sten_super
Brain Surgeon
I'm interested in how Keynesians really believe they can solve recessions by spending more in down turns, then cutting in the boom.
The main equation for aggregate demand is: AD = C + I + G + (X-M) G being government spending. According to Keynes, when one or more of these decrease, aggregate demand decreases and causes an economic slow down. If during the boom, we cut G, we reduce aggregate demand and alas repeat the cycle.
If we are to borrow more, what if our creditors decide to no longer lend? Or what if we borrow more and see no economic recovery; we'll have more debt and still no growth. These factors play a major role in our gilt yields, and we only have to look at Greece to see what happens when yields spike.
The idea that government spending can be used to mitigate the worst of recessions is not exclusively Keynesian - Hayek also espoused investment, he just preferred it to come from the private sector if possible. The justification is that you increase G when the other components of demand (consumer spending, private investment and trade) are experiencing a downturn to bolster aggregate demand, and then withdraw this when the other components are increasing. As a result you can (theoretically) stablise the growth path of aggregate demand. The idea is that across the economic cycle as a whole government expenditure is used to balance out aggregate demand.