revenue collection to influence the economy. Fiscal policy can be contrasted with the other main type of macroeconomic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the money supply. The two main instruments of fiscal policy are government expenditure and taxation. Changes in the level and composition of taxation and government spending can impact on the following variables in the economy:

 

Aggregate demand and the level of economic activity;

 

The pattern of resource allocation;

 

The distribution of income.

 

Fiscal Policy

 

Fiscal policy refers to the use of the government budget to influence the first of these: economic activity.

 

The three possible stances of fiscal policy are neutral, expansionary and contractionary. The simplest definitions of these stances are as follows:

 

A neutral stance of fiscal policy implies a balanced economy. this results in a large tax revenue. Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.

 

An expansionary stance of fiscal policy involves government spending exceeding tax revenue.

 

A contractionary fiscal policy occurs when government spending is lower than tax revenue.

 

However, these definitions can be misleading because, even with no changes in spending or tax laws at all, cyclical fluctuations of the economy cause cyclical fluctuations of tax revenues and of some types of government spending, altering the deficit situation; these are not considered to be policy changes. Therefore, for purposes of the above definitions, “government spending” and “tax revenue” are normally replaced by “cyclically adjusted government spending” and “cyclically adjusted tax revenue”. Thus, for example, a government budget that is balanced over the course of the business cycle is considered to represent a neutral fiscal policy stance.

 

In the past year there have been a lot of measures taken to try to get the UK economy up and running again following the global economic crisis. Before the financial crisis fiscal policies were seen as quite traditional old fashioned policies. This is due to the economy growing at a fairly steady rate and there wasn’t much need for government intervention in regards to increasing spending as consumer spending was fairly high due to consumer confidence in the market. However as soon as the banking crisis occurred due to the banks over lending too freely, many people found it difficult to obtain loans and as a consequence consumer spending became at one of its lowest since the last crisis 35 years ago .

 

The UK experienced a double bubble in both housing and the stock markets from 2001 - 2007.Credit was cheap and easy, regulation lax and rules broken. Fuelled by mortgages of up to 125 per cent, house prices tripled in some areas during that period and the London Stock Exchange (LSE) reached record highs.

 

Home prices peaked in the third quarter of 2007 and the long decline set in. Unable to get wholesale funding UK bank Northern Rock was forced to turn to the Bank of England as lender of last resort in September 2007. This led to the first run on a British bank in generations, and forced the government eventually to nationalise the bank. Northern Rock did not mark the end of the British government’s involvement in the financial sector.

 

It was forced to nationalise Bradford & Bingley, help Alliance & Leicester and HBOS get bought, and provide capital, funding and underwriting worth more than 400 billion GBP to both over-leveraged giants like RBS and Lloyds TSB, and relatively stronger groups like Barclays, HSBC and Standard Chartered.

 

By Q2 2008 the UK was officially in recession and Sterling had dropped more than 30 per cent against the other main currencies.#p#分頁標題#e#

 

With consumer confidence dropping and unemployment rising, the auto and retail sector were the next victims of recession. Household names in the High St including Woolworths, Zavvi (the former Virgin Megastores), MFI, Adams and Waterfords Wedgewood went into receivership by Christmas 2008.

 

Impact of lowering Interest rate in influencing economic activity

 

The Bank of England or BoE is one of the oldest central banks in the world. It was established in 1694 under the Bank of England, and became known as the ‘Old Lady’, or the Old Lady of Threadneedle Street, where it is located in London. It was nationalised after the end of World War II, and plays a key role in monetary policy, managing the national reserves and helping to maintain the stability of the British bankingand financial systems..

 

UK Monetary Policy is set by the Bank of England. One of Gordon Brown’s first acts as Chancellor of the Exchequer in 1997 was to give the BoE independence in setting rates, which previously had to be approved by the Chancellor. The Bank of England had cut interest rates to 1.0 per cent by the end of 2008, and that is expected to drop to 0.5 per cent for most of 2009 and 2010.

 

Since 1997 the Monetary Policy Committee (MPC) has had the responsibility for setting the official interest rate. However, with the decision to grant the Bank operational independence, responsibility for government debt management was transferred to the new UK Debt Management Office in 1998, which also took over government cash management in 2000. Computer share took over as the registrar for UK Government bonds (known as gilts) from the Bank at the end of 2004.

 

It should be remembered that the government retains control of the final objective of monetary policy - the Government sets the inflation target within which the Bank must operate when carrying out monetary policy decisions. The Bank of England's record since it was made independent in May 1997 has been a strong one. Underlying inflation has stayed remarkably close to the official target measure of 2.5% (plus or minus 1%). On no occasions has the Governor of the Bank of England been required to write an open letter to the Chancellor explaining either an inflation over-shoot or an under-shoot.

 

UK budget deficit stood at 5.3 per cent of GDP in 2008. With economic stimulus packages and bank bailouts being worked on, that was expected to balloon to 11.3 per cent of GDP in 2009 and 13 per cent of GDP in 2010.

 

In 2008, the UK had the 43rd largest relative national public debt, at 47.2 per cent of GDP. This figure could rise to 58.5 per cent of GDP by 2009 and 70 per cent of GDP in 2010, thanks to the projected budget deficits of 2009-2010. Inflation had ramped up to 3.6 per cent in 2008, but has dropped back with the economic collapse and was expected to be 0.4 per cent in 2009 and 0.8 per cent in 2010. It had the 58th lowest inflation rate in the world at end 2008. The 3-month Treasury rate has similarly dropped, from 5.5 per cent in 2008 to an expected 1.3 per cent in 2009 and 2010.#p#分頁標題#e#

 

The unemployment rate had reached 6.3 per cent in the UK by the end of 2008 according to the Office of National Statistics, reaching close to 2 million unemployed. This figure is likely to grow to the 2.5 million – 3 million figures, or 8-10 per cent. The UK has the third highest current account deficit in the world of US$186 billion. It has a large trade deficit in manufacturing and has become a net importer of energy and North Sea extraction declines. It runs $468.7 billion of exports (9th in the world export rankings) and $654.7 billion of imports (6th in the world).

 

By the end of 2008 estimated public debt had already risen to 42 per cent, and could rise to 70 per cent of GDP by 2010, meaning that the rules have gone out of the window as fighting the recession takes priority. Keynesian economics says this is the right thing to do, but it leaves the British government finances dangerously over leveraged - and over leverage was, after all, what got us into this mess in the first place.

 

Giving the Bank a degree of independence is no guarantee of macro-economic stability in the long run. A recent study from the National Institute of Economic and Social Research (NIESR) claimed that had the Bank kept interest rates at 6% during the first two and a half years of its life as an independent bank, the final outcome in terms of output and inflation would been broadly similar from the actual out-turn.

 

GDP of UK showed a growth of 0.4% which marked the starting of moving out of plagiarism in the fourth quarter of 2009. In the first quarter of 2010, there was only around .2% growth in the GDP which was very low and a slightly higher increase of about 1.2% was seen in the following second quarter which was a big relief for the economy. A further growth of 0.7% and a much higher i.e. 2.7 % was seen in the next two quarters of the year 2010. Total production output increased by 0.5% in the third quarter of 2010, compared with growth of 1% in the past quarter. A growth of 1.1% was seen in manufacturing output in the 3rd quarter of the year 2010. Output in the service industries rose by 0.5% in the latest quarter, following a 0.6% increase in the previous quarter.

 

Office for Budget Responsibility (OBR) was set up by Democratic government that was made responsible for official projection judgments and controls forecasts of economy. The goals for the growth of economy were projected to 1.8% in the year 2010 and 2.1% in the year 2011 which is according to the predictions made by Outlook for fiscal and economic sections of OBR. In the coming four years the growth of around 2.6% to 2.9% is being expected which is significantly greater than the previous years.

 

Public sector borrowing levels were increased by the Labor government in the budget of year 2009 because of degradation of economic condition of the country due to recession. In the following years 2010 and 2011 the government is planning to spend a huge amount of ￡3 billion to revive the recession hit economy. The government also increased the borrowing capital by 11.4% of GDP which resulted in an amount of ￡159.8 billion. A high record of burrowing i.e. ￡1000.4 billion had been made up to April 2010 which was a record comparable to past years of debt taken by any government in UK.#p#分頁標題#e#

 

An emergency budget prepared by coalition government in 2010 was prepared which was aimed at cutting public spending in the year 2010. This budget plan was totally against the policies of Labour government which would never have done this type of public spending cuts until the year 2011 or 2012. A biggest cut for decades has been done by declaring to cut public spending by around an huge amount of ￡81 billion in the following 4 years.

 

The greatest concern of the government was to avoid any more severe economic downfall and to revive the economy at any cost. The economy went worse in the years 2008 to 2010 by borrowing and spending strategies of the Labor government. There was an increase from 3.5% to 7.5% of GDP in the budget deficit. A downfall of 0.1% was seen in the employment rate in the quarter ending October 2010. This downfall in the employment was the first ever seen in the UK starting from April 2010. There was a loss of 33000 jobs in the quarter ending October 2010. The jobs were cut mostly in the public sector.

 

Latest data for November 2010 indicates that annual inflation was 3.3%, up from 3.2% in October and remaining above the Government’s 2% target. The Bank of England expects UK inflation to remain above the 2% over the coming months, with the rise in VAT in January 2011 likely to further drive inflation upwards.

 

There was a very high cut in the interest rates to be seen as low as .5% which was an all time low ever in the year 2009. This was done with a hope that very low interest will encourage the bank lending’s in the market which was very low in the past months.