Economics 101 v. Contemporary Arrogance

“The study of history is a powerful antidote to contemporary arrogance.”
— Paul Johnson

Keynesian economics are the solution to recessions and depressions. In the battle of great ideas, Keynesian economics can lose traction to free market economics and for folks who have six hours can learn lots about the push and pull of economic theory by watching the PBS series Commanding Heights.

Keynesian economics and the commanding heights of manufacturing lose steam when they fail to accommodate and incorporate the power of human desire, the engine of capitalism. Fashion, this year we want fins on our cars, the next year we want round headlights, the next year we want two tone paint jobs and chrome, the next year we… you get the idea… one thing I took away from watching Commanding Heights is that these human desires and the dynamics of popular capitalism are like a force of nature, they are like wind and tides. Simply dismissing fashion and desire is a big mistake. The wind will blow.

One thing that happens when keynesian economics are employed (see the deficit spending of the Obama administration and started by the Bush administration in response to the economic meltdown) is that governments run deficits. This is a normal cycle of keynesian economics. The deficits are made up in good times if you leave tax rates alone. If the free market capitalists manage to drive tax rates down in the good times and cause the accumulation of wealth, the paydown of debt by government does not occur and we are ill-prepared to deal with the next downturn. This is where we were in 2008-2010. It doesn’t help that the financial planners around Bush and Obama were intent on saving bankers instead of homeowners, but the flattened tax schedule of the Reagan revolution had prevented economic good times from paying down deficits. There is also the issue of the wisdom of spending on war economies instead of peace and manufacturing economies, but that’s a discussion for another time.

Our current situation has created deficit issues and the deficit hawks/vultures are seizing the moment to attack social democracy institutions such as education, health care and social security.

Alternet has a good piece by Larry Beinhart from March 1st.

The Astonishing Stupidity of Not Raising Taxes on the Rich When Budgets Are Tight

The current economy is routinely and universally referred to as the worst recession since the Great Depression.

It makes sense, therefore, to look back at government tax and spending policies during the Depression and what the results were.

1932 — Hoover raises the top tax rate from to 25 to 63 percent.

1933 — Roosevelt comes into office. He begins spending at the same time that new tax hike comes into effect. The Depression bottoms out.

1934 — Recovery begins. The GNP rises 7.7 percent, unemployment falls to 21.7 percent.

1935 — New government spending on public works and rural electrification. A push to strengthen labor and raise wages. New taxes through the creation of Social Security.

The GNP grows another 8.1 percent, and unemployment continues to fall.

1936 — The top tax rate is raised again. This time to 79 percent.

GNP grows a record 14.1 percent; unemployment falls even further.

1937 — Roosevelt is afraid of deficits! He cuts spending for 1937.

There’s a new recession. It continues for a year.

Might be a good time to review our history, kids.