A Simple Cursory View Of Why We Are Where We Are. Keynesian Fiscal Policies Misused and Classical Economic Sanity. Supply and Demand, Monetary and Fiscal Policy, Economic Growth and MONEY, MONEY, SPEND, SPEND, INFLATION, INFLATION
Free market economics is all about understanding the relationship between supply and demand. If the demand for a specific product is greater than the supply of that product the price of that product will increase until demand and supply is in balance. On the national level when the demand for a majority of available products exceeds the supply of those products inflation occurs. This inflation impacts the spending choices of individuals, especially middle and lower income individuals. Understanding free market economics also requires us understand fiscal policy – the governments taxation and spending levels. The taxation and spending choices made by the Administration in power are critical in determining the direction and health of the overall economy. In effect, tax policies determine what percentage of income (and profit) stays in the hands of individuals and free market businesses. Fiscal policy also includes deficit spending, which is the amount of money allocated by congress and spent by the executive branch over and above the amount generated by taxes. Economic growth is the ongoing expansion (or contraction) of production and consumption (including investment). The Federal Reserve uses monetary policy to control the amount of money afloat in the overall economy. Excessive MONEY in the economy, over the amount needed to facilitate transactions, will ultimately lead to inflation.
The Democrat Party has always followed the basic Keynesian tenet of pushing demand side policies to effectuate economic growth, though primarily through government spending and transfer payments. Keynes espoused government intervention during times of economic contraction and that expansion of demand is the major factor driving economic growth. Remember that Keynes developed his theory during the Great depression of the 1930’s and was to a great extent influenced by the poverty created by a deep long term economic contraction. Keynes included tax cuts in the list of recommended policies during times of contraction. Democrats conveniently overlook the aspect of Keynesian theory that specifies tax cuts during contraction and fewer transfer payment based welfare programs during periods of expansion. The intentional selective application of Keynesian theory by Democrats in their ongoing effort to expand government control of goods and services, has diminished the scope and, therefore, the efficiency of the American free market system.
Economic growth and overall employment moved at a snails pace during the Obama Administration due to fiscal policy that was directed toward government spending (heavily transfer payments) rather than free market activity. In fact, slow growth became what was referred to as the “new normal”. Quantitative easing, which effectively increased the money supply through the purchase of longer term securities by the central bank, was introduced by the Federal Reserve as a way to stimulate spending and investment in a period where misguided fiscal policies failed to stimulate spending and domestic investment. Fiscal policy, the most potent economic tool, should have been directed at stimulating consumption and investment through lower taxes and realistic investment incentives. This did not occur. What happened to the promise of shovel ready jobs? What about the renewable energy investments that ended that ended up in bankruptcy? Obama, without outwardly endorsing it, misused Keynesian economic policies to grow government control of the economy in a “smoke and mirrors” move toward the socialist state. Obama’s ineffective fiscal policies, which led to the Federal Reserve’s innovative introduction of quantitative easing, resulted in a noticeable increase in the money supply.
When individual corporate taxes were dramatically cut by the Trump Administration in 2017, the free market was given some oxygen and both the overall economy and employment levels responded in a robust manner. Quantitative easing stopped being expanded in 2014, but was not reduced in overall volume until 2017 when the Federal Open Market Committee (FOMC) began allowing its holdings of securities to mature without reinvestment. Appropriate fiscal policy had sufficiently stimulated free market activity (on both the demand and supply sides of the economy) for the Fed to reduce and quickly eliminate the need for quantitative easing. For the following two years the economy was hitting on all cylinders, and when the Wuhan, China based virus started taking its devastating toll, the American economy was the strongest it had been in many decades, including unprecedented minority employment levels. Due to a split Congress in 2018, and the always difficult task of reducing government spending and the overall size of government, the tax cuts generated fiscal deficits. But, unlike the Obama deficits, substantial economic growth and increased tax revenues were also generated. MONEY became a more controllable issue without inflation being an issue.
In 2020 the pandemic with it’s nationwide shutdowns and stay at home orders, for all but essential workers, changed all of the national economic dynamics. The consequential spike in unemployment and overall threat to economy led to the CARES Act, which provided $2 trillion in aid to hospitals, small businesses, and state and local governments. MONEY. With the economy in lock down, unemployment benefits radically expanded and MONEY flowing to prop up businesses, on line consumption flourished and pent up demand was building. The FOMC cut the federal funds rate by a total of 1.5% in March, 2020, as well as jump started quantitative easing on a large scale basis. Including all of the pandemic related stimulus checks and unemployment insurance the federal government spent $6.6 trillion in 2020. LOTS OF MONEY. MONEY was everywhere during 2021 when the economy reopened and consumers kept consuming even though inflation began dealing heavy blows to lower income individuals. MORE MONEY! The hard core far left Keynesians and even the Fed pushed the narrative during most of 2021 that the sharp upturn in inflation would subside. What a poor bet with so much MONEY already out there and total 2021 federal government spending reaching $6.8 trillion! MONEY, MONEY, MONEY. Even moderate Keynesian economists such as Lawrence Summers sounded the same inflation alarm as virtually all conservative economists, well in advance of the Fed’s November position change. Also, note that federal spending was higher in 2021 under Democrat control, given a reopened economy, than during 2020, when much of the economy was shut down and emergency stimulus was at its highest. WAY TOO MUCH MONEY
In November 2021, the Fed started to taper the pace of asset purchases. But, during the first year of the Biden Administration (2021), this source alone had already pumped lots of MONEY into the economy. Regardless of the COVID-19 variants and continued risks and work at home restrictions, the economy stayed on track to return to the economic growth rate generated by the Trump tax cuts. Also in November 2021, on top of all this MONEY the Democrat led congress passed the $1.2 Trillion Infrastructure and Jobs Act. By the end of 2021 it was apparent that INFLATION was going to be a far more serious problem than previously anticipated by the Fed and the gurus and pundits supporting Biden’s socialist spending agenda. Once again, short sighted politicians and left leaning pundits ignored one of the basic economic truths – MONEY counts. Keynesian demand side fiscal policy functions consistently over time only in a low inflation environment. The Fed’s long term target rate of inflation is 2% for a reason.
Inflation occurs when demand exceeds supply, and when the primary policy for driving economic growth is pushing from the demand side, aggressive spending is treacherous. Supply chain and other frictional issues have aggravated inflation to some extent, but they will resolve over time as the free market rewards those enterprises that offer the best solutions. The “Big Bad” Inflation Wolf that won’t go away without a change in government policies is the combination of government SPENDING and excessive MONEY in the money supply. The Fed has already made plans to address the MONEY issue by accelerating their planned tapering of long term securities purchases in their quantitative easing program and projecting a number of federal fund rate increases. The elimination of long run security purchases by the Fed will limit the additional amount of MONEY injected into the economy, but it does not alter the amount of MONEY already out there unless they start selling securities or at least letting them retire without repurchase. Given that the economy is already awash in MONEY, the last thing that is needed is massive federal spending. If Biden gets a significant portion of his socialist spending agenda through Congress, the Fed will be forced to act aggressively which may stall the economy and yet not totally control inflation.
The Democrat Party socialist gurus need to SPEND, SPEND, SPEND to accomplish their ultimate goal of transforming the American free market system into a welfare state. Unfortunately, when SPEND, SPEND, SPEND is combined with MONEY, MONEY, MONEY the result will inevitably be INFLATION. When this situation is allowed to persist for even a short period of time the result is likely to be severe INFLATION, INFLATION, INFLATION. When fiscal policy (SPENDING) and monetary policy (MONEY) are simultaneously allowed to get significantly out of balance with supply and demand dynamics, inflation is the inevitable result, and righting the ship can be tricky. In the present situation, the Fed is in a terrible position and if it moves aggressively to correct the MONEY issue that has been allowed to persist for too long and if the Democrat gurus don’t clean up their socialist fiscal policy spending, the American economy will plagued by “yo-yo” style volatility. The lesson to be relearned is that elections have consequences. If federal spending was rational during 2021 as the economy reopened and as well as projected for 2022, the Fed would have greater flexibility to deal with the inflation issue. They could be tightening the MONEY supply at a more gradual pace than they have planned, and raising the federal funds rate less aggressively. The situation we are presently in was totally avoidable. The Democrat Party’s persistent blindness towards the problems associated with too much MONEY and too much SPENDING in their pursuit of socialism is like a person that believes in “eating to excess until you get thin” and “spending until you get rich”. What is especially sad is that the Democrats may ultimately succeed in paring back inflation, but only after their SPEND, SPEND, SPEND policies coupled with MONEY, MONEY, MONEY have tanked whatever is left of the robust economy created by the Trump tax cuts. The Democrats need to thoroughly review Milton Friedman’s insightful analysis of the pivotal role of MONEY in a stable economy.