How Would a Benevolent Ruler Combat a Recession?
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may have wanted to replenish his declining checking or savings account, or buy a corporate bond, or a corporate stock, or pay taxes, or pay down debt, or buy goods or services, and he was willing to give up the bond to do it. The typical bond seller has much higher wealth and income than the typical tax-rebate recipient. It seems likely that money used to send tax rebates to households will increase aggregate demand for goods and services much more than if that same money were used to buy government bonds from bondholders willing to sell some bonds. After full-employment output is achieved by the stimulus- without-debt policy, confidence has returned to normal, and the tax rebates to households have been phased out, there will be more money in the economy than before due to the tax rebates. If the ruler thinks this extra money might cause too much spending and therefore inflation, the ruler can remove it from the economy by temporarily cutting government spending so it is less than tax revenue, or by temporarily raising tax revenue so it is greater than government spending. Either action results in more money coming into the government than the government spends. The government can remove this surplus money from the economy until money in the economy is back to normal. Then government spending can be set equal to tax revenue.
Whose Writing Guided the Benevolent Ruler? When the benevolent ruler was asked whose writing was most influential, the ruler replied that the greatest influence came from two economists: John Maynard Keynes and Abba Lerner. The ruler said Keynes (1936) taught the crucial importance of aggregate demand for goods and services: if aggregate demand falls, it causes the economy to go into recession, so demand must be raised. Keynes warned that in a recession monetary
