Countercyclical policy of the state: concept, types, consequences

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Countercyclical policy of the state: concept, types, consequences
Countercyclical policy of the state: concept, types, consequences
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Uneven economic development or wave fluctuations in general development, especially negative phases, as well as the impact of related economic crises, encourage governments to take measures aimed at reducing general fluctuations in the development of production. Against this background, the main goal of countercyclical regulation is to reduce the harmful effects of general crises and soften economic cycles. The counter-cyclical policy of the state can change the course of the economic cycle, modifying the nature of economic dynamics and the relationship between the phases of this cycle. Under such influence, the mechanism of wave motion as a whole is modified.

General concepts

The economic cycle is a wave development and the form in which the market economy moves. The length of time between two states of the economic process is called the economic cycle. There are several types of cyclesnamed after their explorers. Cycles lasting 3-4 years are Kitchin cycles; periods lasting ten years - Zhuglyar cycles; periods of 15-20 years are called Kuznetsov cycles; cycles lasting 40-60 years are the cycles of N. Kondratiev. The basis of these cycles are episodically appearing general crises and the subsequent rise in production. Thus, a countercyclical policy is a policy aimed at regulating, preventing both a crisis state and subsequent states of the highest point of activity (peak). To achieve these goals, the state influences the economic system in a certain way - in a diametrical direction relative to the phases of the economic cycle, smoothing out the upper and lower turning points. Unlike the theory of general equilibrium, the theory of economic cycles studies the reasons for changes in the economic activity of society.

Salary and pensions

Structure of the business cycle

The following phases are distinguished in the structure of the economic cycle:

  • Crisis (recession, recession) - in this stage, production decreases, growth rates are negative, demand decreases and the number of unemployed increases. Usually lasts more than six months.
  • Depression (stagnation) - the country's income decreases, the rate of decline in production stops, and the growth rate curve becomes positive. This phase usually does not last very long.
  • Revitalization - a kind of transformation: production begins to grow, unemployment also recedes - there is a gradual return toa stable state of the economy.
  • Rise - at this stage, the state's income grows, the demand for investment increases, the labor market revives, prices rise and, accordingly, wages. Almost all the resources available in the country are beginning to be included in the production process. As a result, there is a gradual transition from growth to decline again.
Buying and selling dollars

Inflation

An integral element of the economic cycle is inflation, which depends on the cyclical movement of the economy. Under such conditions, a state counter-cyclical policy (or stabilization policy) is vital. In modern conditions, the economic anti-crisis policy of the state is aimed not only at preventing a crisis, but also at regulating the price mechanism by reducing the sensitivity of prices to the crisis narrowing of market demand and increasing sensitivity to demand growth. Rising prices for goods and services affect both consumption and aggregate demand. The countercyclical policy in a socially oriented model involves increasing pensions and salaries of workers, strengthening support for the social sphere, taking measures to combat unemployment, reducing drug prices, and freezing student tuition fees.

Russian rubles

Types and forms of stabilization policy

There are two types of countercyclical policy:

  • Monetary consists in changing the money supply in order to stabilize the aggregate volume of production,employment and price levels.
  • Fiscal involves influencing the phases of the economic cycle through changes in government spending and taxes.

What policies should be pursued to dampen fluctuations in the business cycle? To answer this question, we can turn to two main paradigms. The counter-cyclical policy of the state for these purposes uses two directions - neo-Keynesianism and neo-conservatism.

Neo-Keynesianism

According to this paradigm, the state quite actively intervenes in the regulation of aggregate demand through measures in the field of budget policy. In an economic downturn, counter-cyclical fiscal policy, together with expansionary monetary policy, can expand demand by increasing government spending, lowering tax rates, and offering tax breaks on new investment. The introduction of forced depreciation and a decrease in the discount rate of interest are encouraged.

Piggy bank with money

Neoconservatism

Followers of neoconservatism (new classical school) and monetarists focus primarily on supply. They believe that the state should not interfere in the economy, and its policy should be aimed only at self-regulation of the external market. They consider government regulation to be a source of economic instability. In conducting monetary and fiscal policy, the government should be guided by rules set for a long period. In the process of changing real GDP, the amount of money supply matters.To do this, it is proposed to maintain the growth of the money supply at the same level, because only the volume of the money supply determines the level of production and the rate of inflation in the future. According to neoconservatives, budgetary policy does not have much influence on the economy, so government intervention in the economy should be completely abandoned. The counter-cyclical economic policy is reduced only to the dependence between taxes and government spending (the federal budget is annually balanced).

Countercyclical regulation is carried out by the Central Bank and the federal government. The main task is the final regulation of aggregate demand and the optimal combination of monetary and fiscal measures.

Minister of Finance of the Russian Federation

Basic regulation methods

The main instruments of influence on the economic cycle are monetary and fiscal leverage. During the recovery, so that the economy does not "overheat", the countercyclical policy is reduced to curbing growth. Thanks to the increase in the refinancing rate and other reserve requirements, money becomes more expensive, and the flow of public investment is reduced. In this case, due to a decrease in government spending, demand is also reduced. This is also facilitated by an increase in taxes, the abolition of incentives for investment and depreciation. In order to prevent complete decline, the state provokes an artificial crisis, which is less serious and short-lived.

During the depression to stimulate productionthe government is raising spending, cutting taxes and offering tax breaks to individual companies, and is taking steps to reduce loans. The state may sometimes pursue a policy of protectionism to encourage domestic producers and help the domestic market by protecting them from foreign agents by imposing customs duties or by limiting the price of imports. Also, exchange rate adjustments have a stimulating role in the field of exports.

Government of the Russian Federation

Stimulus policy

Countercyclical policy instruments include: monetary, fiscal and investment policies, wages and tariffs. They are implemented according to the scheme:

  • Monetary policy: in the recovery phase - a decrease in the money supply, and in the crisis phase - an increase.
  • Fiscal policy: recovery phase - tax increases and spending cuts, crisis phase - tax cuts and increased budget spending.
  • Investment policy: recovery phase - decrease in government investment, crisis phase - increase in government investment.
  • The policy of wages and tariffs: in the phase of growth - lowering wages, in the phase of crisis - increase.
  • Russian Kremlin

Negative Consequences

Countercyclical monetary and fiscal policy has some limitations. The response to the softening of the economic cycle may be an increase in inflation in the economy, which is undesirable for it.

The counter-cyclical policy pursued by the government may lead to some distortion of the cycle: crisesbecomes larger, although they become less long and deep; the rise phase is lengthened, and the depression phase, on the contrary, is reduced; there is a global crisis that affects all countries, so it becomes very difficult to get out of the crisis.

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