John Maynard Keynes, and his followers, argued in favor of government intervention in the economy. They believed that fluctuations in output and unemployment are due primarily to shifts in aggregate demand. Such shifts, they argued, are often caused by arbitrary feelings of optimism or pessimism. The government could counteract these shifts by the use of fiscal and monetary policy. For example, the Fed can increase the money supply and lower interest rates when excessive pessimism is dampening aggregate demand.

Critics of active stabilization argue that automatic stabilizers, such as the tax code, make active policy less necessary. The most important argument against active stabilization policy is that both monetary and fiscal policy affect the economy only with lags, so that stabilization efforts may actually be destabilizing. Most economists believe that it may take six months or longer before lower interest rates bring about additional investment. Fiscal policy entails lags because spending and taxing decisions must work their way through a legislative process. It may take at least as long before Congress recognizes that a problem exists, adjusts spending or tax policy, and observes the policies taking effect.

This means that the economy may have to wait a significant amount of time before the active policies start to work. Even worse, the lags may be long enough that the economy may have started to improve on its own, such that the active policies are actually counterproductive by the time they take effect.