Saturday, August 20, 2011

Why Americans Hate Economics

Why Americans Hate Economics clearly reveals, among other things, many of the fallacies associated with conventional macroeconomic thinking. Macroeconomics is the field of economics that studies the behavior of the aggregate economy.

The article debunks both Keynesianism and its demand based logic, the government's usual formula for solving our short term economic problems these past eighty years.

As an example, Keynesians believe that the problems associated with weak economies can be addressed by creating demand through government spending programs. In their view, when times are tough, things such as government stimulus spending programs, additional unemployment benefits and minimum wage raises will increase consumer spending. As a result, the programs will essentially pay for themselves by increasing employment, taxes, economic growth and so forth. If only that were true.

After eighty years of trying, the results are in for all to see, assuming people are willing to face reality. This fantasy island approach of new demand creation by government spending isn't the way the world works.

That's because government doesn't create anything. It first gets its money to spend from people outside the government, such as taxpayers or lenders. In simple words, government takes money from person A, deducts its "government operating commission", and then gives the remainder to person B. No new money or wealth is created in the process of getting money from A to B; in fact it's subtracted. The money is merely taken from A and then redistributed to B. At least most of it is.

That's pretty simple stuff for most of us real citizens to understand. However, we citizen taxpayer simpletons are not elite and sophisticated politicians, so we probably don't intuitively (or otherwise) understand the logic behind macroeconomic based policy making.

As the article says, "Economic bimboism is rampant in Washington." Or as a professor from George Mason University said about this approach, "Macroeconomics was nothing more than a dismissal of the rules of economics." That dismissal began in the 1930s with the rise of Keynesianism, and its pervasiveness continues today, unfortunately.

In another statement the question's answer is given, "How did modern economics fly off the rails? The answer is that the "invisible hand" of the free market system, first explained in 1776 by Adam Smith, got tossed aside for the new "macroeconomics," a witchcraft that began to flourish in the 1930s during the rise of Keynes. Macroeconomics simply took basic laws of economics we know to be true for the firm or family--i.e., that demand curves are downward sloping; that when you tax something you get less of it; that debts have to be repaid-- and turned them on their head as national policy."

{NOTE: "demand curves are downward sloping" simply means that there is an inverse relationship between price and the quantity demanded. Thus, higher price = lower quantity demanded and vice versa.}

Supply side advocate Arthur Laffer sums up as follows, "All economic problems are about removing impediments to supply, not demand." And he's right.

But the article doesn't tell the whole story. Unfortunately, there's another reason why Americans hate economics. At least that's what I believe. Human nature plays a role, too.

What we'll call the simple but not easy rule applies here. We humans prefer things to be both simple and easy. But economic decisions, while simple, are usually not easy ones to make. They always should require us to make choices in the face of scarcity. We can't have it all, and even if we could have it all, we couldn't always have it now. Thus, difficult choices require us to make tradeoffs among various alternatives. That's simple but not always easy.

Our two political parties have done a genuinely awful job of forcing us to make these choices over the years. {We invariably chose the "easy way out" by taking on huge chunks of debt instead of making tradeoffs by deciding what we'd have and pay for as a society. But that's another story.}

Republicans tell us they'll reduce taxes and give us smaller government. But they don't tell us how we'll manage to pay for existing levels of medicare, medicaid, tax breaks on houses, charitable deductions, social security and so forth without raising our taxes. They don't talk about such unpleasantries, and we don't require them to do so. Shame on us.

A good discussion of the Tea Party and its role, past and future, is worthwhile reading in The Tea Party's Achilles' Heel. The jury's still out on whether the Tea Party will be prove to great for America or just another special interest.

Similarly, will the various Republicans seeking the presidential nomination seriously discuss the entitlements issue as part of the call for fiscal responsibility, or will each of them be just another loud but empty voice in the end? The Tea Party and its supporters could be helpful here, but we'll just have to wait and see what happens. Hopefully, they will surprise us all by advocating that we pay fully for the entitlement programs we choose for ourselves and our descendants.

Of course, Democrats always feel our pain and will fight to the bitter end to protect our entitlement benefits, old and new. They also will battle tooth and nail to keep everybody employed or if unemployed, then paid until employed, and at a high wage, along with world class medical care and related niceties, too.

But they won't tell us how much we'll have to pay for all this stuff. And they certainly won't admit that everybody's taxes, and not just those of the millionaires and billionaires, will have to be raised in dramatic fashion if we choose all these feel good results. Nor will they tell us how much economic growth will be adversely affected by the bigger and bigger government they always seem to embrace, in fact if not in word.

In sum, our two political parties each have promised us the impossible, and we humans have liked to hear those simple and easy feel good solutions, regardless of our political persuasion. A fantasy world for one and all.

But the fantasy will now end, because it must. If something can't go on forever, it won't.

As a society we're now faced with making simple but non-easy choices and tradeoffs. That results from decades of accumulating debt and deficits that now demand our attention.

We can call this simple, if not easy, economics. But not macroeconomics, please.

Thanks. Bob.

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