The uneven development of the economy or wave fluctuations in overall development, especially the negative phases, as well as the impact of related economic crises encourage governments to implement 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 mitigate economic cycles. The countercyclical 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 this 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 a market economy moves. The length of time between the two states of the economic process is called the economic cycle. There are several types of cycles, named after their researchers. 3-4 year cycles are Kitchin cycles; periods of ten years in duration - Juglar cycles; periods of 15-20 years are called Kuznetsov cycles; cycles lasting 40-60 years - these are N. Kondratyev’s cycles. 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 and preventing both a crisis state and subsequent states of the highest point of activity (peak). To achieve these goals, the state in a certain way affects the economic system - in the diametrical direction relative to the phases of the economic cycle, smoothing the upper and lower turning points. In contrast to the theory of general equilibrium, the theory of economic cycles studies the causes of changes in the economic activity of society.
Business cycle structure
The following phases are distinguished in the structure of the economic cycle:
- Crisis (recession, recession) - at this stage, production decreases, the growth rate is 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 acquires positive values. This phase usually does not last very long.
- Revival is a kind of transformation: production begins to grow, unemployment also recedes - there is a gradual return to a stable state of the economy.
- Growth - at this stage, government revenue is growing, demand for investments is increasing, the labor market is reviving, prices are rising, and accordingly, wages. Almost all the resources available in the country begin to be included in the production process. As a result, the transition from growth to recession gradually occurs again.
Inflation
An integral element of the economic cycle is inflation, which depends on the cyclical movement of the economy. In such circumstances, 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 of narrowing market demand and increasing sensitivity to rising demand. Rising prices for goods and services affects both consumption and aggregate demand. The counter-cyclical policy in a socially-oriented model implies an increase in pensions and salaries of employees, increased support for the social sphere, measures to combat unemployment, lower drug prices, as well as freezing student tuition fees.
Types and forms of stabilization policy
There are two types of countercyclical policies:
- Monetary is to change the money supply in order to stabilize the total volume of production, employment and price levels.
- Fiscal involves the impact on the phases of the economic cycle through changes in government spending and taxes.
What policies should be implemented to mitigate fluctuations in the business cycle? To answer this question, we can turn to two main paradigms. The countercyclical policy of the state for these purposes uses two directions - this is neo-Keynesianism and neo-conservatism.
Neo Keynesianism
According to this paradigm, the state is quite actively interfering in the regulation of aggregate demand through measures in the field of budget policy. In an economic downturn, the counter-cyclical fiscal policy, together with the expansionist monetary policy, allows expanding demand by increasing government spending, lowering tax rates and offering tax incentives for new investments. The introduction of forced depreciation and a reduction in the discount rate of interest is encouraged.
Neoconservatism
The followers of neoconservatism (the new classical school) and monetarists are guided primarily by the proposal. 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 state regulation as a source of economic instability. In conducting monetary and fiscal policies, the government should be guided by the rules established for a long period. In the process of changing real GDP, the volume of money supply matters. To do this, it is proposed to maintain money supply growth at the same level, because only the money supply determines the level of production and the rate of inflation in the next period. According to the neoconservatives, fiscal policy does not have much influence on the economy, so state intervention in the economy should be completely abandoned. The countercyclical economic policy comes down only to the relationship between taxes and government spending (annually balanced federal budget).
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.
Basic regulation methods
The main instruments for influencing the economic cycle are monetary and fiscal leverage. During the recovery, so that the economy does not “overheat,” countercyclical policies boil down to holding back growth. Due 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 lower government spending, demand is also declining. This is also facilitated by an increase in taxes, the abolition of benefits for investments and depreciation. In order to prevent a complete decline, the state provokes an artificial crisis, which is less serious and short-lived.
During the period of depression, to stimulate production, the government raises expenses, reduces taxes and offers tax breaks to individual companies, and takes measures to reduce loans. The state can sometimes pursue a protectionism policy to encourage domestic producers and help the domestic market by protecting it from foreign agents by imposing customs duties or by limiting import prices. Also, exchange rate adjustments have a stimulating role in the export sector.
Incentive policy
Anti-cyclical policy instruments include: monetary, fiscal and investment policies, wage and tariff policies. They are implemented according to the scheme:
- Monetary policy: in the recovery phase, there is a decrease in the money supply, and in the crisis phase, the increase.
- Fiscal policy: the rise phase - an increase in taxes and a decrease in spending; the crisis phase - a reduction in taxes and an increase in budget expenditures.
- Investment policy: the boom phase is a decrease in government investment, the crisis phase is an increase in government investment.
- The policy of salaries and tariffs: in the phase of rise - lower wages, in the phase of crisis - increase.
Negative effects
Countercyclical monetary and fiscal policy has some limitations. A response to the softening of the economic cycle may be an increase in inflation in the economy, which is undesirable for it.
The countercyclical policy pursued by the government may lead to some distortion of the cycle: there are more crises, although they become shorter and deeper; the rise phase lengthens, and the depression phase, on the contrary, decreases; there is a global crisis that affects all countries, so getting out of the crisis is becoming very difficult.