What is the proper role of government in times of economic crisis?  

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pnrjulius eNotes educator| Certified Educator

There is considerable debate on this question among various economists.

The general mainstream view is called the New Neoclassical Synthesis: Based primarily on the work of John Maynard Keynes, it says that the government has a vital role to play in stabilizing the economy during times of crisis by two basic methods.

The first is monetary policy, the decision of the central bank as to what target interest rates to set, which determines the amount of money in circulation. When the economy is in recession, the central bank should lower interest rates to increase the amount of money in circulation and thereby offset the recession.

The second is fiscal policy, the decision of the government as to how much to spend and how much to take in taxes. During recessions, especially very severe recessions where monetary policy is insufficient, the central bank should run a cyclical deficit, spending more money than they take in taxes, in order to increase the demand for goods and lift the economy out of recession. Then, once full employment is restored, they should balance their budget or even run a surplus in order to pay down the debt they incurred in the recession.

This is the mainstream view, but there are many economists who believe that it is no longer adequate. At the extreme left there are Marxian economists who believe that the government should take a great deal of control over the economy; at the extreme right there are Austrian economists who believe that the government should have almost no involvement in the economy whatsoever. There are also alternative centrist views, such as those that apply insights from behavioral economics to understand the causes of recessions and find better ways to prevent them or respond to them.