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Keynesian and Economic Liberalism

March 22, 2015

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In 2008, as we were in the midst of one of the worst depressions this nation has ever seen, I was weighing the very personal choice of whom to support during the presidential election. For me, it came down to a few things: I wanted a progressive president that could steer the nation and economy out of the economic recession; someone that could halt the decreasing influence of American foreign policy; and someone that could heal a nation that was divided.  I ultimately choose to vote for President Obama. After 6.5 years of Obama in office and the failed application of Keynesian economics, the destruction of American foreign policy, and a nation continually divided, I can now admit my mistake. Obama has proven to be one of the most regressive Presidents of not only our time, but American history as well. Is Obama to blame for everything? Absolutely not; I blame the Central Bank, Bernanke, Yellen, and others more.

However, Obama is the chief; the glue that was supposed to lead these entities. His laissez faire mentality towards the FED, the expansion of American debt, his economic and foreign policies, and  the expansion of social responsibilities have proven to be a destructive cocktail to traditional American economic values that our nation has laid as the foundation for the American Dream for over two centuries. That does not mean he has not had successes; his golf game seems to have improved.

In 1776, Adam Smith wrote “The Wealth of Nations” which quickly became the standard of our economic system, which is called classic liberalism. Smith and others argued for the markets to be free from government intervention. This included no tariffs, no restrictions on manufacturing, and no barrier to trade or commerce. The best way for an economy to expand is through free enterprise and free trade. Classic liberalism was based not only on Adam Smith, but also others such as John Locke, where the emphasis was placed on the free markets of supply and demand and that of securing the freedoms of the individual and limiting government intrusion in personal and market affairs. Classic Liberalism dominated the American landscape for over a century up until the Great Depression of the 1930′s. At this point. classic liberalism split into two primary categories: the first was Neo-liberalism, and the second was Social Liberalism with differing variations of both. The term neo-iberalism has had dramatically different definitions over time.

Locke

The impact of the Great Depression modified traditional liberal economics dramatically. To combat the Great Depression, economists like John Maynard Keynes argued that the issue was not supply as there was massive production of goods; the problem was lack of demand.  Keynes argued that to cure the problem of aggregate demand, the government’s role in the economy had to change. To do this, the state must intervene to moderate the boom and bust cycle of the economy through the use of fiscal and monetary policy. This became known of Keynesian Economics.

The businessman is only tolerable so long as his gains can be held to bear some relation to what, roughly and in some sense, his activities have contributed to society.”  – John Keynes

Keynesian economists argue that the unregulated free market and private sector often lead to inefficient economic outcomes for all class members in a society. To fight the inequalities of unregulated capitalism, the central banks, monetary policy, and fiscal policies of the state should aid the market as a whole through the reduction of interest rates during recessions and state investment in infrastructure. State investment in infrastructure would create employment and higher wages while lowering the interest rates would encourage banks to borrow more money and therefore their customers to borrow more money. This economic model and ideology dominated the landscape both here in United States and the West abroad from 1936 until the economic stagnation and high inflation of the 1970s. Keynesian economics was predicated on the state to only intervene during times of need such as the Great Depression and other recessions. When the economy healed, meaning employment corrected, the state had an obligation to curtail government intervention and pay back the debt incurred through such interventions.

The decadent international but individualistic capitalism in the hands of which we found ourselves after the war is not a success. It is not intelligent. It is not beautiful. It is not just. It is not virtuous. And it doesn’t deliver the goods.” John Keynes

Keynes

In the 1980s, to combat the massive inflation and economic stagnation, Keynesian economic policies were modified to fit a more traditional form of liberal economics: the neo-liberalist. They argued that the state or government’s role in the economic system was extremely limited to protecting property rights, enforcing contracts, and regulating money supply. This ideal was not only embedded in economic freedom from government intervention but also personal freedom  There was no state role in regulating recessions as the belief was that the private sector was always more efficient than the public. The neo-liberalists cut taxes to the rich as the tax savings would trickle down to the lower and middle classes, deregulated financial institutions such as by repealing of the Glass-Steagall Legislation (a part of the U.S. Banking Act of 1933 which limited commercial bank investments in securities), and cut back on social programs. Social program cuts were not solely limited to those that traditionally are referred to as the New Deal Acts during the Great Depression such as the welfare programs, but also reduction of expenditures in industrial production and maintenance of roads and bridges: the unregulated free market.  Neo-liberalists argued for the privatization of state-owned enterprises such as electricity, roads, hospitals, and banks.

The neo-liberal belief system was initially created in the 1930s through Austrian economist Friedrich von Hayek, and was quickly adopted by Republicans who opposed the Keynesian policies of the New Deal during the 1930s. Hayek argued for the minimal state due to his belief that the middle class controlled government through voting blocs, which had allowed the middle class to redistribute the wealth from the rich to society as a whole.

Hayek

It is true that the virtues which are less esteemed and practiced now–independence, self-reliance, and the willingness to bear risks, the readiness to back one’s own conviction against a majority, and the willingness to voluntary cooperation with one’s neighbors–are essentially those on which the of an individualist society rests. Collectivism has nothing to put in their place, and in so far as it already has destroyed then it has left a void filled by nothing but the demand for obedience and the compulsion of the individual to what is collectively decided to be good.” Friedrich Hayek

The neoliberalists fostered economic expansion unlike any time in our nation’s history. Unlike Keynesian economics that focused on increasing demand through state investment, neoliberalists such as Ronald Reagan argued for supply-side economics. Inflation in 1982 and 1983 was corrected and the United States enjoyed 25 years of an unprecedented economic boom.

Between the early 1980s and 2007 we lived in an economic Golden Age. Never before have so many people advanced so far economically in so short a period of time as they have during the last 25 years. Until the credit crisis, 70 million people a year [worldwide] were joining the middle class.  The U.S. kicked off this long boom with the economic reforms of Ronald Reagan, particularly his enormous income tax cuts.  We burst from the economic stagnation of the 1970s into a dynamic, innovative, high tech-oriented economy. Even in recent years the much maligned U.S. did well. Between year-end 2002 and year-end 2007 U.S. growth exceeded the entire size of China’s economy.” Steve Forbes, 2008

One might believe based on the above representation of Keynesian in comparison to neoliberalists that I lean towards unregulated free markets. To a large extent, I do as a libertarian. However, I also see extreme negatives to society as a whole with the unregulated free markets. It was precisely the economic policies of the neoliberals that led to the sub-prime market crash in 2007-09. Left unregulated, the individual and institution will do whatever is in the self-interest of the person or entity. This was Ayn Rand’s vision in Atlas Shrugged, and one individuals like Alan Greenspan and others championed for over two decades. In a game that is played fairly, or in a vacuum of economic utopia, this would be perfectly fine. However, it is not played fairly as financial institutions have proven that the only number that means anything is the number of zeros on the spreadsheet and corporate America has proven that the only thing that matters is the bottom line. The simple reality is neoliberalist policies expanded the vision of Adam Smith, John Locke, and others that influenced classic liberalism too far. It became extremely difficult, if not impossible, for the free market to heal itself in the minds of many.

Keynes stated “When my information changes, I alter my conclusions. What do you do, sir?” When we see changes in our social makeup, economic reality or flaws in our belief system, whether that be economic or political, we need to evaluate and modify if the belief system is not supported by the information.

This is also the problem with Keynesian economics in the modern world.  In 2007, we saw the rebirth of Keynesian philosophy of government intervention in the form of bailouts by both the Bush and Obama administrations, and the central bank not only cutting interest rates, but also the injection of close to 5 trillion dollars into the system through quantitative easing. This is government intervention at levels we have never seen. Keynesian at its heart and radical at its core.

From the saintly and single-minded idealist to the fanatic is often but a step.” Friedrich Hayek

 Why Keynesian Economics has failed:

1) Keynesian economics is largely about state intervention to aid society as a whole. In the 13 recessions the United States has gone through since the Great Depression, only one has lasted longer than 18 months. That would be the current one that is on month sixty-six. Like other recessions/depressions, part of the way Keynesian policies work is through financial institutions and corporate america borrowing more money to inject into the system. The lowering of interest rates to the banks would also lower the interest rates to the customers; great in theory. In practice, banks borrowed the money, corporations borrowed the money, but neither carried out the most important aspect of the theory: that of the trickle down effect. Corporations used the money to further their business abroad in cheaper labor conditions, and when they did hire, they hired a majority of part time employment to reduce expenditures in employment benefits. Corporations also borrowed money to directly invest in the securities markets by buying their own stock or other investment opportunities. Financial institutions certainly borrowed the money as they were supposed to, but mostly lent to corporations to carry out the above and other institutions. The typical average American was left at the alter of financial cost as they were either too scared or could not meet the increased regulations by the banks to loan the money to buy a home, invest in a business, or invest in general.

2) One of the reasons the trickle down effect has not taken place is the evolution of the American industrial economy to that of a technological one. During the industrial age, the rich, despite the core self interest that is the heart of Ayn Rand’s Objectivism, would indirectly benefit the lower classes and thus were a benefit to the social good. The reason this took place was due to the reality that for the rich to get more, they would have to produce more, which led to lower unemployment due to the fact it took more employees to produce more. That is not the case in a technological economy as companies do not need the work force to maintain and increase productivity. Also, companies like Google, Netflix, Amazon, Apple, Microsoft, and countless others do not use manual labor to produce goods as was the case in the 1930s through the 1960s when Keynesian economics was implemented.

3) The investment by the government was primarily supposed to be invested in infrastructure, thus injecting the money directly into the system. This was historically done to increase jobs so consumers had money to spend on the goods corporations created, thus expanding economic growth. The injection of money was done through bailouts to the banks to cover their over-leveraged bad investments and to companies like AIG and GM, among others, whom would have declared bankruptcy without the bailouts.

4) Obama used the economic collapse to greatly expand his social ideology and domestic spending on welfare, healthcare, and educational programs, along with many others.

5) Obama used the economic collapse to justify increasing taxes on the rich to pay for increased spending in social programs. This is very Keynesian as it is the rich and corporate american that is sitting on more savings in cash that at any point in American history. Apple, Microsoft, and Google alone are sitting on hundreds of billions in cash reserves. When the amount of money saved in the economy is higher than spent, unemployment rises. This makes perfect sense in theory and practice. However, in application, under Obama it makes zero sense while the central bank is printing trillions of dollars to directly put money in the same pockets Obama is trying to tax.

 6) There has been no reduction in the expansion of debt used to stimulate the economy following the crisis in 2008-09. This is vital for Keynesian to work long term. Without it, the risk to hyperinflation and economic stagnation are too great as was the case in the 1970s which is why Keynesian policies were replaced by the neoliberals in the 1980s in the first place.

At the beginning of this post, I stated that Obama has been the most regressive President from an economic standpoint in our nation’s history.  He and the Central Bank used the economic collapse as a way to bring back the failed dogma of Keynesian economics. In a perfect world, Keynesian economics make sense. Expand government debt and spending to offset the reduction of consumer spending during times of economic crisis, curtail debt and spending immediately following the crisis which should have happened in the summer of 2009. The problem with all of this is the reliance on the United States government to reduce spending when they are the number one consumer in the world and we know what consumers do: consume.

So what is the answer? It’s obviously not Keynesian economics, as it relies too much on government restraint in spending after the recession.  It cannot be the neoliberalist economic reality, as in that reality, the money flows only to the top, and the top outsources, hordes, and uses the money to expand self-interest with the social regard a very distant second, at best. The reality is our economic approach is radical. Human nature is radical and maybe Thomas Hobbes was correct: it’s nasty, brutish, and short.

Even as a libertarian and classic economic liberal, I understand the need to maintain some degree of regulations regarding financial institutions. Without it, they have proven to over-leverage their investments and the investments of others in the financial markets. I also understand the need to encourage corporations to hire within the United States through tax incentive plans. Further, I understand one of our issues that does not get enough ink is immigration, and not the kind that puts up borders, but the kind that encourages men and women to seek out this great country for opportunity. When that happens, immigrants create businesses, become employees, and first and foremost pay taxes. I also recognize the role of the state in society can be included to increase social standing for all, but not as applied through social welfare programs, but through investments in education, both financial and traditional. I also believe that everyone in society attempts to improve society whether they consciously know it or not.

The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species.” Adam Smith

The answer remains a mystery as there are many logical, rational economic responses that work perfectly in a box. The problem relies in the public and private sector to carry out such economic agendas. I think the one thing that is the closest to reality is when the evidence changes, we need change with it. The Obama Presidency has not changed despite overwhelming evidence that their policies have not worked. The Central Bank has not changed despite overwhelming evidence that their Keynesian policies have not worked.  This is their failure. This is their legacy. This is why Obama is perhaps the most regressive president in our Nations history.

My utopia, my box (Pandoran or not): The five steps needed

1) Abolish quantitative easing immediately,

2) Cut the government deficit to a max of 3% of GDP (tip to the Oracle),

3) Across the board tax cuts (the private sector is more efficient than the public),

4) Raise interest rates to offset risk to inflation, and

5) Get a drink as the next two to four years would be very painful (and liquor sales increase during times of economic recession).

Matt

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3 Replies to “Keynesian and Economic Liberalism”

  1. Avatar Paul Seward says:

    Excellent Matt, My thoughts exactly

  2. Avatar Mack Grout says:

    great essay

  3. Avatar STEWGILGIS says:

    It was upsetting to read at the start of your essay that you voted for Obama in 2008. But reading further on, your thoughts and historical perspectives were insightful and true.

    Let’s hope that there won’t be a 3rd Obama term (Hillary). I hope for change with the goals of personal freedom, economic freedom, and a debt-free future for our children and grandchildren. And to keep the American Dream alive for future generations.

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