The great recession of 1973-75 was a severe blow to Keynesian economics because inflation was high while at the same time there was significant unused capacity in the form of unemployment and idle factories. Theoretically, this wasn’t supposed to happen. Also, the failure of traditional Keynesian medicine, especially the tax rebate of 1975, led economists to search for other causes and cures for economic malaise.
I must have missed the chapter where Lord Keynes said prices could not rise during a recession. It just so happens that I took my first course in economics in 1974 and was struck by how the General Theory seemed to capture what was happening in the U.S. economy at the time. And I don’t recall Lord Keynes ever saying that the only remedy for weak aggregate demand was a tax cut. That sounds more like George W. Bush. As Kash notes:
Secondly, is there any reason – any reason at all – to limit this analysis to tax cuts? Being consistent, we should apply exactly the same reasoning to examine the dynamic budgetary effects of changes in spending, which presumably increase economic growth and thus partially pay for themselves. Perhaps the new Division would even be able to discover that one way to eliminate the budget deficit would simply be to dramatically increase government spending
Not to turn classical on Bruce and my fellow Angrybear – I thought the issue was one of long-term growth. This worrying about returning to full employment should be a short-term concern given that we are not yet at full employment – despite all the statements to the contrary coming from the White House and its supporters. But even Lord Keynes would have noted that reducing national savings lowers investment and economic growth in the long-run.