Martin Garnica Macro Economics October 18, 2010 Keynesian vs. Monetarist Keynesians and Monetarists agree that the problem that the economy confronts is not enough aggregate demand; however that’s the only thing that they agree on. Keynesians and Monetarists each have a different way on how to approach the problems that our economy faces. Although both Monetarist and Keynesians have well thought out strategies to boost the economy, I believe that Keynesian economics are more effective. There are three ways that Keynesians can boost aggregate demand.
One way is to lower taxes on people. Once those taxes are lowered people’s paycheck become bigger so they have more money to spend therefore that increases aggregate demand. Another method that Keynesians believe works is raising taxes on people with low marginal propensity to consume and make transfer payments to people with high marginal propensity to consume. Examples of transfer payments would be Welfare payments and housing vouchers. Also, an increase in government spending helps increase aggregate demand.
Keynesian economics were applied by Franklin Delano Roosevelt during the Great Depression. In the book Franklin Delano Roosevelt written by Russell Freedman it says that “Works Progress Administration (WPA) workers built railroads, airports, post offices, hospitals, playgrounds, and schools from Maine to California”. (p. 95) The WPA was one of the New Deal Agencies. The New Deal increased government spending through many programs like the WPA, a program that helped employ “eight million people” (98).
Roosevelt also invested in human capital through some of his relief programs. For example, through the program by the name of Civilian Conservation Corps (CCC) “Tens of thousands were taught to read and write and thousands went on to college. ” (95) Through the CCC Roosevelt increased human capital which led to an increase in United States productivity. Also, during Roosevelt’s administration he established a couple of form of transfer payments that are still used today, the two most famous ones are social security and unemployment insurance.
To help pay for the New Deal’s relief programs Congress passed a bill “sharply raising taxes for big corporations and wealthy individuals. ”(p. 102) . By taxing the wealthy, whish is a Keynesian approach Roosevelt was able to fund relief programs during the Great Depression. Although Keynesian economics have helped the economy when aid was needed the most, there are some issues that Keynesian economics has yet to resolve. One of the problems is that it takes time for money to be spent.
If there is an increase in government spending to increase aggregate demand the government still has to gather and decide on what specific projects the money would be spent on. The second problem that Keynesian economics face is fairness, who says that rich people like Bill Gates and Warren Buffet should be taxed more? Third issue is that company that issue bonds are crowded out by the government bonds. Monetarists have solutions also to help economy although they are not as effective as Keynesian economics.
Monetarists believe that aggregate demand will increase with an increase in money supply. Monetarists have three ways to increase money. One way the monetarists increase the money supply is by lowering the reserve requirement that means that the bank has to have a lower amount in reserves which increases the amount of money that can be loaned. Second, a decrease in the discount rate increases the money supply. The discount rate is the rate at what the banks borrow money form the Federal Reserve.
Also monetarists the money supply by buying bonds. The number one reason why none of these three monetarist ideas work it’s because it only applies to people that work and qualify for a loan. Although the supply of money does increase the bank still has to make the decision to loan out the money. Also like Keynesian economics monetarism takes time. One of the possible reasons that we are currently in a recession is that bank gave out loans to almost anyone.
In the book In Fed We Trust: Ben Breanne’s War on the Great Panic written by David Wessel , it says that “Osama did propose mending the law to require the Fed to get t the Treasury secretary’s written approval before exercising its authority to lend to nearly anyone. ”(270) Also a democrat of Virginia by the name of Mark Warner says that the “Fed and the treasury had struck private deals and put smaller less powerful but often better run institutions at a competitive disadvantage. ”(270) The Fed controls our lives.
The public is controlled by a group of people that we did not even elect. They also meet in secret and the subjects that are discussed in their meetings are not made public. Until this year we found out that two years ago during one of their meeting the Feds priority was doughnuts. Also Mark Warner says the “answer to the Great Panic is not to make the Fed more powerful, but to diffuse its regulatory powers in a grand council of regulators. ” (270) I completely agree with Warner I don’t believe that there is one god reason why the Fed should be the so powerful.
Keynesian economics work because if the government spends more then more jobs are created and the new employees that come in to the work force would help pay for the tax cuts that are made. Keynesian economics are the best approach to save our economy when we are trying to achieve full employment.
Works Cited Freeman, Russell- Franklin Delano Roosevelt-Clarion Books, Houghton Mifflin Company. New York,NY. 1990. (pg. 95 and 102) Wessel, David-In Fed We Trust:Ben Bernanke’s War on the Great Panic. Crown Business . Crown Publishing Group. New York 2009