Keynes v Reagan; the First Debate.

The first Presidential debate, this Oct. 3 in Colorado, will be focused on three topics; economics, the role of government, and governing. Hosted by the near universally respected Jim Lehrer, a former Marine and host of PBS news hour, the ninety minute debate divided into five 15 minute segments promises to be an exposé of applied political and economic philosophy. Unfortunately neither candidate has seemed particularly interested in discussing details of their plans, so we could be hearing a great deal more philosophy than application.

Repeatedly we have been told this is the most important election of our lifetime, because of the choice that we are being presented. However that choice is only defined in the vaguest possible terms. The Republicans define it as between freedom and dependency, while the Democrats set the parameters as community versus greed. The truth is we are being given an option between consumer side, Keynsian economics and supply side, Reaganomics. This is not a new choice, we have been arguing it for 30 years. However, in the wake of the Great Recession, a finer point is placed on the choice this time around. Which ever view wins the election, if the economy turns around, will cement themselves in the minds of the American public as the more valid plan. A forecast made all the more significant by economic predictions of inevitable growth in the next four years regardless.

Heading into this debate, the Republican theory holds the reputation of “got us into this mess”, while the Democrat hypothesis bears the slightly less onerous critique “not quite, but getting there”. The question will be which candidate can make a better case to a cross section of America. Will President Obama be able to explain that Keynes argues economies are driven by consumers purchasing inventory, thereby forcing the manufacture of more inventory, in persuasive manner? Or will Govenor Romney be able to make a more powerful argument on behalf of Reagan that by reducing government participation, the engine of capitalism will run faster, to everyone’s benefit? Not exactly stimulating material to work with.

The Keynesian Argument

At it’s core, the economic philosophy put forward by John Maynard Keynes, and followed by every President from FDR to Carter, and Clinton, suggests that markets are driven by consumers. The theory being people buy products causing manufacturers to make more inventory to replace it, and that drives growth. In contrast, if large numbers of people are unemployed and unable to make purchases, it sets off a series of dominoes further hurting the economy due to inventory not moving off shelves.

Keynes further argues that the boom/bust cycle which is inherit to a competitive marketplace, also creates instability and opens the door to exploitation. The safety net and entitlements are designed to offset these negatives by keeping currency in the hands of consumers so that when there is a downturn, the unemployed will not serve as the first in a series of negative dominoes due to their inability to buy products. This will, according to the theory, slow both growth and recession by removing (taxing) a portion of the economies profits and using them to fund the safety net. This is also expected to remove the more egregious opportunities for exploitation by removing the dependency on employers for survival.

To the Keynesian, Supply side means choosing more profits while ignoring more human suffering.

The Supply Side Argument

Made famous by Presidents Ronald Reagan and George W Bush, this theory’s core argument is that markets are driven by those individuals and businesses who create products and services. Everything that exists in the marketplace is there because these actors put them there, and therefore all market activity flows from them. Under this this theory, growth is stimulated by fertilizing the marketplace for the producers via low taxes, minimal regulations, and government purchases of military technology from the private sector.

To the Supply Side economist the cycles of the marketplace are not a negative that needs to be stabilized. Opportunity lives in these boom/bust cycles, as weak businesses are destroyed during the downturns, room is made in the economy for the growth of new business. New business means new jobs and new technologies and the growth of both the economy and the culture. Artificially supporting consumption doesn’t protect workers, it supports failing business, preventing new growth, and thereby keeping people from gaining new employment.

To the Supply Side Economist, Keynesian theory means undermining liberty and the marketplace by making people dependent on government instead of survival of the fittest.

Facts on the Ground

We live in a time when taxes are lower than they have ever been, and the number of recipients of safety net and entitlement funds is higher than ever. At the same time we have an increasing quantity of regulations, and no federal jobs initiative. TARP saved the banks, and the Obama Stimulus package primarily prevented further job loss and offered further middle class tax breaks. We have increased military spending, while only 1% of our population is actively serving in the wars we fight.

20120924-000850.jpg

20120924-000822.jpg

20120924-000835.jpg

These are not examples of plans running concurrently, or in compromise. These are examples of contradictory policies undermining each other. While each side is able to pass some of it’s programs but not others, neither theory can effectively execute its plan. The result is an economy stabilizing at the bottom, with millions of consumers requiring assistance and trillions of dollars uninvested by suppliers

As a result,the economy stabilizes at the bottom, with millions of citizens unemployed and receiving assitance, and trillions of dollars sitting in the hands of suppliers not being invested

 

 

The Question for the Debates

The question is not which plan would work, either one would work as advertised if allowed to be fully executed. The question is which end result do we desire, a slow growth, stable, government managed economy or a volatile and highly profitable, free market economy? Or do we want the status quo, resulting in a sluggish market encumbered by antithetical governing polices and a public that has no faith in its leadership?

This will be the subject of the first debate. So for the moment the question is, can our candidates deliver an eloquent and insightful discussion? Or will we just get more slogans and backbiting?

 


Leave a Reply