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Oct
01

Are we all still “Keynesians” now?

By J. Edward Nelson

I first heard the term “Keynesian” used in describing the economic policies of our government by a panelist on a segment of NBC’s Meet the Press, and after doing some research, I fully agree with this characterization.  As well as former President Richard Nixon’s proclamation that, “We are all Keynesians now.”  But what does that mean exactly?

To understand this term, and the often criticized propensity of the federal government to increase spending during economic downturns, even when running a deficit (referred to as “deficit spending”), a firm grasp of the economic philosophy espoused by John Maynard Keynes from the early 20th century is extremely beneficial.

KEYNESIANISM

In a nutshell, Keynes believed that economic downturns could be rectified expeditiously through the federal government borrowing money, then infusing it directly into the pockets of American consumers.  This would, the theory posits, increase overall consumption, stimulate the economy and stabilize employment.  As opposed to allowing markets to correct themselves in the long run, because, Keynes reasoned, “in the long run we’re all dead.”  The popular vernacular for this philosophy today is “economic stimulus.”

Central Banks are essential to this economic philosophy, loaning the federal government the money necessary to artificially stimulate the economy, as well as federal income taxes used to secure these loans.

From Herbert Hoover forward, most American presidents have utilized some aspect of Keynesianism within their economic policies.

In the 1930s, Hoover and FDR implemented Keynesian economic policies in order to stimulate the economy during the Great Depression.  Both men increased government spending substantially during their terms in office, with FDR spending more than all Administrations which preceded his COMBINED.  But throughout the decade unemployment still averaged 17%, economic output (GDP) shrank each successive year, and the federal income tax was increased from 25% to 79%.

As the national debt increases so do federal income taxes to compensate for this growing, outstanding debt owed to central banks.

Gerald Ford and George W. Bush utilized Keynesian “tax rebates,” greasing the pockets of the electorate with borrowed money instead of cutting taxes and allowing Americans to simply KEEP their OWN money, in order to combat recessive economies, but to no avail.  In both instances, GDP was not positively impacted, unemployment increased, and each recession worsened.

The Bush Administration borrowed more from foreign banks within its first term than all Administrations which preceded it COMBINED.

In practice, Keynesian economic policies have NEVER attained their desired results in the United States.  The Bush Administration being a sterling, recent example of this.  Although, they have consistently resulted in rolling federal budget deficits and record increases in the national debt.

That the Obama Administration appears headed down this same road, ie, Obama’s Economic Stimulus Package, is far from surprising, yet seemingly belies any reasoned assessment of the track record of U.S. economic policy (particularly in recent years).

This does not strike me as “change we can believe in.”

FREE MARKET ECONOMICS

Philosophically, free market economics advocates a very different posture than Keynesianism regarding government intervention within the marketplace. This theory contends that a natural flow of goods and services will occur between buyers and sellers through mutual consent, with the role of government being solely to protect participants in the marketplace against force or fraud.

NOT tip the scales in favor of either buyers or sellers, ie, “greasing the wheels of capitalism,” with tax rebates or subsidies, particularly with BORROWED MONEY.

Proponents contend that economic downturns should be corrected by the market itself, and that government intervention within the marketplace only serves to prolong economic recessions. History tends to agree with this point of view.

If the economic policy makers in the White House fully embraced free market economics, as opposed to Keynesianism, the benefits for American citizens and the U.S. economy would be monumental: the federal income tax (100% of which is used to pay the national debt) would fade into oblivion, employment and economic output would become more steady (minimizing “boom or bust” cycles), government spending would be curtailed substantially, balanced budgets would become normative, and the legitimate concern over foreign policy being unduly influenced by the federal government borrowing money from foreign banks, in order to monetize outstanding debt, would become a relic from the past.

Michael Moore, award winning documentary film maker whose most recent work, Capitalism: A Love Story, is a scathing indictment of modern American capitalism, has stated in a number of interviews, promoting the movie, that our economic system should be replaced with something more “democratic.” Ironically, Moore advocates the U.S. government adopting a “socialist” modeled health care system, and Keynes viewed his economic philosophy as being most effective within a “totalitarian state.”

The freedom of choice inherent within the philosophy of free market economics, devoid of fraud and coercion, could very well embody the democratically oriented economic system which Moore envisions for America.

The lives of American citizens would be markedly improved if an American President could credibly say, “We are all Free Marketeers now.” That would constitute the type of CHANGE this country desperately needs, as opposed to more empty rhetoric.

 

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