Thursday, June 11, 2009

Should the government do anything to prevent economic declines?

Economic declines eventually end without government intervention, but it may take an unacceptably long period of time. The British economist John Maynard Keynes popularized the idea that the government should play an active role in managing the economy. Keynes admitted that an unassisted economy may correct itself in the long run, but “in the long run we are all dead.” We may not live long enough to see the improvement in the economy.

Recessions are caused by insufficient overall spending on newly produced goods and services. Increases in unemployment reduce national income, which in turn reduces aggregate demand further. This deepens the economic decline and may lead to a depression. The length and severity of the Great Depression led most economists and public policy analysts to conclude that it is appropriate for the government to intervene in the economy to try to reduce the severity of recessions and prevent depressions.

See also "Recessions & Depressions: Questions & Answers."

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