Brief History of Macroeconomic Thought and Policy
2. Keynesian Economics in the 1960s and 1970s
- Briefly summarize the monetarist school of thought that emerged in the 1960s, and discuss how the experiences of the 1960s and 1970s seemed to be broadly consistent with it.
- Briefly summarize the new classical school of thought that emerged in the 1970s, and discuss how the experiences of the 1970s seemed to be broadly consistent with it.
- Summarize the lessons that economists learned from the decade of the 1970s.
The experience of the Great Depression led to the widespread acceptance of Keynesian ideas among economists, but its acceptance as a basis for economic policy was slower. The administrations of Presidents Roosevelt, Truman, and Eisenhower rejected the notion that fiscal policy could or should be used to manipulate real GDP. Truman vetoed a 1948 Republican-sponsored tax cut aimed at stimulating the economy after World War II (Congress, however, overrode the veto), and Eisenhower resisted stimulative measures to deal with the recessions of 1953, 1957, and 1960.
It was the administration of President John F. Kennedy that first used fiscal policy with the intent of manipulating aggregate demand to move the economy toward its potential output. Kennedy's willingness to embrace Keynes’s ideas changed the nation's approach to fiscal policy for the next two decades.