The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
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Situational Economics

Economists often develop a religious fervor about some school of thought.  We see constant dogfights between Keynesians, Supply-Siders, and Austrian (Tough Love) economists.  Sometimes, we still hear from Monetarists.

But economics is more like situational ethics than religion.  Different ideas are appropriate at different times in different places.  Today’s editorial in “The Wall Street Journal” is an example.  That newspaper is a religious devotee of Supply-Side economics, which means a tax cut can cure any problem.  Today, it argues Keynesian economics being used in this recession is wrong-headed and compares the current recovery with that of 1981-82 under President Reagan, which rebounded nicely following the Reagan tax cut.

Talk about apples and oranges!  The recession in 1981-2 resulted from a severe oil shock when the economy was already lethargic.  This one resulted from a severe financial crisis, the worst since 1929.  As we’ve said in this space many times, recovery from financial crisis is different from some garden-variety recession.  Tax cuts are a great way to get a lethargic economy moving faster . . . unless government revenue has already decreased from 20% to only 15% of GDP, and you are already borrowing 42% of every dollar spent.

Keynesian economics is good for getting a car out of the ditch.  Supply-side economics is like high-test gas to go faster . . . if you can afford it.  And, Austrian economics is good to make you solvent enough in the long-run . . . that you can afford high-test gas later.

Sometimes, I recommend apples and sometimes oranges.