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Keynes’s ideas have penetrated deeply into the public consciousness, to the extent
Macroeconomic policy activism is the
that many people who have never heard of Keynes, or have heard of him but think they
use of monetary and fiscal policy to smooth
disagree with his theory, use Keynesian ideas all the time. For example, suppose that a
out the business cycle.
business commentator says something like this: “Because of a decline in business con-
fidence, investment spending slumped, causing a recession.” Whether the commenta-
tor knows it or not, that statement is pure Keynesian economics.
Keynes himself more or less predicted that his ideas would become part of what
“everyone knows.” In another famous passage, this from the end of The General Theory,
he wrote: “Practical men, who believe themselves to be quite exempt from any intellec-
tual influences, are usually the slaves of some defunct economist.”

Policy to Fight Recessions

The main practical consequence of Keynes’s work was that it legitimized macroeco-
nomic policy activism—the use of monetary and fiscal policy to smooth out the busi-
ness cycle.
Macroeconomic policy activism wasn’t something completely new. Before Keynes,
many economists had argued for using monetary expansion to fight economic down-
turns—though others were fiercely opposed. Some economists had even argued that
temporary budget deficits were a good thing in times of recession—though others dis-
agreed strongly. In practice, during the 1930s many governments followed policies that
we would now call Keynesian. In the United States, the administration of Franklin
Roosevelt engaged in modest deficit spending in an effort to create jobs.
But these efforts were half - hearted. Roosevelt’s advisers were deeply divided over
the appropriate policies to adopt. In fact, in 1937 Roosevelt gave in to advice from

fyi

The End of the Great Depression
It would make a good story if Keynes’s the risk of war grew larger, the United States deficit was 30% of GDP. Today that would be a
ideas had led to a change in economic began a large military buildup, and the budget deficit of $4.3 trillion.
policy that brought the Great Depression to moved deep into deficit. After the attack on And the economy recovered. World War II
an end. Unfortunately, that’s not what hap- Pearl Harbor on December 7, 1941, the country wasn’t intended as a Keynesian fiscal policy, but
pened. Still, the way the Depression ended began deficit spending on an enormous scale: it demonstrated that expansionary fiscal policy
did a lot to convince economists that Keynes in fiscal 1943, which began in July 1942, the can, in fact, create jobs in the short run.
was right.
The basic message many of the young Unemployment rate,
economists who adopted Keynes’s ideas in budget deficit Budget deficit
(percent of GDP)
the 1930s took from his work was that eco-
30% Unemployment rate
nomic recovery requires aggressive fiscal
expansion—deficit spending on a large
scale to create jobs. And that is what they 20
eventually got, but it wasn’t because politi-
War-time
cians were persuaded. Instead, what hap- 10 deficit
pened was a very large and expensive war, spending
World War II.
0
The figure here shows the U.S. unem-
ployment rate and the federal budget deficit
as a share of GDP from 1930 to 1947. As –10
you can see, deficit spending during the 1930 1933 1936 1939 1942 1945 1947
1930s was on a modest scale. In 1940, as Year

346 section 6 Inflation, Unemployment, and Stabilization Policies