Abstract:
This paper compares the depth and length of the recent crisis with the Great Depression in the 1930s. It claims that economic policy played a crucial role in shortening and curtailing the recent crisis. We analyse which policies were applied during the recent crisis and which measures worked. We know that policies relying on large infrastructure projects inherently involve an implementation lag. These lags have been very high in the recent crisis and some expenditure planned will maybe never be spent. We therefore suggest implementing a leakage rate for government expenditure programs which represents the part of intended public expenditures not spent in the first twelve months after the program is set into action. It might be higher than the savings rate out of a tax cut. Furthermore, exit strategies should ideally cut expenditure to the same extent as the increase in government spending during the crisis had been, so that sooner or later tax rates and debt rates may return to pre crisis levels. The core of the Keynesian policy recommendation is to raise expenditure in the crisis but to achieve a balanced budget over a full cycle. If expenditure is not cut after the crisis tax and/or debt rates will increase after each downturn and the basis for any Keynesian policy in the next crisis will be eroded. This does not preclude that it might be useful in the exit phase to change the tax structure in order to lower taxes on labour, specifically for low wages, while increasing taxes on financial transactions, carbon dioxide emissions, capital gains or property. This would lower unemployment and boost demand in economies with tendencies to underconsume.
