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Friday, November 14, 2008

A Keynesian Moment?

Mort Kondracke gives his blue print for getting the economy out of its malaise. First, he sets out the monumental task facing the next President.

An emerging consensus among conservative and liberal economists seems to indicate that we'll experience negative growth - 2 percent to 4 percent-through 2009 and into 2010. And unemployment will rise past 10 percent.

They suggest it will match or exceed the highest unemployment rate since World War II (10.8 percent in December 1982). In 1932, during the Depression, it rose to 25 percent.

Then, Kondracke gives the framework for what needs to be done.

As to what to do, former Clinton White House domestic policy adviser William Galston, now at the Brookings Institution, observed that "this is a classic Keynesian moment," and he pointed to a remarkable exchange that took place on PBS' "Newshour with Jim Lehrer" on Monday.

Liberal economist Alan Blinder of Princeton, an adviser to both Bill Clinton and President-elect Barack Obama, and conservative Martin Feldstein of Harvard, an adviser to former President Ronald Reagan and Sen. John McCain (R-Ariz.), agreed: There's got to be a lot of government spending.

"You need to boost spending in the economy," Blinder said. "It almost doesn't matter what kind of spending, but we'd like it to not to be wasteful spending, something that's valuable in its own right."

Kondracke then lists a plethora of government projects like highways and other infrastructure projects that would boost government spending.

I agree that an increase in spending is the key, however boosting spending by boosting government spending is not only cowardly but short sighted. Those, like Kondracke, that think that an increase in spending must be done by increasing GOVERNMENT spending are those that have no faith in our consumers, entrepeneurs,and other businesses.

There are two ways to boost spending. One way is the manner in which Kondracke suggests. That is to have government pour money, usually borrowed, into the economy. The other way is the way Ronald Reagan did it. Cut taxes and allow consumers and businesses to boost spending because the government has given them more of their money back.

In Kondracke's method, there is a guaranteed increase in spending for obvious reasons. In Reagan's method, you are putting your faith in the folks that drive the economy, the consumers and businesses. By cutting taxes, the government puts more money into the hands of the private sector, but the private sector isn't guaranteed to use it to spend. As such, folks like Kondracke go for the sure thing and propose that government spends because that assures an increase in spending.

The Kondracke method also assures that government expands, borrows, and the economy becomes more dependent on government. All of these things are very bad in the long run. This is the method that FDR used and while his economic platform has been lionized by some, in my opinion, it wasn't all that successful. FDR focused on spending by the government to grow the economy and in my opinion, the direct result was that eight years later our unemployment was still over 10%. The government is the worst entity to rely on to boost the economy. If it works, then everyone will continue to rely on the government to boost the economy. Furthermore, governments typical waste money and spend it in a manner that isn't very efficient. Finally, governments need to borrow in order to spend. Ultimately, expansion of government in order to boost spending causes inflation.

Now more than ever, we have to believe in the foundation of our economy, our consumers and our businesses. Cut their taxes, all their taxes, and let them drive our economy forward.

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