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As Long as We Remember...

May 22, 2012

Dogs v. Economic Security

Farrell Keough

Between the sensational talk of eating a dog versus abusing a dog, we might hear a reasonable argument about how to handle our national economic woes. With this in mind, let’s arm ourselves with quick review of two currently discussed perspectives.


First, we need to recognize no single governmental philosophy has ever existed; it is more often a blend of various perspectives. We have rarely seen a truly laissez faire capitalist system and moving toward such is a nonstarter.


But, we have seen tremendous shifts in the levels to which our federal government has involved itself in our markets. An argument could be made that the real expansion of government involvement began when President Woodrow Wilson signed the Federal Reserve Act in 1913. Since that time, presidents of every stripe have involved themselves in our federal monetary policies: Lyndon Johnson, (The Great Society) – Richard Nixon (removal of the Gold Standard) – Jimmy Carter/William Clinton (Community Reinvestment Act) – George W. Bush (TARP). (Obviously, this list is not exhaustive.)


We are so immersed in government interference in our monetary system that – short of a revolution – we will not see a change to that dynamic. In short, it is not the role of government as much as the level with which government should inject itself.*


Recent discussions have referenced two schools of thought – those of John Maynard Keynes and Friedrich August Hayek. The two men were contemporaries and had very different approaches to economics – one preferred governmental funding to stimulate growth while the other promoted governmental austerity and less regulation. It may surprise you that both approaches have certain valid elements.


Let’s explore some of the aspects, shall we?




Simplistically, if investment exceeds saving, inflation will result and conversely, recession will be the outcome. Hence, during a depression, the government should encourage spending while also discouraging savings.


There is a misinterpretation about how Mr. Keynes dealt with Say’s Law of Markets, which “says that production is the source of demand.” In short, “when an individual produces a product or service, he or she gets paid for that work, and is then able to use that pay to demand other goods and services.” Many Keynesian promoters advance that – under his theory – the opposite is true. This contradicts what Monsieur Say actually promoted which is “frequently misinterpreted as ‘supply creates its own demand,’ which is evidently false. If it were true, anyone could do whatever they wanted for a living and be successful at it.”


Finally, the cusp of Keynesian economic policies lie in two areas – time is not much of a factor, (a one year cycle is just as reasonable as a five year cycle) and measures must be made in the aggregate. Therefore, the focus should not be so much on the individual business as on the entire nation, and on the necessary spending to promote the general economy. The time for the government to step in and spend in excess to stimulate economic growth is when “businesses and people tighten their belts and spend less money.”**




Director of the Austrian Institute for Business Cycle Research – “[m]ost of Hayek’s work from the 1920s through the 1930s was in the Austrian theory of business cycles, capital theory, and monetary theory.” In short, economic systems, while unstable, are remarkably efficient.


Numerous economists found his perceptions about the central banks’ money supply harming the economy far more than it could benefit – his early work did not receive broad approval. Acclaimed economist Milton Friedman noted he was “an enormous admirer of Hayek, but not for his economics. I think Prices and Production is a very flawed book [and] [The Pure Theory] is unreadable. On the other hand, The Road to Serfdom is one of the great books of our time.”


Herr Hayek continued to pursue his ideas that economists and central planners could not know enough to make wise decisions about the wider governmental policy decisions. His anathema toward central planning grew during the periods of Nazi Germany and the rise of the Soviet Union. Even Keynes praised his writings during these periods. Winning a Nobel Prize in 1974, his work progressed toward a distain for nationalized monetary units. His concepts of private enterprise issuing currency gained substantial notice after the fall of the Soviet Union.**


Which system?


Now we face the conundrum of today’s politics – which policy do we choose? Many promote the Keynesian approach as the economic system of President Franklin D. Roosevelt’s and Barack Obama’s stimulus package. Others promote Herr Hayek’s ideology as the austerity policies seen in Europe.


The answer will surprise many of my conservative friends – we choose both!


The basis for this proposal is the remarkable economic turnaround during President Ronald Reagan’s administration. Two specific areas display the use of both policies: Reaganomics (tax cuts, spending cuts, tightened monetary policy, and deregulation) and Defense Spending Increases. The tax cuts coupled with the tight rein on the monetary supply was as pro-Hayek as any conservative could desire. The spending and accompanying deficits were as pro-Keynesian as any liberal could promote.


Spending during the 1980’s increased 1.3% to 23.5% of Gross Domestic Product (GDP) with deficits doubling. Midway through the first Reagan Administration, the deficit was “6.0 percent of GDP, compared with 2.6 percent in 1981.”


Under President Obama’s Stimulus Plan, the deficit has hovered around 24-25% of GDP. But, much more worrisome, federal revenues are expected to drop below 15% of GDP.


In short, throwing huge sums of money at the economy without a well established plan for which industries will achieve the best bang for the buck harms a nation. Wise targeting, which facilitates growth across a wide spectrum of the economy, coupled with business and consumer-friendly tax breaks will generate a well sustained period of economic and widespread prosperity. We have some difficult decisions to make. It is likely we will speak of dogs more than our security.



* Tea Party friends will vehemently argue that discussing the allowance by the federal government to involve itself where it has no legitimate purview only perpetuates the problems. This point is very true, but until we can actually make the change such that our Congress, states’, and populace accept and enforce this, we are left with what we have.


** These are obvious oversimplifications meant for the brevity of such a column.


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