The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
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Thumbnail of Economic History

In the beginning, there was the Austrian school of economics, which argued that government tax revenues must equal government expenses every year.  The problem was that Austrian economics is “pro-cyclical,” i.e., it makes cycle highs higher and cycle lows lower.  The only time the government can increase its spending is when revenues are rising, which is when the economy is already improving.  Conversely, when the economy is weakening, government tax revenues decrease, driving the cycle low lower.  Originally adopted by the Republicans, it has been abandoned to the Libertarians.

During the Great Depression, Lord Maynard Keynes developed his theory that governments should engage in deficit spending to stimulate a weak  economy when tax revenues are also falling.  The Democrats have largely adopted this theory of economics.  Actually, Democrats adopted half of Keynesian theory, because Keynes argued that deficits are acceptable during weak economic times but that debt should be reduced during strong economic times, and that has not happened since the Clinton presidency.

Arthur Laffer called Keynesian economics “demand-side,” because it focused on economic demand from spending, and he argued that a “supply-side” approach was superior.  Cutting taxes would allow the economy to produce more, driving up the economy.  Since Ronald Reagan, Republicans have largely adopted this theory.  Unfortunately, they only adopted the easy part.  Laffer never argued that a tax cut was appropriate at all times.  (Google the “Laffer Curve.”)

One thing that both Keynes and Laffer agreed on — was that budgeting should be planned for each economic cycle, not each year.