The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Economic Evolution

07/26/2019

No animal ever had an opinion on evolution.  No plant was ever asked to vote on evolution.  But, they changed over time — they evolved anyway.

Originally, there was no study or discipline known as economics.  It was a period of  chaos, with extreme boom/bust and with harsh economic consequences during those inevitable downturns.  Then, Austrian economics became the dominant economic philosophy, which said revenues and expenses must be equal every single year.  If taxes and other revenues declined, spending MUST be decreased immediately.  Of course, this gave politicians little control over the economy.

Then, Keynesian economics became the dominant philosophy, which said revenues and expenses must be equal over every single business cycle, with budget surpluses (savings) during good economic years to maintain expenses during bad economic years.  Of course, this philosophy was corrupted by Democratic politicians who saw deficit spending as good for the economy in both good and bad economic times.

Then, Supply-side economics became the dominant philosophy, which said tax decreases will ALWAYS stimulate the economy.  Of course, this philosophy was corrupted by Republican politicians who also saw “short-term” deficit spending from lower taxes as good for the economy in both good and bad economic times.

Nobody lives long enough to see evolution in nature.  Some  people do live long enough to see economics evolve.  In my lifetime, I have seen Keynesian economics evolve into Supply-side economics.  Unfortunately, both philosophies have a weak link, i.e., elected politicians.  Democratic politicians are more likely to face a primary challenger if they vote for spending cuts, especially entitlement cuts.  Republican politicians are more likely to face a primary challenger if they vote against a tax cut, any tax cut.  There is no motivation to do the right thing, as it increases the probability of facing a primary challenger.

Thus, we need an economic philosophy that makes politicians irrelevant.  Enter Modern Monetary Theory (MMT), which says deficits don’t matter.  That was proven by Quantitative Easing.  Following the Great Recession, the Treasury began spending money “like drunken sailors” and financed that spending by issuing Treasury bonds, that were purchased by the Federal Reserve System, about $4 TRILLION worth.  That experiment proved the U.S. can sell all the bonds it wants, without international consequence, at least in the short run.

Under MMT, Republicans can keep cutting taxes and Democrats can keep increasing entitlement spending, with wild abandon and without fear of a primary challenger.  The Fed will just keep buying bonds from the Treasury to cover the exploding deficit.  We CAN have “guns AND butter”!

This seems slightly insane to me but may explain why the normal business cycle no longer seems relevant.  We are way “overdue” for a recession.  The cycle seems to have been reset.

I am reminded of the “Minsky Minute”, named after Hyman Minsky, who theorized debt was like a balloon, which expanded and expanded, until it burst violently.  But Minsky had never seen Quantitative Easing.  You know, “it’s different this time.”

MMT will work, until it doesn’t.  I suspect that point will be reached when other nations refuse to accept dollars, and the dollar loses its “reserve” status.  Watching currencies will become more interesting.

Having witnessed the  contentious birth of Supply-side economics and the slow seduction of MMT, what will come next?  Will we simply restart the process . . . chaos?

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