Politics and Money

[lesgetrich]

Hey Sherman, I beg to differ...

In the early 1970's ... When Nixon took us off the Gold Standard ... He stated "We are all Keynsians now" ... Not a lot has really changed since then.

That was the last major change in monetary policy ... The next one could very well be far more tragic.

The next one was Reganomics, i.e. Supply side economics, which turned Keynesian Economics on its head by preaching that tax cuts for the wealthy and pro-business policies would create more goods and services. From Wikipedia...

Keynesian Economics

Keynesian economics (/'ke?nzi?n/ kayn-zee-?n; or Keynesianism) is the view that in the short run, especially during recessions, economic output is strongly influenced by aggregate demand (total spending in the economy).

Prior to the publication of Keynes's General Theory, mainstream economic thought held that a state of general equilibrium existed in the economy: because the needs of consumers are always greater than the capacity of the producers to satisfy those needs, everything that is produced will eventually be consumed once the appropriate price is found for it.

Keynes's theory overturned the mainstream thought of the time and brought about a greater awareness of structural inadequacies: problems such as unemployment, for example, are not viewed as a result of moral deficiencies like laziness, but rather result from imbalances in demand and whether the economy was expanding or contracting. Keynes argued that because there was no guarantee that the goods that individuals produce would be met with demand, unemployment was a natural consequence especially in the instance of an economy undergoing contraction.

He saw the economy as unable to maintain itself at full employment and believed that it was necessary for the government to step in and put under-utilised savings to work through government spending. Thus, according to Keynesian theory, some individually rational microeconomic-level actions such as not investing savings in the goods and services produced by the economy, if taken collectively by a large proportion of individuals and firms, can lead to outcomes wherein the economy operates below its potential output and growth rate.

Prior to Keynes, a situation in which aggregate demand for goods and services did not meet supply was referred to by classical economists as a general glut, although there was disagreement among them as to whether a general glut was possible. Keynes argued that when a glut occurred, it was the over-reaction of producers and the laying off of workers that led to a fall in demand and perpetuated the problem. Keynesians therefore advocate an active stabilization policy to reduce the amplitude of the business cycle, which they rank among the most serious of economic problems. According to the theory, government spending can be used to increase aggregate demand, thus increasing economic activity, reducing unemployment and deflation.

Supply side economics turned all of this around, and it's been the guiding principle of Republican thought since Reagan...

Supply Side Economics

Supply-side economics is a school of macroeconomics that argues that economic growth can be most effectively created by lowering barriers for people to produce (supply) goods and services as well as invest in capital. According to supply-side economics, consumers will then benefit from a greater supply of goods and services at lower prices; furthermore, the investment and expansion of businesses will increase the demand for employees. Typical policy recommendations of supply-side economists are lower marginal tax rates and less regulation.

As in classical economics, supply-side economics proposed that production or supply is the key to economic prosperity and that consumption or demand is merely a secondary consequence. Early on this idea had been summarized in Say's Law of economics, which states: "A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value." John Maynard Keynes, the founder of Keynesianism, summarized Say's Law as "supply creates its own demand." He turned Say's Law on its head in the 1930s by declaring that demand creates its own supply.

However what most separates supply-side economics as a modern phenomenon is its argument in favor of a low tax rate for primarily collective and notably working-class reasons, rather than traditional ideological ones... Supply-side economists... argued that the alleged collective benefit (i.e. jobs) provided the main impetus for tax cuts.

This is the foundation of the difference between Republican Conservative and Democratic Liberal philosophy. Unfortunately, post Reagan, Wall Street came heavily under the influence of Supply Siders. Anyone with a graduate degree in Economics these days puts their career on the line by subscribing to Keynesianism since they'll have a hard time finding a job. Consequently, only a few true Keynesian economists (e.g. Paul Krugman, Robert Reich et al.) have any real economic influence these days.