Tuesday, December 9, 2014

The Amateur Economist

Ignore Keynes At Our Peril
*John Maynard Keynes, (5 June 1883 – 21 April 1946) was a British economist whose ideas have fundamentally affected the theory and practice of modern macroeconomics, and informed the economic policies of governments. He built on and greatly refined earlier work on the causes of business cycles, and is widely considered to be one of the founders of modern macroeconomics and the most influential economist of the 20th century His ideas are the basis for the school of thought known as Keynesian economics and its various offshoots.

List of economic panics* and depressions throughout U. S. History
1807; 1815; 1857; 1873; 1893; 1896; 1907; 1910; 1920; 1929.
In the early 1930s Keynesian economic theory was employed to resurrect the economy and 60 years of moderated business cycles followed. In 2003 Keynesianism was discarded and the resulting great recession of 2007 followed.

*panic, crisis in financial and economic conditions, marked by public loss of confidence in the financial structure. Panics are characterized by a general rush of investors to convert their assets into cash, with runs on banks and a rapid fall of the securities market. Bank failures and bankruptcies naturally follow.

In my opinion Keynes would have approved of the recession prompted tax cuts in in 2001 and 2003 to increase consumption and prime the economic pump. The cuts emulated the successful policies of John Kennedy and Ronald Reagan. The problem with the Bush cuts were, that unlike previous stimulative cuts, they were untargeted and untimed. The economy recovered and the reduced tax revenue caused an increase in budget deficits.
The Bush administration was also the first modern one to wage not one but two wars without increasing government revenue to pay for them. This further exacerbated the deficits and national debt problems.
When the inevitable recession hit the economy, there was no room for tax cuts to be applied and a growing deficit and debt problem mandated that the only approach was to unleash monetary and fiscal stimulus measures that helped bring about a recovery but added to the debt problem.
In hind sight if the Bush administration had ended the tax cuts at the peak of the recovery and increased taxes to cover the cost of the wars, a lower cost of recession recovery could have been employed.
Business cycles and resultant recessions are an integral part of any capitalist economic system. The time tested and proven way to reduce the severity the cycles is to increase consumption via temporary and targeted tax cuts and deficit spending. The Clinton tax increases during the highs of the 1990s handed Bush a tool that was squandered.
If we tax the economic highs and spend in the lows the cycle can be controlled in a less severe way.
Any good farmer knows that one good season with good profits is not a reliable indicator of future years. The farmer will save a portion of one years earnings to use in the bad years when the weather and prices are down.
Paul Hunter paulhunter45177@gmail.com

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