There are quite a few misunderstandings about Keynesian fiscal policy, two of them include:
- Successful fiscal expansion relies on having a war and large military spending. No, fiscal expansion would work much better if it is targeted on public services under provided in a free market, such as: transport, health and education. These maintain AD and improve (rather than destroy) infrastructure.
- Fiscal Policy means bigger government. In a boom, governments should be aiming to run budget surplus (or at least very low borrowing). For example, restraining public spending, and not slashing taxes. From a fiscal point of view, in the boom years, it was a mistake to allow UK government spending to grow faster than GDP; in the US it was a mistake to cut income taxes in the boom. The government should have had better finances at the start of 2007, but, we didn’t and you have to deal with what you have.