Obama, Supply Side vs. Keynesian Economics
Posted: Sunday, February 01, 2009
by Tex Norman
The problem with economics is, until now, there has been no real way to "test" an economic theory, but that may be changing now. I won't go back to the beginnings of economic theory, but I will start with the period prior to 1929 and move forward at break-neck speed. Here is my reader's digest summary of economic theory:
1. SUPPLY AND DEMAND
2. KEYNESIAN ECONOMICS
An odd prolific thinker John Maynard Keynes wrote a book putting forth the idea that there are times when the economy gets so sick, so out of kilter that the usual practice of allowing recession to reset the economy just doesn't work. Keynes believed in supply and demand, but he also believed that if there is a sort of synergistic effect caused by poor choices and mass fear that is like being caught in whirling pool of rushing water and you just go round and round and can't get out without help. Keynes thought this was the time when the government should step in and use it's power to stimulate the economy.
Keynesian economics was being practiced on a limited basis by FDR and the Great Depression government, but before we could see if it really worked we had World War II. The Great War put people back to work, eliminated most unemployment, but in general the people were not really living well. By the end of the war the economy seemed to have reset itself, and we had good times starting in the 1950s.
Some Keynesian theory inspired people like Lyndon Johnson to declare war on poverty and there was a belief that a big spending government could just keep writing checks and stimulate the hell out of the economy and things would be great.
New recessions and frightening National Debt brought on a reaction that was decidedly anti-Keynesian.
3. SUPPLY SIDE ECONOMICS
The more recent and generally Republican approach to the economy was to marry three parts of pure capitalism with one part of diluted Keynesianism. You may recall how we all waited with baited breath while Allen Greenspan would announce if interest rates would be cut, stay, or rise. The theory was that the economy was a little like a steam engine and if it cooled off you heated it up with a turn of the dial (cutting interest rates), and if it got too hot (inflationary) all you had to do was ease back on the dial (stay or raise interest rates). Business would grow when the economy was running smoothly at a controlled pace.
When the middle class and working class and the poor complained we were told that there was a trickle down effect. Let Big Business do well and the money would trickle down to the peons. It felt more like we're peed on than peons.
4. NEO-KEYNESIANISM
With this recent 2008 recession people are thinking back to Hoover era Republicans who did nothing and let a bad Recession become a Great Depression with deflated prices and (at one point) 25% unemployment. Tweaking the economy by turning the interest rate dial stopped working. We knew that when the interest rate was dropped to zero and the economy continued to tank.
We now have, for the first time in history, a chance to actually test Keynesian Economics. This makes a lot of people nervous. It should. We are in a horrible situation and people are actually considering using an untested economic theory to fix a very real problem.
On the other hand, all economic theories are untested, so anything we do is going to be an untested theoretic solution. No one knows what is right? Anything we do to address our current economic woes will be untested things.
THE BRAKES
The Republicans want to put the brakes on, and just fall back on cutting taxes, and hoping that lower taxes is going to inspire big business to just start working again.
Many Americans, like me, just don't buy it. Big business is for big business not for America and not for the people of America. If big business cared about the people of the United States they would invest in the US and not ship jobs off to exploited workers in countries with low taxes, poverty wages, and a total disregard for working conditions. Big business does not support trickle down economics. To big business the trickle is just a leak that hasn't been plugged yet.
Some Republicans have suggested that IF money is spent it should be sure to create jobs that are going to be sustained. They mean jobs in the private sector, not government jobs. This is a reasonable suggestion. The counter to this is that we are in an emergency. When you have a patient with a failing heart you don't stop and consider what you can do to repair the broken bones. Instead you ignore all the problems except the one problem that is essential. Unless we get the economy moving we are only going to get into a deeper and deeper economic hole and it is going to be harder and harder to get out of this hole.
One thing is sure, and that is that whatever money the government distributes to the states to spend, these Republican Legislators are not going to pass on the money. Their hands will be out just like everyone else. Many of the crazy schemes for stimulus money are coming from Republicans opposed to the stimulus. Consider the Mob Museum money being requested by Las Vegas.
THE OBAMA DILEMMA
While Keynesianism is untested, many feel it is something to try. The cutting taxes thing and deregulating business and hoping for the best has been tried for years and we see where we are now. The mood is, at least try this Keynesian thing.
According to the theory if the economy is down a trillion dollars then it needs a government stimulus injection, but that government stimulus does not have to be a trillion dollars. According to the theory a percentage of the needed boost is all you have to do, say 1% and once, say $600 to $800 billion is in the hands of the people they will go out, pay bills, buy cars, houses, do repairs, and everywhere they go to spend money those service providers and retailers will have more money to spend. $800 billion in the hands of regular people will become recycled dollars. Every dollar they spend with a retailer or service provider is going to be re-spent by the people who get those dollars, and the people getting that money will spend and with business getting better, more supplies will be needed more workers needed, and eventually the economic sputtering engine will take hold, get into a rhythm and start running smoothly.
Obama has not said that this is the solution. Obama promised to work on the problem. It is my opinion that it might be better to get this money into the hands of regular people and let them buy stuff and start small businesses and get homes, and NOT give it to big business. Big business could care less about this country or its citizens. This was never clearer than when we learned that at the same time these financial giants were on the brink of collapse and at the very time they were lobbying for and receiving billions of tax payer dollars from the government they were giving upper level management millions and millions of dollars in bonuses.
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Top-level comments on this article: (6 total)Tex like all of us being pursued by the bill collector we all will ebcuase WE OWN IT ALL. There is no bottomless pit and creditors will chase you to the grave. [read my past post] Good job and best wishes, Robert.OMG, this is some solid thinking and free education you've packed in this article, Tex. I really gobbled this one up. Isn't it frustrating that someone like you can figure out how to stimulate this massive economy -- get the money into the hands of the ordinary folk -- but our leaders have little or no clue? Thanks so much for sharing your knowledge. I wish more readers will find your article. ~mogama~
What is the best way to get money into the hands of the middle & lower class?The best way starts with education so that they can get a decent paying job.If they get decent paying jobs, then they wouldn't be lower class.The theory is that rarely, but inevitably, the economy can get so broken that the only way to get the economy going again is for the government to become the consumer and spend long enough in a great enough measure that the economy starts up again. It is like squirting ether into the carburetor of your car. But as soon as the engine starts running again, you stop the ether asap. If you push too much ether (the stimulus) you actually overwhelm the engine and kill it. The same is true of our economy. We were so broke that we needed a government squirt of stimulus. I am fairly sure that how the stimulus was spent was flawed. The jobs created have been too few because the places it was spent were not optimal. Mistakes in delivery does not mean the stimulus was not needed only that it could have been more effective than it is. The best way would have been to really keep an eye on job creation. Every expenditure should have been linked to the maximum number of jobs it would create. In my mind, the roads, the power grid, boosting manufacturing have to be our aim. We want the money spent not only to create jobs, but to add benefit after the project has ended, For example, when Ike built the interstate highway system, those roads made near-by real estate much more valuable, food, gas, lodging sprung up all along the interstate highway. Big business build office and distribution centers, and factories near by so that the work force would have access to roads to get back and forth, and trucks would have easy close access to ship products. When we invest in the infrastructure we not only create jobs, but the infrastructure itself continues to be an opportunity for business to use and grow, and this is a gift to ourselves that keeps on giving, it grow the economy.
With the stimulus considered to be a failure, for the most part, i.e. it didn't fund the proper projects as Tex described, would it be in the best interest of the People to prevent another one?Maybe, but not necessarily. If you try something, it doesn't work out as you expect, you might drop the whole idea, but what if you see the problem, and see the errors and now you think you can correct the errors and actually fix the problem? Would it be wise to not do the right thing because you did the wrong thing first?I have to say that while the stimulus had many flaws, and many of those flaws started off as Bush decisions, I do not think it is fair to say the stimulus has been a "failure, ofr the most part." There are many experts in the field of economics that claim the stimulus did actually avert a far worse economic calamity. It could have been better, but it was better than doing nothing. Doing nothing would have duplicated the mistakes that sustained and prolonged the Great Depression. FDR started off implementing Keynesian economics, but when there was initial resistance, FDR backed off some and there are some leaders in this field of study that say that backing off was what prolonged the depression.I think the biggest mistake with the stimulus and the TARP money was that decisions were made too quickly. We were told by the Bush White House that if something was not done within the first 7 days we would have another great depression. So, in a panic, our leaders DID SOMETHING. It wasn't the stimulus idea that was bad, it was the hasty stimulus implementation that caused us to have the problems we face now.
It wouldn't be fair to say the Bush Administration was the at-fault party when both presidencies are to blame for mis-handling the stimulus situation. However, in the effort to avoid political polarization of this discussion, what could have been done, or, what can we do to prevent a future catasrophe of this nature?I seems we are too quick to provide a band-aid rather than preventing the injury. More responsibility should be placed on the shoulders of the American people. After all, no one was forced into buying a house they couldn't afford, were they?On a side note, I've noticed an increase in advertisements for "easy credit," similar to those of the earlier part of this decade--before the collapse. Are we allowing the cycle to repeat itself?Secondly, how does the 2008 collapse fit in with business cycle thoery? From the few college economics courses I've taken, I know ecnomists like to use this term? Tex, is there some correlation here?Bill Clinton can be blamed for the terrible housing market. His administration allowed everyone a chance to get a home(even those who can't afford one). He passed laws to allow banks to sell loans to people who can't afford them. Bush's problem was that he didn't undo Clinton's mistake.
This sounds like someone on the left manipulating the facts. The sentence "Let Big Business do well and the money would trickle down to the peons." sounds alot like a line I heared in Obama's speech.The Republicans' tax cuts would give people extra money to "spend with a retailer or service provider is going to be re-spent by the people who get those dollars, and the people getting that money will spend and with business getting better, more supplies will be needed more workers needed, and eventually the economic sputtering engine will take hold, get into a rhythm and start running smoothly".Obama stimulus bill programs are a way to exercise his far-left views. Cash for Clunkers gives money to the failing Auto Big Busness, while taxing everybody else. How is taking money from american taxpayers and successful businesses and giving it to inefficient companies going to make the economy better. Cash for Cockers doesn't help the economy. It is another way for him to spend america into deeper dept for his the sake of going green.Neo-Keynesianism has been tried before. It was in Japan during their Lost Decade.You clearly believe in a Republican view of the world and I clearly do not. I wish I could say let's agree to disagree, but that is notg part of the Republican approach to things. I lived 8 years with Bush W and really said very little against him, because I blamed the voters for re-electing.Watching the Tea-baggers and Deathers and those willing to kill people at church for performing a surgical procedure that IS LEGAL, tells me that there is very little tolerance for any view but their own.What I believe is that KEYNESIAN ECONOMICS hasn't been tried with gusto because it is so scary. FDR tried it, pulled back, tried it a little more, pulled back and it was his unwillingness to try it that prolonged the Great Depression. Is that the truth? I don't know. Is it left wing ideology? Maybe, but I can't be sure.Some of the choices of out going Bush and in coming Obama were bad ones. I think that some were so scared of another Great Depression that there was a rush to do something, that doing anything was better than nothing, and that if we wait even a day or so we could be in a fall that could not be stopped.I think the fear caused a rush to action and the choices were not thought out. To the stimulus money was NOT spent properly. That doesn't mean KEYNESIAN ECONOMICS was wrong (or right) it just means that the stimulus was not spent properly. If more thought were put into it, I think those dollars could have created more jobs than it did.I don't blame all of our current economic woes on Bush. I actually have two other culprits that I feel are most responsible: Regan and Clinton.But here is the thing: you obviously hate the left and I'm not a socialist (in my mind) but I am far far more left than Obama, so I am sure your hate of the left extends to me. But you signed your blast of me views Anonymous. What is the matter with you. Are you ashamed to stand behind your own words? Sign your name. Stand for your beliefs.I once tried to follow a policy that if I got an Anonymous comment I would delete it. I have not deleted yours because I want your view to be out there. I want the issue to be debated, even by the weak and cowardly tea-baggers who are afraid to sign their own names to their own opinions.Republicans have a dismal history of tax cuts for the middle class. Bill Moyers recently wrote a great article on what has become a plutocracy, where the rich simply do not need the middle class any more, and so there really is no "trickle down" even though that Reaganite myth persists without any proof of concept.
Every Republican tax cut since Reagan has served to make the wealthiest class preserve their wealth, but has done nothing for the other 90% of the tax payers. The wealthy class have less and less incentive to distribute their wealth. It has nothing to do with Obama, but the sheep-like followers of the Republican model continue to parrot the myth.
Republicans' preference for the upper 10% has exacerbated the problem of economic stagnation, because the people who benefit have no vested interest in stimulating the economy. From 1950 to 1980, salaries rose from $17,719 to $30,941. That’s a 75 percent increase in income in constant 2008 dollars.
From 1980 to 2008, average incomes went from about $30,000 to about $31,000. In spite of a continued growth in the economy, only a few at the top benefited, while the bottom 90% of earners did not benefit at all from the continued growth. The average American's relative income grew by $303 in 28 years. In all industry, wage suppression is the way businesses handle profit preservation. Even though the Republicans argue "less taxes mean growth!" that has shown to have no basis in reality. What we have, in reality, and this is so obvious I can't understand why I'm restating it, is that financial, energy, and auto CEOs have made and kept obscene salaries and bonuses, and the way they do it is through wage suppression of the lower 90%.
So, if the government does give the wealthy those great tax cuts, the result won't be economic growth. The wealthy will simply keep the money in interest bearing saving and securities investments. No new businesses will result, no trickle down will happen. It's a scam, it sounded like a good idea at the time, but Reaganomics is simply burning bridges between where the wealth is and where it should be going. Tax cuts for the upper class doesn't work, never worked, and the wealthy have no inclination to make it work.
http://www.truth-out.org/bill-moyers-money-fights-hard-and-it-fights-dirty64766
I appreciated the article and the time and effort you took to write it. Moreso because I know there is a lot of lobbyist dollars from corporations that will go to someone to write something totally opposing your view, and you do it for free...I'm not anti-corporate I actually love business but I understand that business exist to serve people we don't exist to serve business, if at anytime stimulation is needed it should go to the people first.Tex, thanks for your views as well. You have to have studied what has happened in other countries where the leaders get to pick and choose what companies or industries fail and what ones can continue to attempt to survive? In Michigan, we have been a victim of government high taxes where or governor worked to increase the tax baby shoe bronzing services and give tax breaks to the film industry. How is it working for us? Not well. Warren Harding got us out of a depression in less than 18 months, why after almost 30 are we still struggling. The proof of our struggle is in the fact that the government is going to attempt to buy our debt with money it does not have. China has to be close to the point of not lending us more, so the fed will have to print more. That is nothing short of a tax on every person in this country and it will hurt the poorest of us the most. It seems like the world may be almost out of money so, thus we may never know if we can spend our way so far into debt that it is prosperous. The question is do we wait until we have maxamized the amount of debt that the American people will have to pay back or do we stop this experiment before our grand children are enslaved?The solution is simple, it works for families, cities, states, governments and planets. Live within your means pay down your debt and allow people enough of their own hard earned money to be able to “Pursue Happiness". Anything else is an attack on freedom!
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