Republicans enjoy hammering the Obama administration for the slow economic recovery during his eight years. It is "his failure," they allege, and "proof" that Keynesian economics has failed. Instead of "demand side" Keynesian economics, Republicans insist that "supply side" economics, centered on lower taxes and getting rid of "burdensome regulations," is the answer.
Democrats remind us that the Republicans have blocked every Democratic proposal that would have stimulated the economy. Not only has the slow recovery not disproved the efficacy of Keynesian economics, but it was indeed the stimulus provided by the modest Keynesian-type expenditures that pulled the economy out of the Bush Great Recession.
The debate rages on. Republicans focus on supply side measures, tax incentives and reduced regulations. Democrats focus on demand. Without middle and working class income with which to purchase goods and services, producers have no incentive to produce. Reduced taxes, especially for the wealthiest Americans, and reduced regulations do not put income in the hands of the public to create the demand for additional goods and services.
The Keynesian macroeconomic philosophy dominated academic and government circles pretty much through the decades of the 1950s and "60s. It fell out of favor beginning in the 1970s, only to see a resurgence of sorts since the Bush recession of 2008.
As opposed to macroeconomics, dealing with the entire economy, I learned my microeconomics, having to do with economics of the firm, growing up on that dairy farm where my parents included me in economic decisions as soon as I was old enough to express interest and to grasp such things. I received my macroeconomic policy instruction at institutions were Keynesian economics was taught - Wisconsin, Arizona, and University of California-Berkeley - when Keynesian economics still dominated during the 1960s.
I immediately and enthusiastically latched onto Keynesian economics. It made perfect sense to me.
Wait a minute - how could a Swiss farm boy raised with the generational, ethnic and cultural values of saving and fiscal prudence buy into an economic philosophy where prosperity depends on the proper level of spending?
That's easy: It's because of "the fallacy of composition," the false proposition that what is true at one level of analysis is true at another.
A non-economic example: You're watching the Badgers at Camp Randall and the game comes down to a crucial play. You're excited and stand up to see better. Others, quite logically, reason the same way. All stand up, but nobody sees better than before. The lesson is not that you should remain seated. The lesson is that the rational action by each does not yield the intended result for the group.
Another example: With high corn prices, a farmer plants more land to corn. All, quite logically, reason the same way. The result is an increased supply that drives down price. The rational action by each individual does not result in increased benefits for the group.
So how does this relate to macroeconomic policy and spending in the economy?
During recession, when businesses and households necessarily reduce spending, if the federal government does the same, all will be worse off as these combined actions further prolong the recession.
Spending in our economy is from four sources, the largest of which is private consumption. A second is investment by private businesses. A third source is excess revenue from exports flowing out of the economy on imports. The fourth category is government (all levels) purchases of goods and services. Spending from these sources is also the income of businesses and households, the money that generates demand for goods and services and employment.
There are periods during which, for whatever reason, spending grinds down, and there is not enough demand for goods and services sufficient to provide full employment. The central tenet of Keynesian economics is that the level of spending necessary to generate full employment is not automatic. Therefore, rather than let unemployment languish, federal government spending should increase, providing jobs and income to people so that they can purchase goods and services.
In other words, if the federal government reduced spending at the same time businesses and households reduced spending, all would be worse off.
The often heard "Well, if I have to tighten my belt, the federal government should too," is the opposite of what the federal government to do.
Yes, households and businesses need to be fiscally prudent during hard times. But reduced federal expenditures during hard times further reduces spending and income needed to generate demand, and for businesses to hire. Responsible federal fiscal policy is to increase spending during hard times, thereby putting money into the economy and enabling households to spend, giving businesses a reason to invest, produce, and hire employees.
If, for example, Deere and Company reduces its output and lays off workers, is this because it cannot increase its supply of goods? Would Deere and Company hire more workers and produce more if it had more tax incentives and if it was less heavily regulated?
Or would it hire more workers and produce more if its customers had the income with which to purchase more goods?
It is not supply side issues that limit production and employment. It is effective demand that is needed, and this is what Keynesian economics is based on.
Simply put, if people don't have the dough, they can't buy the stuff. And if people can't buy the stuff, businesses have no incentive to hire people and produce.
That's where the role of the federal government comes in - to make sure that the system is set up to reward workers at all levels, and to ensure full employment. There are times when the federal government needs to step in with direct expenditures to directly provide employment.
While some see this as a problem, it is best seen as the opportune time to spend on items that have been long needed.
Next week: The role of infrastructure in economic growth.
- John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net.
Democrats remind us that the Republicans have blocked every Democratic proposal that would have stimulated the economy. Not only has the slow recovery not disproved the efficacy of Keynesian economics, but it was indeed the stimulus provided by the modest Keynesian-type expenditures that pulled the economy out of the Bush Great Recession.
The debate rages on. Republicans focus on supply side measures, tax incentives and reduced regulations. Democrats focus on demand. Without middle and working class income with which to purchase goods and services, producers have no incentive to produce. Reduced taxes, especially for the wealthiest Americans, and reduced regulations do not put income in the hands of the public to create the demand for additional goods and services.
The Keynesian macroeconomic philosophy dominated academic and government circles pretty much through the decades of the 1950s and "60s. It fell out of favor beginning in the 1970s, only to see a resurgence of sorts since the Bush recession of 2008.
As opposed to macroeconomics, dealing with the entire economy, I learned my microeconomics, having to do with economics of the firm, growing up on that dairy farm where my parents included me in economic decisions as soon as I was old enough to express interest and to grasp such things. I received my macroeconomic policy instruction at institutions were Keynesian economics was taught - Wisconsin, Arizona, and University of California-Berkeley - when Keynesian economics still dominated during the 1960s.
I immediately and enthusiastically latched onto Keynesian economics. It made perfect sense to me.
Wait a minute - how could a Swiss farm boy raised with the generational, ethnic and cultural values of saving and fiscal prudence buy into an economic philosophy where prosperity depends on the proper level of spending?
That's easy: It's because of "the fallacy of composition," the false proposition that what is true at one level of analysis is true at another.
A non-economic example: You're watching the Badgers at Camp Randall and the game comes down to a crucial play. You're excited and stand up to see better. Others, quite logically, reason the same way. All stand up, but nobody sees better than before. The lesson is not that you should remain seated. The lesson is that the rational action by each does not yield the intended result for the group.
Another example: With high corn prices, a farmer plants more land to corn. All, quite logically, reason the same way. The result is an increased supply that drives down price. The rational action by each individual does not result in increased benefits for the group.
So how does this relate to macroeconomic policy and spending in the economy?
During recession, when businesses and households necessarily reduce spending, if the federal government does the same, all will be worse off as these combined actions further prolong the recession.
Spending in our economy is from four sources, the largest of which is private consumption. A second is investment by private businesses. A third source is excess revenue from exports flowing out of the economy on imports. The fourth category is government (all levels) purchases of goods and services. Spending from these sources is also the income of businesses and households, the money that generates demand for goods and services and employment.
There are periods during which, for whatever reason, spending grinds down, and there is not enough demand for goods and services sufficient to provide full employment. The central tenet of Keynesian economics is that the level of spending necessary to generate full employment is not automatic. Therefore, rather than let unemployment languish, federal government spending should increase, providing jobs and income to people so that they can purchase goods and services.
In other words, if the federal government reduced spending at the same time businesses and households reduced spending, all would be worse off.
The often heard "Well, if I have to tighten my belt, the federal government should too," is the opposite of what the federal government to do.
Yes, households and businesses need to be fiscally prudent during hard times. But reduced federal expenditures during hard times further reduces spending and income needed to generate demand, and for businesses to hire. Responsible federal fiscal policy is to increase spending during hard times, thereby putting money into the economy and enabling households to spend, giving businesses a reason to invest, produce, and hire employees.
If, for example, Deere and Company reduces its output and lays off workers, is this because it cannot increase its supply of goods? Would Deere and Company hire more workers and produce more if it had more tax incentives and if it was less heavily regulated?
Or would it hire more workers and produce more if its customers had the income with which to purchase more goods?
It is not supply side issues that limit production and employment. It is effective demand that is needed, and this is what Keynesian economics is based on.
Simply put, if people don't have the dough, they can't buy the stuff. And if people can't buy the stuff, businesses have no incentive to hire people and produce.
That's where the role of the federal government comes in - to make sure that the system is set up to reward workers at all levels, and to ensure full employment. There are times when the federal government needs to step in with direct expenditures to directly provide employment.
While some see this as a problem, it is best seen as the opportune time to spend on items that have been long needed.
Next week: The role of infrastructure in economic growth.
- John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net.
