Role of Government
A recessionary gap is defined as a situation where the economy is operating at a level below its full employment. It implies that the current real level of GDP is lower than it is at full employment leading to increased pressure on prices in the long run. The Keynesian approach asserts that a recessionary gap in the economy can be corrected through expanding fiscal policies in the economy. It implies that the government could step in through its policies and ensure that the recessionary gap is corrected as required. On the other hand, the classical approach emphasizes that this gap could be corrected automatically without any interference. It is observed in the assertion that the best monetary policy to an economic crisis is no monetary policy.
Knoop (2009) reiterates that Keynesian view of aggregate demand and the Classical view of aggregate supply are similar in the sense that they both believe in the idea that future expectations about the economy have an overall effect on the economy. It means that the positions of individuals and their actions pertaining the future nature of the economy would have an overall effect on the economy in one way or another.
However, the Keynesian view of aggregate demand defers from the Classical view of aggregate supply as it affirms that firms would only change their output and employment in cases where there is a change in demand. On the other hand, the Classical approach holds that the level of output produced by firms is limited by the availability of resources such as technology and labor that would help to transform these inputs into outputs.
Comparisons of the Rationale for Tax Cuts
The Reagan tax cuts of 1981 were based on the supply-side economics and was determined basing on four key rationales. The first rationale for the Reagan tax cuts in 1981 was the reduction of the increasing government spending by giving citizens more autonomy. It was based on the rationale of the reduction in the federal income tax. The federal government was to reduce taxes and improve living conditions. Additionally, the Reagan tax cut in 1981 was based on the rationale of reducing government regulation in the market. Reagan believed that independent operations would solve the economic problems that America was experiencing. Last, the Reagan tax cut of 1981 was based on the rationale of controlling the money supply in order to counter inflation. Reduced inflation rates would mean better living for people.
Larson (2003) affirms that unlike the Reagan tax cut of 1981, the rationale of the Kennedy-Johnson tax cut of 1964 was New Economics and was based on the Keynesian approach. It is vital to note that the 1964 tax cuts were based on the rationale of ensuring that the economy is maintained at its full employment and through the manipulation of aggregate demand. It emphasized on government involvement through fiscal policies unlike the Reagan tax cuts of 1981 that were aimed at reducing government involvement.
The Bush tax cuts of 2001 and 2003 are similar to the Reagan tax cuts of 1981 because they are based on a similar rationale of the supply-side economics. It is worth noting that the Bush tax cuts were also aimed at reducing the federal debts and improving the overall living standards among individuals. However, it is asserted that Bush tax cuts of 2001 and 2003 failed because the federal debt increased and levels of economic crises in the US increased.
Certain economic crises such as the Great Depression and Auto-Industry failure require government intervention enormously. It is undeniable that the government plays a key role in the development of the economy. It would play a similar role in dealing with economic crises that are likely to retard the overall development of the country. Salvadori & Panico (2006) agree that there is need for the government to intervene in these crises in order to avert the closure of companies, which may lead to increased levels of unemployment. The government also has the potential to increase its spending in dealing with these crises hence calling for the need of government intervention. A significant example of successful government intervention was the government spending public money to prevent the collapse of AIG. Governments should always intervene in economic crises because it is a common understanding that any government would always have the interests of its citizens at heart. It means that the government would do anything to ensure that the existing problems are alleviated and citizens are able to access better living amid the tough economic situation.
Importance of Keynesian Ideas to Economic Policy Today
The Keynesian ideas are important to the economic policy today as they help economic experts to explain the factors relating to the factors determining the levels of employment in the economy today. Most of the countries around the globe face the problem of unemployment, and the Keynes approach offers significant options that would assist in the creation of employment opportunities through a clear understanding of factors determining the level of employment. Thus, countries are turning to the theory in matters of economic policies relating to employment.
Moreover, Keynesian ideas are important to economic policy today as they guide policy makers and governments on overall economic development and improvement programs. Governments and economic policy makers have been able to understand how to deal with crises such as inflation and recession through Keynesian ideas. They provide a clear understanding of the economy and the manner in which the lives of citizens can be improved through the development of different projects and measures intended toward improving their living conditions.