Keynesian economics is alive and well
I have just received another gem from OC Treasurer Chriss Street in which he points out our “deficit spending running in excess of $4 billion per day.” Does anyone care or have an easy solution? Many opine to simply throw out all incumbents and start over? Will a new Congress be any different? Can we turn this battleship before it sinks to depths that even explorer Jacques Cousteau never reached?
“Trickle Up Economics
Welcome to the wonderful world of “Trickle-Up Economics.” With the impending passage of financial services reform as a compliment to the earlier legislative take-over of the automobile and healthcare industries, Congress will have empowered the federal bureaucracy to control approximately one-third of U.S. consumption. Given the brutal economic failure of this type of “demand management” in the 1970’s, Americans need to be vigilant to the looming risk of economic decline that will serve as the reward for pursuing this type of dubious social engineering.
After successfully maximizing industrial supply during World War 2, Congress reverted back to depression-era economic policies of demand management advocated by British economist Lord Keynes. Keynesian philosophy hypothesized that it was the duty of Congress to protect society from overproduction, which lead to gluts, falling prices and recession. Congress sought to control demand by fully regulating banking activities and keeping the maximum personal income tax rate at over 70%.
Whenever the economy began to slow, Congress felt obligated to increase infrastructure spending and drive down interest rates to rescue demand. Keynesian practitioners were supremely confident in their ability to employ targeted stimulus spending to return the economy to full employment and achieve price equilibrium.
Although possibly noble in concept, Congress interpreted these theories as a green light to escalate spending of taxpayers’ money on their allies, while empowering the Federal bureaucracy to mandate strict control of business activity and labor relationships. A cadre of crony lobbyists worked intimately with Congress to make sure a high percentage of stimulus dollars trickled up into their client’s accounts, rather than benefiting the citizenry with full employment.
After years of continued deficit spending and rising inflation, the US was forced to default on its pledge to allow convertibility of the US dollar into gold on August 15, 1971. This traumatic event was the result of a collapse of confidence in the solvency of the US after gold reserves fell to 8,500 tons from 21,682 tons in just twenty years. With the economy collapsing, Congress unleashed a decade of deficit spending that generated a mean cocktail of high inflation coupled with high unemployment, referred to as stagflation. This failed Keynesian policy caused a liquidity crunches, stock market crashes, a sovereign debt crisis, bank insolvencies, currency devaluations and an explosion in the price of oil. As a result of all this turmoil, gold sky-rocketed over 2300% to $850 an ounce by 1980.
After a decade of misery and as the result of a populist voter revolt, Congress was bludgeoned into temporarily relegating Keynesian demand management economics into the dust bin of history and reverting to policies focused on increasing supply. The rate of personal income and capital gains taxes were slashed by over 50% and the regulatory burden was diminished. Over the next 20 years, U.S. economic performance increased, inflation decreased and interest rates remained very low. By the year 2000, the dollar was strong and the U.S. was running a budget surplus.
Flush with new “supply-side” generated tax revenue, Congress declared Keynesian war on the Middle East and the budget surplus. New Congressional guns and butter stimulus spending doubled the national debt over the next seven years, setting off a huge real estate bubble. When the bubble burst and asset prices declined, threatening the solvency of elites, Congress unleashed the full Keynesian playbook of crony stimulus spending.
With Keynesian theory now back in vogue around the globe, Congress has been on a stimulus rampage! Deficit spending is running in excess of $4 billion per day and our national debt just clocked in at a “lucky” $13 trillion.
But suddenly, we seem to be on our way back to the 1970’s. A worldwide liquidity crisis is looming, stocks markets are crashing, bank insolvencies are increasing, sovereign debt is defaulting, the Euro is devaluing and gold just touched a new high at over $1,200 an ounce.
Fortunately for the US, a populist voter revolt in early congressional elections is ejecting incumbents as punishment for their spending atrocities. With Congress now running scared due to the agony they’ve inflicted, perhaps it’s not too late to stop the Keynesian death grip on our economy. As the revolt builds, now is the time to sweep trickle up economics where it permanently belongs…into the dustbin of history!”
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