Keynesian Economics is Not the Answer

John Maynard Keynes was a British economist who is most famous proposing what is commonly called today deficit spending. That’s only a portion of his theory but it captures the gist of it. He particularly thought government deficit spending was necessary in times of economic turmoil in order to stabilize the economy. His ideas were first put into practice in a significant way during the Great Depression – although some people argue that FDR didn’t do enough to stimulate the economy (i.e., he should have pushed for more spending). There is some merit to this idea. The Great Depression really did not end until WWII and all the government money being spent on building war machines, training and supporting soldiers, etc. On the surface it looks like massive government spending was what fixed the economy. That may be.

However, it also started an era (that has not ended since – there were short periods of time when Keynesian economics was not popular with governments but many of the underlying principles were never rejected) of big government and governmental intrusion into the “normal” workings of capitalism and the free market. As the markets thrived, people spent more money, acquiring more possessions. Governments and businesses followed suit. The U.S. enjoyed relative prosperity between the years of 1945 and 2000 (I could even argue it to 2007). There were some rough stretches in the late 70s and in the 80s but generally the economy was quite good. The Korean and Vietnam conflicts did not significantly interrupt the economy. Neither has any war since (although the latest Iraq War certainly did not help the budget).

The problem with Keynesian economics is that no one reverses the intervention. Governments spend more to stimulate the economy then never (or very rarely) cut back. The other problem is that individuals also deficit spend in the acquisition of more goods. Wants become needs and the deleterious cycle of borrowing and spending then borrowing to repay spending takes on a life of its own. In short, both governments and citizens overspend, which is an unsustainable path. I believe much of our current economic crisis stems from such wasteful deficit spending on an individual and governmental level. I think that Keynesian economic policies were one of the instigators of the current economic turmoil. It just took many years for it to develop again.

That’s why I don’t believe that having the government jump in to stimulate the economy is the right path, especially now that the most conservative estimate of the cost of the economic stimulus is $1.2 trillion (other estimates put the cost at around $2 trillion)! Sure, it will help the economy in the short term. It will probably even help the economy for much of our lifetimes. However, I think it “fixes” the economy at the expense of our children’s security. At some point the government cannot jump in and fix the economy any more because it is the economy. Just as communism was shown to be economically unsustainable, Keynesian economics is also unsustainable (unless it is applied topically then removed when the crisis is over, to use a bit of medical terminology; even then I don’t think it is the best approach). Keynesian economics is not socialism but it does have socialist inspiration. I’m not using an association fallacy (i.e., guilt by association) to equate Keynesian economics with communism or socialism (i.e., Keynesian economics = communism = bad; this is not true) – that’s not my point. I’m merely pointing out that at least the communist variation of socialism was shown to be unsustainable. Governments that strictly follow Keynesian economics could end up in an unsustainable state (as I said before, there would be no more room in which to maneuver).

Now, I don’t think a completely hands-off approach is necessarily the best way to help the economy but we should start with less intervention, less government, and less deficit spending. If we as people and if the government all lived within our means, that would be a major step towards fixing the economic problems of our nation and of our world.

The King is Dead! Long Live the King!

Obama, in a keen maneuver showing how he is bringing change to Washington, proposed a radical new plan to help the economy. I’ll quote from a CNN headline: “Obama begins push for tax cuts, more spending.”

It seems he learned something from Pres. Bush and Congress after all. I like this bold new fiscal plan. Let’s bring in less money while spending more money because that will magically fix the nation’s financial problems. I understand that on a theoretical macro economic scale, it’s not a terrible plan because the goal is to stimulate the economy by freeing up liquid assets. This in turn grows the economy, bringing in more tax revenues. At this point government spending will be reduced and Poof! the economy is good again.

However, the government never seems to get to the reduced spending part. Cutting taxes and increasing spending is a very difficult way to stimulate the economy – it requires much financial acumen as well as the willingness and ability to stop the plan as soon as possible. It’s a good plan in the short-term but is not sustainable. On top of that, it’s amoral at best.

The best way to increase financial stability and to make the economy stronger in the long-term is for the government to reduce taxes and reduce spending. They don’t even have to reduce taxes at first, but they have to learn to live within their means.

The only change so far in Washington is that change the government is “borrowing” from taxpayers and the extra change the government mints to help “fund” its spending habits. I know my critique is simplistic but Obama’s “stimulus plan” basically boils down to “tax less, spend more.”

A Plea for a Return of Fiscal Responsibility

I’ve written a number of posts focusing mainly on Republicans and conservative ideals and haven’t written much recently about Democrats or liberal ideals. While I’ve never downplayed my conservative beliefs, when I started this blog (back when it was hosted by Blogger) it was intended to be a fairly balanced look at U.S. politics. I’ve drifted away from that some because I felt the need to share my conservative voice with others, even if few read my blog. I’m an open critic of the Bush administration’s fiscal policies. I know Pres. Bush inherited an economy in a recession that was quickly struck by the horror of 9-11. The economy faltered but then grew stronger; it was strong for a few years and recently turned downwards. I do not believe we are in a recession and I agree with John McCain that the fundamentals of the economy (e.g., businesses, innovation, hard work, etc.) are still strong.

We are passing through some hard times (I’m not trying to minimize any individual suffering but we are in a nation with hundreds of millions of people) but so far it has not been anything serious. Gas prices are high but I believe that high gas prices are a blessing – they lead to the development of alternative potentially cheaper and more environmentally-friendly technologies. The stock market has been volatile but stock markets always are. My mutual fund hasn’t been performing well over the past year but this particular fund is a long-term investment (it did quite well the previous year) and stock markets always go up over time given enough time.

I don’t believe that U.S. presidents have that much influence on the economy – they certainly have some but in reality it’s pretty limited. Congress probably has a little more influence on the economy but still pretty limited. However, I’m still pretty disgusted by all the deficit spending our nation is doing (again, you can’t put all the blame on Pres. Bush; after all, Congress has to actually set all the spending, the President just approves it; further, there are fewer tax revenues when the economy isn’t as strong, which also affects the deficit). What happened to good old fiscal conservatism? Where are the politicians who believe we shouldn’t spend more than we earn, except in emergencies? Many states run just fine and have budget surpluses. Granted, states receive a lot of money from the federal government but the problem is out-of-control spending in general. We are a consumerist society. We have to have the latest and greatest now! Our government seems to think that we have to try and fund as much as we can, after all, each of us is entitled to handouts from the government.

The recent economic woes have little to do with the government; they stem largely from from our entitlement society. People expect a lot from the government (we should all expect a lot of the government, just not from); many expect too much. We also feel entitled to our individual rights over individual and social responsibility. This leads to excessive consumption by society as a whole, which is also reflected in governmental spending. If we can’t control our spending, how can we expect our government to control its spending? I’m not completely opposed to “big government”; our world is very complex today, much more complex than when the country was founded. The government has to be more involved than it was in the past. However, if our spending is higher than our income, we must curtail our spending. I’m aware that many economists feel that keeping a deficit is necessary for healthy economic growth and that balanced budgets hold us back from growth potential; however, we’ve been increasing our federal deficit and national debt for so long that we have to get it under control. I’m not an advocate of raising taxes, especially when the government wastes so much money. You never solve a problem like our government has by throwing more money at it. This means that the only way to eliminate our deficit and national debt is to seriously reduce our spending. It’s painful – no one likes having their money taken away. It’s not an easy job because people would complain and lobby against the spending cuts. Most people who want the government to reduce spending don’t want the government to take away their money.

The easiest way to start is to eliminate redundancies and close loopholes. Simplifying and streamlining the tax codes and process would immediately produce sizable benefits. We should eliminate many of the farm subsidies, for example. Right now the government is like a massive, largely mismanaged company. Departments need to be modernized and streamlined. Consultants need to be pulled in to help with the process. The government needs to be treated more like a corporation (I’m not saying it should be a corporation, it just needs to be managed more like one). We need to elect officials who have the guts to tackle the economic problems of the government.