Sunday, December 29, 2013

Economics: New Keynesians versus Monetarists

Will President Barrack Obama's love affair with Keynesian economics bring us out of this mess?
During the 2008 Presidential campaign I was of the opinion that if McCain were to be elected that he would be blamed, by the general public, for every downturn in our country going forward, but if Obama were elected that he would get a free pass or at least the benefit of the doubt for quite a while because the general perception in America, with the help of mainstream media, would be that all of this is fallout from the "terrible and incompetent" Bush Administration. With this new completely partisan stimulus bill, which will be the largest expenditure in America's history, President Obama will sign away that free pass. He doesn't need Republican support for this bill to pass, but he wants it because if the boat sinks he doesn't want to be known as the one who single handedly pulled the plug.
Keynesian Economics
Keynesian economics is an economic theory coined by British economist John Maynard Keynes. I will give a very quick and very basic description of the general premise. Keynes believed that, during times of recession or depression, the government should step in and "prime the pump." The general idea is to borrow a massive amount of money and spend it. This is what Barrack Obama meant when he said "some say this is a spending bill; yes this is a spending bill; that's the whole point." In Keynes' theory you have three major bodies, The Government, the People, and the Economy. The idea is for the government to "deficit spend," the government would borrow money and put it in the hands of the people (ideally through social programs that would effectively increase the size of government.) The people would then pump the money back into the economy. Two obvious questions this raises to me is "what if the people put it under their mattress," and "Where does the money come from?" (If we are borrowing it from domestic sources, there is no new money being pumped into the economy, it is just being moved around. If the Federal reserve is just printing it, we all know what inflation will do. If we are borrowing it from China It's all up to the imagination as to what that means.) One of the major tenets of Keynes' theory is based on The Phillips Curve, which shows an adverse relationship between inflation and unemployment. If unemployment goes up, inflation goes down and vice versa. According to Keynes' theory, the two can never co-exist. Keynes' theories, according to many economists, were not only discredited but dis-proven in the 1970s when The United States was faced with very high unemployment and massive inflation. The occurrence was nicknamed "stagflation" because of the combination of stagnant growth and inflation.
In 1982, when the economy was worse than what we are seeing now, Ronald Reagan used the concepts of economists Arthur Laffer and Robert Mundell's supply side economics or "trickle down economics," by slashing the top marginal tax rate from over 70 to under 30%. Reagan also used Milton Friedman's Monetarism or a free market economy and also used basic principles of Keynesian economics (the spending being largely on defense which does not increase the size of government.) Reagan led the U.S. into one of the greatest periods of economic growth in it's history.
Keynesian Economics and The New Deal.
Its funny how there can be such drastic accounts of the same occurrence. You could conceivably line up a mile of Ph.D. Keynesian Economists that will tell you that The New Deal brought America out of the great depression. You could also find the same amount of Ph.D.s that will argue that The New Deal was the beginning of an irresponsible welfare state. Many Economists believe that the New Deal prolonged and deepened The Great Depression and that only World War II saved America from it.
I think the answer can be found in a direct quote from FDR's own Treasury Secretary Henry Morgenthau. "We are spending more money than we have ever spent before, and it does not work. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I say after eight years of this administration, we have just as much unemployment as when we started and an enormous debt, to boot." -Henry Morgenthau, Treasury Secretary 1939.

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