Why Conservative Economic Theories Are Destroying America

Ken O’Brien

At the outset I want to apologize to those readers of The O’Zone who feel I am talking down to them.

However, the reality is that there is a mountain of misinformation and lack of understanding about economics and economic policy.

It is a widely accepted truism that one must live within their means. 

Households must budget based upon their income and their expenses.

The same is true for businesses and corporations.

Similarly, virtually all states are required by their constitutions to have a balanced budget.

However, the effort to take these as God-given truths is misguided.

It results from the fact that households, corporations and states (to a significantly lesser degree) operate in a realm called “microeconomics”.

Within that realm, there is only one policy dimension within which to operate – income and expenses.

In governmental terms, the decisions related to this are termed “fiscal policy”.

For a state government fiscal policy is limited to what you decide to do about taxes, whether those collected or exemptions that are provided. Beyond those options, when expenses exceed income, the only option is to borrow.

However, that is not true of a sovereign national government.

A sovereign national government operates in a realm termed macro-economics.

As a result a sovereign national government has an additional set of policy options.

Those options relate to the fact that a sovereign national government has control over the supply of its currency – the money supply.

The resulting option is called monetary policy – a set of policy options that are not available to households, corporations or states.

It is not available to them because none of them can print money. Only the Federal Government can do that.

And, in the United States, that authority is delegated to the Federal Reserve Bank.

The Federal Reserve is independent of the political system except to the extent that its Chairman is appointed by the President subject to Congressional approval.

To most Americans who even are aware of this set of facts, their primary awareness is about the issue of how much money the Fed is printing – the money supply.

To the vast majority of Americans if the Fed is printing too much money, then they are setting the stage for inflation. They have been taught to believe that the more money that’s out there, the less it is worth.

However, that is only half of the equation.

If I have almost all of the world’s gold, but I am like Goldfinger in the James Bond movie, I want gold solely for its own sake. I will never spend it, I will never trade it. I will sit in my counting room, like a psychotic Midas, and admire my precious trove.

In the meantime, the remaining gold stock will be traded among its holders numerous times. Every time there is such a transaction goods will be bought and sold. People will profit, Taxes will be paid. There will be a demand for more goods from those who now hold the gold and commerce will expand to seek that available gold so that its acquisition will allow the holder to purchase other goods they desire. And so on, and so on, and so on.

A similar phenomenon occurs in relation to monetary policy.

The other side of the equation in relation to money supply is called the velocity of money.

This is a very real economic fact. It is defined as the rate at which money circulates, changes hands, or turns over in an economy in a given period. Higher velocity means the same quantity of money is used for a greater number of transactions and is related to the demand for money. It is measured as the ratio of GNP to the given stock of money.

How does this relate to the fallacious economic policies that have been perpetuated by conservatives since the 1980’s?

The economic theory perpetuated by conservatives is termed supply side economics.

The belief is that the reduction in taxes will result in increased investment in the economy

The converse point of view, espoused by economists who subscribe to the Keynesian school of economics is that increased demand will encourage investment in order to generate income and thus profits. In order to achieve increased demand the government should transfer tax revenue to elements of society who will spend it and thus generate demand and encourage investment.

Supply side economics gained currency during the Republican primaries of 1979-80 when espoused by Ronald Reagan. At the time his principal opponent, George H.W. Bush coined the term “voodoo economics” to characterize the theory.

If supply side economics is a valid theory, then an increase in the money supply retained by those paying less in taxes should result in increased investment and production and increased societal wealth.

Here is a graph of the increase in the money supply since 1930:

Here is a graph of the velocity of money over the same period:

And here is what has happened to the disparity between rich and poor over the period since World War II.

In simplest terms what we have witnessed with the ascendancy of the conservative theory of supply side economics, is a hoarding of wealth to the detriment of most elements of society.

This is a direct result of a decline in demand because of the shrinking of disposable income for the bulk of citizens to the benefit of the wealthiest elements of society.

It is not an issue of makers and takers.

It is a matter of needers and bleeders.