Republicans hijacked term Conservative

When did we lose the modifier, "fiscal," from the brand name, "conservative?" The term conservative has taken all kinds of meanings over at least the past century. As a political economist, my training and therefore my belief structure is founded upon prudent (read that-sensible) personal and public financial principles (read that rules for living when related to personal, and laws and regulation when related to public). By that measure, I am a conservative.

The Republican Party has captured the label, "Conservative," but its actions are far removed from the intended definition. Viewing the most recent past, when this party was in control of the Federal Government, it managed to raid the Treasury in two ways. It cut taxes and sanctioned two unfunded wars. It is not a party of fiscal conservatism.

Now I get to the dilemma of current day conservatism dealing with progress. In its present day form, conservatives are antithetical to moving forward. This problem does not exist in fiscal conservatism, i.e., living within one's means. In my lifetime there were several balanced budgets, most the result of ending wars. These occurred between 1946 and 47 and 47-48 as a result of reductions after World War II. Again balances happened between 1950 and 51, 55 and 56 and 56 and 57, the first 3 within the Truman Administration, the last two under the Eisenhower Administration. During this time, the highest marginal tax rate that contributed to such result was 91% and the economy for the most part, thrived.

A balanced budget was achieved between 1999 and 2001. Both parties like to claim a budget surplus at the end of the Clinton Administration. The final outlays shown in the Report of the Treasury were deficits, but with the addition of off budget elements, there was a surplus. It is difficult to determine from published documents whether a budget led in the end to a surplus or deficit. The only telltale is whether the total deficit increased or decreased. The deficit clock on 6th Avenue in New York was turned off in 2000, but turned back on in 2002. Before 2001 it was a Democratic Administration in charge, succeeded by a Republican one that ran deficits for every year it was in power and turned the clock back on.

While my philosophy of fiscal conservatism concludes that government must balance its books, I consider this necessity to be one of over time and not every year. Thus, I am opposed to a Constitutional Amendment that would require a balanced budget for each year. This leads me to my final thought. During periods of recession it is necessary for government expenditures to exceed receipts. This principle stems from consideration of the components of Gross National Product (GNP), consumer expenditures, private and public investment, and other public expenditure. Those who call for reduction in public expenditure, especially investment, during periods of recession should review the economic history of the U.S., especially what occurred in 1929-30.

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Economics 101

There are two ways to look at macroeconomics, one called Keynesian (government spending to prop up the economy) and one most recently related to Milton Friedman (monetary policy as the best way to manipulate the economy). From an accounting perspective, both yield the same answer (GNP), but they diverge in how each leads to its result.

Keynesians view GNP as the equation of the sum of income (what consumers earn for consumption, C, and what they save, S) and what the government earns in taxes (T). This side equates with expenditures, what consumers spend for consumer goods (about 70 percent of the total), private investment (I) and government expenditures (G).

The formula, C+S+T=C+I+G, symbolizes the basic model — the left side is income, the right side is expenditure. In today’s economic scenario, consumer expenditure (C) and private investment (I) have slumped to depression levels. The only salvation under the Keynesian model is for G, government expenditures, to make up the difference. The gap in the last quarter was over 6 percent, a reduction in C and I expenditures.

C and I are about 80 percent of GNP. They are so large that increasing G must be so massive to bring GNP back to equilibrium. GNP should be about $15 trillion. The 6 percent reduction would require about $1 trillion in immediate increase in G, and possibly a continuation for one or two years.

Monetary theory also has a formula for national income: M, the money supply and V, the velocity of turnover. GNP equivalent to the Keynesian would be M times V.

In our current circumstance, V has been slowed because it is the banking system that controls it. The Bush administration operated from the perspective of “juicing” the banks, getting them to lend funds so the economic system would regain its foundation and money would flow from buyers to producers to workers in an endless cycle. Nothing wrong with the thinking, it just did not happen.

Now, there is another measure of GNP I will call micro/macro. National income is the sum of all quantities bought (Q) times their price (P). In order to clear markets (Q), P must be such that there is enough money (MV). If the money supply is curtailed by a slow down in V, P must fall, a deflation — something to be avoided at all costs — it is a psychological killer.

Conclusion. If you are a Keynesian, increasing G is your chosen route. The amounts would have to be so substantial as to be impossible to comprehend.

If you are a monetarist, finding a way to increase either M (printing press) or V (getting the banks to lend) is your answer. Our first attempt was to increase V (lending by banks). It was a failure. Printing money is a possibility, but very dangerous.

The long run solution is that liquidity must be restored, that government deficits cannot be maintained at the trillion-dollar level. The real need is to restore confidence in the money supply and those who run it, the banks and the Fed.

Steamboat Springs Today March 11, 2009