When politicians talk "spending" and "bailout", they are generally parroting an economist named Keynes who advocated that the Federal Government must step in and inject cash into the financial system when an economy slows down and businesses stop borrowing money for growth's sake. The Government must do this, Keynes said, in order to stabilize failing banks, "jump start" businesses to borrow/spend again, and to create Government-financed jobs such as the “shovel-ready” infrastructure improvements we’ve been hearing about. In other words, Keynesians attempt to create a financial feeding frenzy by throwing “blood” in the water.
To finance all of this, the Government has but two legitimate options to obtain the cash, and both are bad:
1) Borrow money: The money usually comes from either a conglomeration of banks or the government of another country (lately China has been the primary lender). Government loans are just like the loans you and I take out - they incur interest (thus increasing the balance) and must eventually be repaid. Since the Government has no way to actually make money, they must eventually raise taxes to pay off the loan.
2) Print money: That's right, just print more. When the US abandoned the gold standard back in 1971, we switched to "fiat money." "Fiat" means "by decree" and implies that the printed money has value simply because people trust it has value - even though it isn't backed by anything. Some argue that there is little difference between counterfeit money and Government-printed money. The end result is that every time the Fed prints money, the overall value of all money in circulation is diluted - which will eventually lead to inflation. Considering the amount of money contained in the Bailout and Stimulus Bills, the inflation is likely to be MASSIVE. Tomorrow's dollar will not buy what today's dollar does—by a long shot. Historically, inflation takes a LONG time to return to equilibrium through - guess what - even more taxation.
At its core, Keynesian Economics is a Big Brother approach to our country's financial system, driven by "experts" in ivory towers who attempt to run the economy via spreadsheets: centralized, heavily overseen by Government, and subject to price-fixing and spending control by a Frankenstein hybrid of government and select businesses and banks who tow the government line (1).
Keynesian economics advocates taking our economy and giving control to the Federal Government - a government that operates with all the efficiency, transparency, and competency of the Department of Motor Vehicles, the Veterans Administration, and the IRS. Are you frightened? You should be. You should be terrified.
Now consider an alternative - one focused on removing government barriers to business growth and consumer spending. This school of thought, originating in the Austrian School of Economics (2), is similar to the Chicago School of Business (3). Both advocate that the problem with government intervention during an economic downturn is that businesses and people become fearful of the unknown consequences of Federal meddling. They therefore tend to “hunker down” – not hiring, not spending, and not borrowing. They conserve cash. As things get worse, businesses are forced to lay people off and cut production. Consumers stop buying things like cars, homes, and meals in order to conserve cash and hang on until better days arrive.
The Austrian/Chicago disciples believe that Government’s main role in times like these is to quell the economic fear by "getting out of the way." Government needs to avoid scaring businesses and consumers, and instead create incentives that encourage businesses to produce, hire, buy and invest.
They suggest:
- Tax cuts for individuals
- Reduced sales taxes
- Cutting capital gains
- Tax cuts that incent businesses to hire and grow
- Removing restrictive trade agreements and eliminating tariffs to open international business opportunities
- Allowing banks autonomy to encourage startups and expansion
- Making government less prominent, allowing businesses to do what they do naturally, creating a positive-reinforcement loop of freedom and prosperity
By doing these things:
- Businesses will have new opportunities to make money
- Businesses will hire people
- New businesses will be created
- People will become prosperous, feeling secure in their jobs and with their purchasing power
Further, the Austrians say the Keynesian Model is fundamentally flawed because when the government dumps money into the system it does not quell the economic fear. As we are seeing today, it actually increases it—CEO’s from across the country are being called into Congressional hearings and given the 3rd degree. They are being told by a bunch of government bureaucrats how to run their business. The result is that companies still “hunker down” even after the “stimulus," fearful of all the regulations, unknown consequences, and random public lashings.
Citizens do the same. They don't spend because nothing seems to be changing, companies remain stagnant. The media hysteria makes it worse as pundit after pundit screams, “The sky is falling." Everyone remains scared, waiting for the storm to blow over—something that could take years.
The end result of a Keynesian Stimulus? Massive debt, massive inflation, massive taxation, and continued layoffs. There is no jump-start of the economy. It's like throwing gasoline on a fire.
What many find infuriating is that Keynesians ignore, or argue away, the 1930's (FDR's New Deal), 1970's (Carter) and 1990's (Japan) when Keynesian theories were put into practice but failed miserably. In each instance it took a decade for the economy to recover, and it didn't recover until the Keynesian approach was abandoned.
An example of the Austrian theory being implemented is Ireland in the late 1990's. Prior to 1990, Ireland was one of the poorest nations in Europe; it was massively socialistic. Huge portions of its population were on welfare and companies avoided investing in Ireland like the plague. Then Ireland decided to implement a (partial) "fair tax" system that ceased penalizing businesses with excessive regulations and high taxes. What happened? Ireland became the 2nd strongest economy in Europe nearly overnight (second only to Luxembourg). Today, the Irish have one of the highest standards of living and greatest buying power in Europe (4).
"We went on a borrowing, spending and taxing spree, and that nearly drove us under," said Irish Deputy Prime Minister Mary Harney. "It was because we nearly went under that we got (sic) the courage to change." Ireland, up until the late 1990's, was a poster-child for the Keynesian economic system our current politicians are foisting upon us. But the Irish government recognized their mistake and reversed course. In just a few years, and for the first time in history, Ireland transitioned from a Third World economy to the leading economy in Europe. Now THAT'S change I can believe in!
Now, I'm no economist, and I've probably left out a lot of important stuff, but to my knowledge these are the basic premises and facts. I highly encourage you to do some research on your own and confirm/expand on these thoughts. From my standpoint, it just comes down to a common sense approach: stop government intervention, offer irresistible incentives to businesses and consumers, and let human nature and the free market take over. Call me simplistic, but this common-sense approach to financial prosperity has worked for every private citizen’s checkbook and company ledger that I know of.
(1) See http://en.wikipedia.org/wiki/Keynesian_economics for more info
(2) See http://en.wikipedia.org/wiki/Austrian_School and http://mises.org/ for more info. All see von Mises and Menger
(3) See http://en.wikipedia.org/wiki/Chicago_school_%28economics%29 for more info. Also see Friedman and Hayek
(4) Here's some great background reading on how Ireland did it: http://www.nytimes.com/2005/06/29/opinion/29friedman.html?_r=1 , http://www.oecdobserver.org/news/fullstory.php/aid/164/Ireland_s_economic_boom:_the_true_causes.html , and http://www.taxfoundation.org/blog/show/626.html.
Monday, March 2, 2009
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8 comments:
Glad to see this topic being raised. Advocates of the Austrian approach will need some some effective rhetoric to advance the cause, as the Obama Admin has at times attributed the entire economic collapse to the failure of "Trickle Down Economics". Now, I don't buy that argument for two seconds: whatever the failures of the past, Socialism cannot be our future. Moreover, anyone that understands health and diet will tell you: one must take enough of something good for it to work. Tiny doses of a supplement or token changes to diet may not have the necessary effect.
Your statement is complete propoganda. For the most you don't really know what Keynsian economics is and your half brained solution is the precise method that got Ireland into the recession in the first place. You don't seem to understand that the policy of laissez-fair or "getting out of the way" as you so neothically put it is implemented in a recession. It completely counter-acts the boom bust economic system that the economic crap you believe in put us into. Keynsian Economics taxes in boom and pumps in bust and that is the only way to counter-act boom-bust-bomm-bust and the only way to get us out of what we are getting outselves into. None of your examples were Keynsian economics and people shoulod not be afraid of Keynsian economics but quite wary of everyhthing else.
From EW, the post author:
First of all, of course I'm shilling for Austrian economics - that's the whole point of the article!
Secondly, from Wikipedia, here's a summary of Keynesian economics:
"Keynes argued that the solution to depression was to stimulate the economy ("inducement to invest") through some combination of two approaches: a reduction in interest rates and government investment in infrastructure. Investment by government injects income, which results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.[2]"
So, in short, Keynes advocated centralized manipulation of lending rates, as well as dumping currency into a sluggish economy in order to jumpstart spending at lower-financed rates. This is exactly what I stated in my original article.
Thirdly, as to Ireland's ties to Keynesian policies and their results:
Here is a summary of the historic facts that formulated my comments on Ireland~
1) Ireland's economy was anemic but stable through the early 20th century, primarily due to its primarily agrarian economy and benchmarking its currency against the English pound, which was in turn based on a gold standard according to the Bank Charter Act
2) Up until the late 1950's, Ireland pursued an insular and protectionist economic policy primarily via high international trade tariffs, resulting in dissatisfaction in its populace as they fell farther and farther behind the rest of Europe's standard of living.
3) In the late 1950's the Irish government relaxed trade tarrifs and pursued foreign investments - which resulted in a steady but slow upward trending in their GDP and standard of living, and the Irish population enjoyed a period of modest economic growth throughout the 1960's and very early 1970's.
4) All was looking good until Bretton Woods and the oil embargoes had a disastrous impact on the Irish economy in about 1973, and as a result domestic industry and modernized farming took a rapid downturn into recession
5) In response, the Irish government implemented CLASSICALLY KEYNESIAN methods to try to boost their rapidly sinking GDP and control inflation:
* An adoption of strong centralized banking system by joining the EMS (European Monetary System) in 1979
* Efforts to depress inflation by and drive consumer demand (and thus employment) up by forcing interest rates to stay low and exchange rates to remain high - as epitomized by the Keynesian Phillips Curve theory
* Strong fiscal expansionary and spending policy (i.e. Federal boosting of the economy via pumping dollars into the system)
* Financial propping of failing businesses through Federal cash injections
* Virtually all of this Federal spending was financed through borrowing from foreign banks/nations
* Unemployment and welfare payments were increased in an effort to boost the rising ranks of the unemployed
6) As a result, the following occurred:
* Initial artificial deflation, causing false overvaluation of the Irish currency, shrinking profit margins for businesses, and therefore causing even more unemployment
* Economic retraction of the Ireland's GDP and GNP drove their 'Misery Index' above 24% and unemployment to 17.4% in the early 1980s
* Budgetary debt increased from .4% in 1973 to 54% of GDP in 1981
* The ration of debt to GDP hit 112% by 1987, with 90% of national income taxes collected servicing the debt
* Taxes were drastically increased to subsidize the injection of Federal cash into the economic system and welfare programs, with marginal taxes reaching a peak of 77%, including social security and income taxes
* Increasingly high and wildly fluctuating inflation as the results of the fiscally flooded economy and artificially manipulated mortgage interest rates as the Irish Consumer Price index bounced back and forth between 10-22% from 1973-1985
Finally, what stopped the Keynesian death-spiral? It started when Margaret Thatcher rose to political power in the U.K. and implemented monetarist (i.e. Friedman's Chicago/Austrian approach) economic policies to combat a similar economic slump in Britain. Thatcher forced the English to gradually detach themselves from the Government teat and centralized planning, and since the Irish economy and currency was strongly tied to England's, their subsequent recovery had a positive ripple effect in Ireland. The Irish were quick to see the link, and were inspired to take the reins and start slashing their own Federal spending. They also removed artificial currency controls, reversed the restrictive business/personal tax structures, and returned to a more lassaiz-faire international trade policy that showed such promising results in the 1960's - all typically Friedmanesque moves. From 1987-2004, the Irish experienced an economic boom that completely transformed their economy and brought an unprecedented period of high consumer confidence and standard of living. Employment took off during this time period, and the previous 20 years of stagflation and unemployment completely reversed themselves. During the boom period of the early 2000's the country's employment rated increased from a little over 50% to over 67%, most of which was in the services sector.
So, to my critic - I'm completely open to being educated, but you are going to have to provide more than rhetoric to convince me. Please provide documented references to back up your assertions. Also, you say "Keynesian Economics taxes in boom and pumps in bust and that is the only way to counter-act boom-bust-boom-bust and the only way to get us out of what we are getting ourselves into". My question to you is this: since Keynesian 'pumping' in the bad times is ultimately subsidized by increased taxation, and you admit that in the good times Keynesians seek to fill public coffers through even more taxation, how is Keynesian economics anything other than a "tax in the good times, tax in the bad times" system?
References:
http://en.wikipedia.org/wiki/Monetarism
http://www.gov.ie/en/essays/twentieth.html
http://www.nbp.pl/konferencje/radisson/Mowcy/O_Connel/oconnell_paper.pdf
http://books.google.com/books?id=cWQ7n3i870gC
http://research.stlouisfed.org/econ/nelson/mpn3newJan07.pdf
http://books.google.com/books?id=bpPNRJLTNhgC
http://www.finfacts.com/irelandbusinessnews/publish/article_10005059.shtml
http://www.finfacts.ie/finfactsblog/2006/11/milton-friedman-and-progressive.html
Let me break this into layman terms. There are three schools of thought in economics. Trickle up, trickle down and don't trickle. Trickle up and trickle down both put us on the road to fascism. Don’t trickle is the road to freedom.
There are always long term consequences when the government meddles in the economy. It causes problems and offers itself as the solution which leads only to more problems. The problem with trickle up and trickle down is that once you have stimulated the economy you must continue stimulating in order to keep the gain. Or worse you must continue increasing the amount stimulus to satisfy the greedy neo-con-fascist or neo-lib-fascist who manages to capture the gains for themselves. Trickle up and trickle down economics are not sustainable. Eventually it must stop and the economy collapses back to where it would otherwise be if no stimulus was ever added and the process starts all over again; boom and bust.
I’m not saying the government can’t play a role. It has a very important role and that is to regulate the externalities. Externalities are where an entity like a corporation pushes the cost of doing business on to someone else (i.e. a community). Unfortunately, once you start down the fascist path the government starts to act as an agent pushing the externalities on to others. It socializes risk and privatizes the profits created by pushing the externalities out on to the tax payers.
Keynsian Economics is heroin to government apparatchiks, because it demands politicians spend money.
It's a philosophy that demands that junkies keep getting high.
They will not give it up without a fight.
Truth and American prosperity have nothing to do with it!
Unfortunately, the average We The People American hasn't got a clue about money, debt, banking or economics. I'm afraid that the ignorance of your We The People candidates will help to lead the sheep to slaughter and America will fall.
The founding fathers recognized and warned the people about the danger of allowing the power of money creation to fall into private (for profit) hands. It is because we failed to heed their warnings that we are now caught up in the ridiculous debt trap of today.
Your ignorance is dangerous, particularly if it will help shape the views of your candidates. Thinking like this will feed what's left of America to the wolves that are devouring us. Please visit http://www.monetaryreform.com and start investigating the truth about money.
Enlightening and scary
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