Keynesian Economics, or “The New Economics,” holds that governments should vary taxes and spending to offset both rising inflation and staggering output. Free-marketers argue that the cost of periodic crashes is worth it, in order to preserve the freedom of capital movements. At the moment, the former notion is prevailing.
Before the 2008 financial crisis, inflation stayed low (did not exceed 4% from 2004 to 2008) and there was little price volatility. It seemed like perpetual prosperity would ensue. What went wrong?
Unfortunately, it would seem that price levels and inflation are lagging, and not leading indicators. Although the metrics seemed stable before the financial crash, behind the scenes, too much money was being shifted from production into speculation. It took some time, but the speculative frenzy triggered by mortgage-backed securities finally kicked in. And the metrics plummeted, and now, output has staggered.
Keynes’ solution to a poor economic state is to “prime the pumps.” This means that government should step in to increase government spending. It is noted that massive military defence spending by the US in WW2 helped to end the Great Depression. If we apply Keynesian Economics to the current Canadian economy, now is the time to increase government spending to stimulate the economy. Our economy needs injections of cash from the federal government in order to prevent a recession.