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Breaking the Secret Code of Macroeconomics Lingo (Part IV: Opinion) September 8, 2012 6:01 PM | Tagged as Hayek, Keynesian, macroeconomics

 

Of course the big question is which school is right? The Biz Bucks Guy comes down firmly with the Hayekians.  A common poke at Kenyesians is “OK, we Keyenians admit that unfettered free markets work in practice, but do they work in theory?” A-hum.  Yes, they do.

 

Does demand-side stimulus (spending) fix an economy in recession? The data is clear. No.

 

Does supply-side stimulus (tax cuts and no spending) fix an economy in recession? The data is also clear. Yes.

 

Consider the work of Alberto Alesina of the Harvard School of Economics. See his NBER Working Paper 15438 of the National Bureau of Economic Research. His work studied recessions throughout the world from 1970 through 2007. Conclusions:

 

1. Tax cuts (Hayek) are more likely to increase economic output than increased spending (Keynes).

2. Spending cuts with no tax increases (Hayek) are more likely to reduce deficits and debt than tax increases (Keynes).

3. Spending cuts (Hayek) are less likely to create recessions than tax increases (Keynes).

 

Also see Hendrickson’s short paper:  A Brief Review of the Success of Tax Cuts (http://www.insideronline.org/archives/2007/winter/chap7.pdf). Hendrickson shows that tax cuts by Harding/Coolidge, Kennedy, and Reagan improved the economy each time.  The Bush tax cuts did also, although the economy was tacking into the winds of his and Congress’ spending binge. 

 

Read Amity Shales’ The Forgotten Man about the Great Depression. Roosevelt’s Keynesian spending never worked. See Morgenthau's comment in “The Blip President” blog Aug 6, 2012. Obama is repeating that history. The Democratic Party’s platform calls for some $600 billion more demand-side stimulus…on top of what they did for the past 3 ½ years! 

 

Clearly, Hayek and “fresh water” economics wins.


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