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Fiscal Policy: Why Aggregate Demand Management Fails and What to Do about It

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  • Pavlina R. Tcherneva

Abstract

This paper argues for a fundamental reorientation of fiscal policy, from the current aggregate demand management model to a model that explicitly and directly targets the unemployed. Even though aggregate demand management has several important benefits in stabilizing an unstable economy, it also has a number of serious drawbacks that merit its reconsideration. The paper identifies the shortcomings that can be observed during both recessions and economic recoveries, and builds the case for a targeted demand-management approach that can deliver economic stabilization through full employment and better income distribution. This approach is consistent with Keynes's original policy recommendations, largely neglected or forgotten by economists across the theoretical spectrum, and offers a reinterpretation of his proposal for the modern context that draws on the work of Hyman Minsky.

Suggested Citation

  • Pavlina R. Tcherneva, 2011. "Fiscal Policy: Why Aggregate Demand Management Fails and What to Do about It," Economics Working Paper Archive wp_650, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_650
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    References listed on IDEAS

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    1. Robinson, Joan, 1972. "The Second Crisis of Economic Theory," American Economic Review, American Economic Association, vol. 62(2), pages 1-10, May.
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    6. Pavlina R. Tcherneva, 2012. "Permanent On-The-Spot Job Creation—The Missing Keynes Plan for Full Employment and Economic Transformation," Review of Social Economy, Taylor & Francis Journals, vol. 70(1), pages 57-80, September.
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    More about this item

    Keywords

    Labor Demand Targeting; Aggregate Demand Management; Full Employment; Income Inequality; Poverty;
    All these keywords.

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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