American Dream: Conservative View - Did Conservative Economic Policy Work?
IT IS INTERESTING HOW things finally come together in your head. Ever since I began writing my hubs on politics and the economy, I knew what the answer was regarding this topic and have written thousands of words about it; but, I was mostly preaching to the choir on the one hand, or raising the hackles of many others on the other, and, in the end, probably convincing very few, who believed otherwise, of the correctness of my position. I even used charts and graphs in many of these hubs but I never felt my point was being made crystal clear, it is a very complicated subject, with many moving parts, after all.
Then, one morning, before actually fully waking up, which is when I do a lot of my thinking, I hit on it; a simple, easy to understand chart that brings a complex subject together in what I think will be a will be an undeniably clear picture of proof that one economic theory works, and the other doesn't.
EUREKA!!
Of course, I am not going to show you this chart immediately, I need to lead you up to it a bit. Chart 1, below, shows you all of the recessions, depressions, and panics in America's history from 1815, forward; there were a few before that but all were related to external factors. The recessions listed here are for all reasons, internal and external, financial/monetary and non-financial.
THERE IS JUST A FEW THINGS TO REMEMBER about this, and the other two charts. First, each pyramid represents a single economic downturn of one variety or another. Second, the height of the pyramid indicates the severity of the downturn; here, a rating of 4 meas a severe Recession. Most downturns rated above a 4 resulted in depressions or panics, as classified by the National Bureau of Economic Research (NBER). Below 4, we are talking about recessions. Finally, where the pyramid begins its journey upward, is when the NEBR determined the recession beginning. Where the pyramid comes back to zero is where the negative growth ended, not when the economy recovered; that was generally many years later.
The next chart is simple Chart 1, without economic downturns caused by outside events. These are the recessions and depressions that would be reacting to the prevailing economic theory being practiced by the federal government leading up to and during the event.
NOTICE THAT MOST economic downturns in America since 1815 were financially- based This is important because this means that which economic theory that the federal government followed would be extremely important in determining the how well America was able to execute its economic growth and maintain its economic well-being.
This brings us to our final chart, Chart 3. All Chart 3 is, is Chart 2 with more information added.
- Let's look at the very bottom of the chart where there is a red and blue bar running across it; that is simply showing you whether a Conservative or Liberal federal government was in power at that point in time.\
- Now look at the thick red line going up and down running across the top of the peaks on the chart. That line represents my estimation economic schools of thought with 10 being closer to the Conservative Austrian (Ron Paul) School and 1 being closer to the Keynesian (Johnson) School.
- The remainder of the chart are highlights and milestones to explain significant events.
I FEEL THERE ISN'T MUCH MORE TO SAY TO MAKE MY POINT; the chart says it all for me. Consequently, I will keep it short and hope I get a lot of comments.
To me, the landscape above the red bar, when the Conservative school of economic theory had full charge of the American economy is astoundingly and dramatically different than that above the blue bar which represents when a form of Keynesian economic theory held sway. Further, there is no question in my mind, which is better for America, I would there is in you're either now, whether you are Liberal or Conservative.
Before I leave this to you, let me define things a bit.
The Conservative, "Austrian" School of economic thought that was practiced for most of the period from 1815 to 1929, with a short pause during and just after President Theodore Roosevelt's administration. It was also being reestablished, starting in 1981, with President Reagan, and brought nearly to fruition under President George W. Bush in 2001; it came to an end in 2009 with the Great Recession of 2008, and the election of President Obama; this is the school of economic thought that Ron Paul, the Tea Party, and the other arch-social and fiscal Conservatives want to reestablish, if they can. Its basic tenants are what brought us the term "trickle-down" theory; you throw enough money at the rich, and it will flow down to the poor. A more common and appropriate name is "supply-side" economics in that government remove as many obstacles (regulations, oversight, and taxes) from the operation of a free-market, capitalistic economic system as possible and the result will be a market-based economy that will feed on itself and where market forces will determine prices, demand, and production keeping everything in balance. This is known as laissez-faire economics, the idea being that any government interference will simply gum up the works and knock things out of balance.
Keynesian economics, on the other hand, believes that the Austrian School is fundamentally flawed and is unstable. That once it begins operating, it quickly moves away from a free-market, capitalistic model to one of monopolies, monopsonies, oligopolies, major, destructive boom-bust cycles, and the creation of a great divide between the working and wealthy-class. Keynesian economics, at its core, believes that an efficient economy is that is demand-driven, but to do that, it must be prevented from becoming "supply-driven"; which is the natural course of things in an unregulated economy and hence the need for regulation.
Nobody today believes that pure Keynesian economics is the right answer anymore and many refinements have been perfected which have been applied since it was inaugurated back in 1940 until its near demise 2000. The main purpose of the regulations and oversight over business, mainly the financial sector, is to reduce the number of boom/bust cycles and, when they do occur, mitigate their severity.
Have These Charts Made The Picture Clearer For You
Have These Charts Changed Your Mind About Which Economic Theory Works Best?
© 2012 Scott Belford
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Comments
AUTHORHi Credence, what is that old saw about pictures being worth a 1000 words?
ME, despite the right's incessant gripe about the New Deal, it is obvious on the charts that the severity of economic downturns have been far less severe since the FDR thirties. As I have said in my articles, laissez-faire capitalism leads to unsustainable chasms between rich and poor making the possibilities of social unrest all the more certain. Voted up, thanks Cred2
- AUTHOR
Chris57, I think you have great analogies! Your follow-up analysis is very compelling, but only in a proactive sense, when you have time on its side ... it takes time for demand to develop.
In the Solyndra case, I imagine that is who you were talking about, the stimulus effect was immediate (the carbon foorprint was a collatoral benefit much more suited to the demand-based solution) because it infused dollars directly into the economy, the only thing that was at the moment, and confidence into the American psyche, something else also needed.
While what you suggest is the absolute best solution in most situations, I suggest it wouldn't work as well as a stimulus in situations such as what was left Obama in Feb 2009.
I am not so sure that it is that the mainstream models are outdated. One, the Austrian, is simply wrong; it only works in good times when you have almost 100% ethical, moral individuals in the economic drivers seat.
The Keynesian, on the other hand was more successful, but not entirely, it ultimately failed as well, but, it was mutable. If I am not mistaken, I think some new modification of the Keynsian idea is being put forward by non-Conservatives today.
Stimuli are like medicine. The dose has to be much too high to reach the sick body part in question. That is why i don´t think stimuli will work, no matter "how big or small the dog may be".
Incentives work like medication applied directly to the sick part. In my example the carrot only works for sheep, donkey, rabbits, but not for carnivores.
An example for the US economy. To reduce the carbon footprint there were some initiatives from the Obama administration, especially in Solar energy. But that was stimulus only, pouring money into companies to create panel production. Now by the way, that is a supply side intervention, something from Mr. Hayeks world (Austrian model). Stimuli are not precise, you can claim them for any model if you will.
An incentive would be to inject money at the demand side. Subsidize energy solar consumption to make it competive to conventional energy. Then demand will rise and the supply side (producers of panels...) will benefit. Just an example. Much more to discuss, i have the impression that both mainstream economic models are outdated.
- AUTHOR
Agreed, HS. Most models work fine within the original parameters for with they were built, such as the Austrial economic model; they are stable there. But, bust those parameters, then all hell breaks loose.
The sign of a robust model, a good, workable model, is if it keeps reacting reasonably well, or at least gives one time to adjust, when the boundaries from which it was built are breached; the original Keynesian almost did this. Even so, it needed some tweaking and adjusting over time. The current version led to what you see from around 1960 to 2000.
You can't find another 40 year period of stability like that in the history of the United States, period.
Great analysis My Esoteric. The conservative laissez faire form of economics always works well for awhile until greed and excess take hold. Then "poof" it all explodes and we are in recession or worse. Then the dreaded keynesian economics is needed. Of course then the conservatives lie and blame the liberals and keynesians for all our ills.
- AUTHOR
Abso;utely wonderful example, Chris57. My only addition might be to reduce the size of the dog and leave it in the field along with the carrot outside the field, if that isn't part of your example anyway; I couldn't tell.
I think the stimulus is just one of the tools in today's Keynesian model. It posits that when private industry seriously stops fueling the economy for an unreasonably long period of time, then only the government has the ability to kick-start the economy again via a stimulus if the conditions are correct.
Interesting approach, to put the economic theory in relation to real world impact.
Interpreting your graph, i would say that the school of common sense (not fully Austrian, not fully Keynesian) was best to keep things stable.
However no model or theory cares too much about looking back into the past. The basic flaw of all theories is, that they always come up with instruments and medication to cure present problems for the future.
But things like public debt or huge accumulated current account deficits don´t pop up out of thin air, there is always a backlog behind.
Economic theories always try to simplify things by reducing everything to money and markets. There is a lot more to it, just to name politics or technological progress.
Let me try to make a little contribution by translating economy into a flock of sheep on a wide meadow. The task is to move the flock from one side of the meadow to the other side without losing any sheep. Now - the Austrian school will put away with fences and prays that rain will come and fall only onto the path to the other side. Sheep are left alone and of course they gain strength and prosper but they don´t get anywhere.
Mr. Keynes will set up fences so sheep don´t run into the wrong direction. He will also fertilize the path to get good green grass to have the sheep follow that path. he might also have his dog jump into the flock to start them moving. That is not so bad if he would not have to reset the fences as the sheep move on and of course he spends money for fertilizing.
Neither of the models is really attractive. I would propose a model, where a large carrot is placed on the other side of the meadow. May be with some bright colour and a good smell. Then the flock of sheep will gradually move to the other side. The nature of the sheep will keep them all together on the path, none is lost, and the shepard only had one effort: set up the carrot and publish and advertize its existence.
In other words: Doing nothing is bad (laissez fair), using stimulus (QE...) is no solution, but creating incentives certainly would be helpful.
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