Understanding Fiscal Policy
Fiscal policy is largely based on the ideas of British economist John Maynard Keynes (1883-1946), who argued that economic recessions are due to a deficiency in the consumer spending and business investment components of aggregate demand. Keynes believed that governments could stabilize the business cycle and regulate economic output by adjusting spending and tax policies to make up for the shortfalls of the private sector. His theories were developed in response to the Great Depression, which defied classical economics’ assumptions that economic swings were self-correcting. Keynes’ ideas were highly influential and led to the New Deal in the U.S., which involved massive spending on public works projects and social welfare programs.