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Every dollar spent by the government would create a multiple in income. Unemployment would vanish, the tax base would broaden, and the budget deficit would disappear, Keynes argued. But during the oil crisis of the seventies, it became clear that Keynes theory did not work. Higher public spending did not resolve unemployment. On the contrary, unemployment increased in line with the increase of government spending. In fact, the economy experienced "stagflation", which meant that there was a combination of inflation, recession and unemployment. (Stone 1984).
According to Nissanen (1988), an increase in public spending, as advocated by Keynes, does not stimulate the economy...
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