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Fiscal cliff or launch pad? Part 1: Keynesian v. Austrian Model

By Debra Rae
web posted October 15, 2012

Particularly in an election year, every citizen's mandate is to know the issues and become engaged in the political process, but where to start?

Econ 101: Back to Basics

Foundational worldviews determine fiscal policy. For example, our founders acknowledged God as the source of all prosperity. [1] The basis for wealth is a solid work ethic [2] that relinquishes exploitation, conspicuous consumption, selfishness, and shortsightedness. Not government stimulus, but rather "diligent hands bring wealth." [3]

In the words of Thomas Friedman, "The Puritan ethic of hard work and saving still matters. … We need to get back to collaborating the old-fashioned way. That is, people making decisions based on business judgment, experience, prudence, clarity of communications and thinking about how—not just how much." [4] Engaging the free market to multiply goods and services—thereby expanding wealth and opportunity for all, rich and poor—distinguishes wise stewardship.

Blame Game Folly

Debating John McCain (2008), Obama admitted, "It's true that nobody's completely innocent here," and lamented further, "We have had over the last eight years the biggest increases in deficit spending and national debt in our history." [5] Rather than reverse this disturbing trend, however, our nation today boasts the greatest deficit spending ever and, for the first time, the U.S. lost its "triple A" rating. [6]

Truth be told, both Presidents George W. Bush and President Obama espouse progressivism; furthermore, presidential candidate Mitt Romney is best characterized as a progressive neocon. Repeated, failed policies of both political parties have resulted in a $15-plus trillion debt, plus a $118 trillion unfunded liability. But forget the blame game. America needs answers. But hope, change, and the can-do spirit must be grounded in reality, not illusion; therefore, we best recommit to America's foundational principles and review history for answers. [7]

Lessons from History (Supply-Side Austrian v. Demand-Side Keynesian Theory) [8]

Dr. Michael Coffman characterizes the first significant depression this twentieth century (1920-1921) as "the forgotten depression." President Woodrow Wilson's excessive non-defense and deficit spending, exacerbated by tax increases, backfired until, by 1920, unemployment jumped to about twelve percent.

After his election in 1921, Warren Harding cut the government's budget in half; and by 1925, he had slashed taxes from seventy-three to twenty-five percent. As early as 1923, unemployment had fallen to 2.4 percent, thus signaling end of the depression. The Roaring Twenties were launched, not by progressive policies of Wilson and ilk, but rather by what has come to be known as the "Harding Miracle."

A four-year research project of two distinguished UCLA economists, Harold L. Cole and Lee E. Ohanian, concludes that, had the government under FDR not intervened, the Great Depression that followed would not have persisted, as it did, for nearly fifteen years. Significant government intervention actually slowed the process of recovery. To blame were Roosevelt's specific anti-competition and pro-labor measures—not capitalism. [9]

The Harding pattern was replicated when, under President Ronald Reagan, the nation's worth more than doubled. President John F. Kennedy likewise cut all tax brackets by thirty percent (even for the rich).  At the same time unemployment plummeted, the economy jumped by fifty percent.

Many remember with nostalgia the economic surplus under President Clinton's watch, due in large part to the technology boom; but Charlie Gasparino of the New York Post traces seeds of today's economic malady to Clinton's mobilizing big government to ensure home ownership for all Americans (Recall the Community Reinvestment Act [10]).

Gasparino further contends that, as President, Clinton put "the final nail in the coffin of the Depression-era Glass-Steagall Act [11]," thus ushering in "an era of wild risk-taking." For this bipartisan folly, Bill Clinton shares blame for the financial crisis in 2008 with fellow progressive George W. Bush. [12]

Global Booms and Busts

A regular columnist for the New York Times, Paul Krugman insists that commitment to a non-Keynesian doctrine has proved to be false, even "disastrous," in other countries. [13] Not so. On the international stage, as Europe imposed excessive taxes/regulations and maintained unsustainable health and retirement-related benefits, Sweden pared back government and cut welfare spending and taxes (including property taxes for the rich). Her supply-side approach to the 2007-2009 recession ensured Sweden's economic growth—the fastest in Europe—and her economy consistently outperforms the U.S. economy.

Rather than employ the Keynesian (government-controlled, demand-side) model lauded by progressives, Sweden applied the Austrian School of Economic Theory (laissez-faire economics constrained by a few necessary laws to protect businesses and consumers). Not to learn from history is to repeat it. If America persists in replicating Europe's bankrupt welfare society, she's next in line to fail.

Moral Consensus and Choice

Most of our nation's founders accepted that God owns all; and man, empowered and blessed by God, stewards it. It's the Lord who builds the proverbial house, lest they labor in vain who build it. [14] For this reason, the 2012 Republican mantra, "WE Built It!" is sadly flawed. King Nebuchadnezzar made a similar boast; in the end, he was profoundly humbled, and his great Babylon fell to ignoble ruin. [15]

Even so, Max Weber's Doctrine of Vocation rightly honors human labor that yields prosperity. [16] By contrast, Frederick Engels incited the proletariat to seize political power and, then, turn the means of production into state property, owned in common. In a Marxist system, major sectors of the economy are nationalized (e.g., bail outs), and wealth is redistributed. To ensure guaranteed income (not so much personal wealth), the "ends justify means."

In Greek, economics speaks to "household management"—this with respect to production, distribution, and consumption of wealth based on goods and services. Biblically, the rich get richer—but not necessarily off the backs of the poor, as progressives contend. Recall the parable of the unprofitable servant who buried money entrusted to him, rather than put it to work to double its value. As a result, his Master rebuked him, denied him an "even cut" of what his fellows earned, and stripped him of what he had buried. [17]

The lesson? Equality of opportunity doesn't ensure equality of prosperity. Even so, economic justice describes much of Barack Obama's platform for America. [18] If the words of presidential hopeful Mitt Romney are to be believed: "President Obama's view of a free economy is to send your money to his friends. [Romney's] vision for a free enterprise economy is to return entrepreneurship and genius and creativity to the American people." [19] ESR


  1. Psalm 50:10.
  2. Isaiah 65:21ff; Jeremiah 32:43ff.
  3. Proverbs 10:4.
  4. Thomas Friedman, New York Times, October 15, 2008.
  5. http://www.ontheissues.org/2008_Pres_2.htm
  6. www.reuters.com/article/2011/08/06/us-usa-debt-downgrade-idUSTRE...
  7. US Debt Clock as of 12/15/11. http://www.usdebtclock.org/ 
  8. Michael Coffman, Ph.D. Plundered: How Progressive Ideology Is Destroying America (Bangor, Maine: Environmental Perspectives, Inc., 2012): 9-20.
  9. Sullivan. "FDR's Policies Prolonged Depression by Seven Years," UCLA Newsroom, August 10, 2004.          http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.asp
  10. http://en.wikipedia.org/wiki/Community_Reinvestment_Act
  11. http://en.wikipedia.org/wiki/Glass–Steagall_Act
  12. Joe Weisenthal. "The Untold Story of How Clinton's Budget Destroyed the American Economy," BUSINESS INSIDER Politics, September 5, 2012.
  13. Paul Krugman. "GOP is Dead Wrong on the Economy." (Seattle: The Seattle Times, October 14, 2012): News A21.
  14. Psalm 127:1.
  15. Daniel 4:30.
  16. Protestant Ethic and the Spirit of Capitalism, 1905. http://www.sparknotes.com/philosophy/protestantethic/summary.html
  17. Matthew 25:14-30.
  18. John R. Talbott. Obamanomics: How Bottom-Up Economic Prosperity Will Replace Trickle-Down Economics (New York: A Seven Stories Press First Edition, 2008): 29-31.
  19. http://www.brainyquote.com/quotes/quotes/m/mittromney430129.html

Debra Rae is a regular contributor to The Intellectual Conservative. © 2012







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