Economics: neo-Keynesian vs neo-liberal policy

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When it comes to government intervention into economy during recessions, where do you stand?
Do you tend to align with neo-Keynesians, or neo-liberals? Or do you endorse some other, non-mainstream policy?

What arguments, in your opinion, justify your views?

On the grounds of good control, adjusting money flows and creating "future money" in the form of credit is a necessary requirement to keep our economy stable. Keyne's advocated pumping money into the economy to promote consumption and capital investment. He also proposed taxing the excess money out when the economy stabilize. This was to keep prices stable. Unfortunately our politicians only exercised half of what Keynes recommend. They pump the money in but they won't tax it out when it needs to be taxed.

I see the benefit of gentle counterbalancing control to keep prices stead and investment up.

I also believe that Keynesian policies do have a point, and that it's often a good policy choice to make.
What do you believe are its main setbacks? Would an increase in government spending lower the interest rates in the long run, resulting in lower investment into real capital, and hence lower long-run growth rates? Because this is what seems to follow from the long-run IS/LM model.



What policies, in your opinion, are good at counteracting such setbacks? What's your opinion on various monetary policies? Could a combination of Keynesian policies for the short run, and, monetary policy which seeks to moderately increase interest rates for the long run lead to an optimal outcome?

Maybe, but the Neo-Keynesian type Central Bankers and mainstream economists who rule the roost these days seem to favour policies of zero (or negative) interest rates and money printing which, as they well know, will be difficult or impossible to reverse. I'm thinking of people like Yellen, Krugman, Rogoff, Draghi, Carney, Buiter, Summers, Lagarde, Abe and a whole lot more.....Their kind of policies could well end in disaster.

Well, their policies do make sense when there's a recession - they can put economy out of the said recession. And these policies were endorsed by pretty much both ends of the political spectrum.
But when such policies are used when there's no recession, and the market is close to full employment, they might just result in lower growth rates in the long run.

Here's why:
Imagine there's a recession. There's a lot of unemployment, and people consume less, which leads to more unemployment. The government injects money via spending into the economy, and people start consuming more again, which in turn leads to more being produced and more people being employed.

But this policy is not without long-term consequences and side-effects. For example, if the government injects lots of money into the economy, the interest rates will fall (in the long run), because the money will be far less scarce. This in turn, in some cases, might lead to lower growth rates, because if the interest rates are low, there's usually less incentive to invest for the banks and firms.

Of course, this is just a very simple example. In the real world, the relationship between the interest rates and long-run growth rates are very complicated. But it seems to me that the neo-Keynesian policy shouldn't be used to attempt to generate growth even when the economy is at full employment - it can, in some cases, lead to the opposite. Neo-Keynesian policy should only be used to get an economy out of a recession and downward spiral - this is what it is intended for. It isn't intended to be used to generate high long-run growth rates.

Any counter-arguments, additional arguments, or questions?

Made a blunder: Meant to say that increased government spending could crowd out private investment in the long run, as the availability of credit would diminish, resulting in lower long-run growth rates.
Also, I meant to point out some of the disadvantages of increasing the money supply too much instead: the interest rates could fall too much - so much, that it could negatively affect long term investment, and hence long-run growth rates.
And then there's inflation and consumer expectations which come into play, which makes everything even more complex.