The problem with economics is, until now, there has been no real way to "test" an economic theory, but that may be changing now. I won't go back to the beginnings of economic theory, but I will start with the period prior to 1929 and move forward at beak-neck speed. Here is my reader's digest summery of economic theory:
1. SUPPLY AND DEMAND
In the industrial era of the United States there was a firm belief in capitalism and free enterprise would fix the economy. Taxes were a hindrance to people going into business, or growing their business. There was always a tension between supporting a government big enough to provide the needs of the country, without being so burdensome that the taxes stifled the climate of free enterprise. Recession was not viewed as a problem, but as a solution. Recession was the economy correcting itself. Leave the economy alone, and if houses get too expensive, then the recession will come in and RE-SET prices. This thinking is blamed for Hoover and the Republicans taking a hands-off approach to the Great Depression. The thinking was, when the economy crashed, was to leave it alone and it will get well all by itself.
2. KEYNESIAN ECONOMICS
An odd prolific thinker John Maynard Keynes wrote a book putting forth the idea that there are times when the economy gets so sick, so out of kilter that the usual practice of allowing recession to reset the economy just doesn't work. Keynes believed in supply and demand, but he also believed that if there is a sort of synergistic effect caused by poor choices and mass fear that is like being caught in whirling pool of rushing water and you just go round and round and can't get out without help. Keynes thought this was the time when the government should step in and use it's power to stimulate the economy.
Keynesian economics was being practiced on a limited basis by FDR and the Great Depression government, but before we could see if it really worked we had World War II. The Great War put people back to work, eliminated most unemployment, but in general the people were not really living well. By the end of the war the economy seemed to have reset itself, and we had good times starting in the 1950s.
Some Keynesian theory inspired people like Lyndon Johnson to declare war on poverty and there was a belief that a big spending government could just keep writing checks and stimulate the hell out of the economy and things would be great.
New recessions and frightening National Debt brought on a reaction that was decidedly anti-Keynesian.
3. SUPPLY SIDE ECONOMICS
The more recent and generally Republican approach to the economy was to marry three parts of pure capitalism with one part of diluted Keynesianism. You may recall how we all waited with baited breath while Allen Greenspan would announce if interest rates would be cut, stay, or rise. The theory was that the economy was a little like a steam engine and if it cooled off you heated it up with a turn of the dial (cutting interest rates), and if it got too hot (inflationary) all you had to do was ease back on the dial (stay or raise interest rates). Business would grow when the economy was running smoothly at a controlled pace.
When the middle class and working class and the poor complained we were told that there was a trickle down effect. Let Big Business do well and the money would trickle down to the peons. It felt more like were peed on than peons.
4. NEO-KEYNESIANISM
With this recent 2008 recession people are thinking back to Hoover era Republicans who did nothing and let a bad Recession become a Great Depression with deflated prices and (at one point) 25% unemployment. Tweaking the economy by turning the interest rate dial stopped working. We knew that when the interest rate was dropped to zero and the economy continued to tank.
We now have, for the first time in history, a chance to actually test Keynesian Economics. This makes a lot of people nervous. It should. We are in a horrible situation and people are actually considering using an untested economic theory to fix a very real problem.
On the other hand, all economic theories are untested, so anything we do is going to be an untested theoretic solution. No one knows what is right? Anything we do to address our current economic woes will be untested things.
THE BREAKS
The Republicans want to put the breaks on, and just fall back on cutting taxes, and hoping that lower taxes is going to inspire big business to just start working again.
Many Americans, like me, just don't buy it. Big business is for big business not for America and not for the people of America . If big business cared about the people of the United States they would invest in the US and not ship jobs off to exploited workers in countries with low taxes, poverty wages, and a total disregard for working conditions. Big business does not support trickle down economics. To big business the trickle is just a leak that hasn't been plugged yet.
Some Republicans have suggested that IF money is spent it should be sure to create jobs that are going to be sustained. They mean jobs in the private sector, not government jobs. This is a reasonable suggestion. The counter to this is that we are in an emergency. When you have a patient with a failing heart you don't stop and consider what you can do to repair the broken bones. Instead you ignore all the problems except the one problem that is essential. Unless we get the economy moving we are only going to get into a deeper and deeper economic hole and it is going to be harder and harder to get out of this hole.
One thing is sure, and that is that whatever money the government distributes to the states to spend, these Republican Legislators are not going to pass on the money. Their hands will be out just like everyone else. Many of the crazy schemes for stimulus money are coming from Republicans opposed to the stimulus. Consider the Mob Museum money being requested by Los Vegas.
THE OBAMA DILEMMA
While Keynesianism is untested, many feel it is something to try. The cutting taxes thing and deregulating business and hoping for the best has been tried for years and we see where we are now. The mood is, at least try this Keynesian thing.
According to the theory if the economy is down a trillion dollars then it needs a government stimulus injection, but that government stimulus does not have to be a trillion dollars. According to the theory a percentage of the needed boost is all you have to do, say 1% and once, say $600 to $800 billion is in the hands of the people they will go out, pay bills, buy cars, houses, do repairs, and everywhere they go to spend money those service providers and retailers will have more money to spend. $800 billion in the hands of regular people will become recycled dollars. Every dollar they spend with a retailer or service provider is going to be re-spent by the people who get those dollars, and the people getting that money will spend and with business getting better, more supplies will be needed more workers needed, and eventually the economic sputtering engine will take hold, get into a rhythm and start running smoothly.
Obama has not said that this is the solution. Obama promised to work on the problem. It is my opinion that it might be better to get this money into the hands of regular people and let them buy stuff and start small businesses and get homes, and NOT give it to big business. Big business could care less about this country or its citizens. This was never clearer than when we learned that at the same time these financial giants were on the brink of collapse and at the very time they were lobbying for and receiving billions of tax payer dollars from the government they were giving upper level management millions and millions of dollars in bonuses.
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