Fiscal Stimulus and the Ghost of Keynes: An Evolutionary Chronicle

The concept of the desirability of government expenditure has undergone roller-coaster locomotion over the years. This paper provides a longitudinal map of this evolutionary journey. The traditional skepticism against any role of government in classical economics has been seriously questioned and effectively done away with the advent of Keynesian macroeconomics during the Great Depression. This was epitomized in the US President Roosevelt’s New Deal during the 1930s. While the notion of a fiscal stimulus was in vogue during the 1940s through the 1960s, with spiraling inflation, the efficacy of fiscal stimulus came to be questioned, and slowly the intellectual tradition of austerity was reborn. Theoretically, this got a fillip initially from Milton Friedman and later by the rational expectationists like Robert Lucas. While the birth of the new Keynesians since the 1980s swung the austerity pendulum away from a hands-off policy of the government, the absence of any significant recession in the advanced world during the 1990s, and first few years of the new millennium gave credence toward a policy of fiscal minimalism and associated austerity. Meanwhile, in the policy space, Reagan-Thatcher policy experiments of privatization and supply-side economics during the 1980s effectively implemented such orthodoxy in both sides of the Atlantic. The global financial crisis of 2008–2009 changed all that, and a serious debate on the issue of “austerity versus stimulus” took place in the context of handling the fall-out of the recession. The recent COVID-19 pandemic, too, provided continuity to this intellectual debate.