Wednesday , 26 October 2016

The Republican/Austrian & Democrat/Keynesian Divide

It is understandable why there is such a major divide between Republicans and Democrats in America when one examines their diametrically opposed, and seemingly irreconcilable, Keynesian and Austrian economic views. This article explains the different approaches to fiscal policy for each party and why he thinks one approach is better than the other based on research on the subject.

Republican Party – Conservative – Austrian Economic Philosophy
The government has no money of its own. It has only the power to tax and spend the money of others. There can only be a transfer that takes place, not a creation of wealth: jobs in X are gained, but jobs in Y are lost. However, this transfer is actually a loss. Taxing away a person’s ability to fulfill his own wants and then providing him with things he may not care about makes him worse off. This process condescendingly supposes that individuals cannot decide for themselves what they need.

Democratic Party – Liberal – Keynesian Economic Philosophy
If the economy is “too slow” then the government should lower interest rates and increase government spending. If the economy is “overheated,” the government should raise interest rates and decrease government spending. Increased government spending, [i.e. economic stimulus,] will act as a fiscal multiplier in that one dollar in government spending, once it filters through the economy, will make GDP increase by more than one dollar.

Research Findings
Research done by Ethan Ilzetzki, Enrique Mendoza, and Carlos Vegh, covering data from 45 countries from 1960 to 2007, has determined that “it depends” on the size of the fiscal multiplier. Furthermore, the size of the fiscal multiplier critically depends on:

1. Key characteristics of the economy:
a) closed versus open,
b) predetermined versus flexible exchange rate regimes,
c) high versus low debt.

2. The type of aggregate being considered:
a) government consumption,
b) government investment.

As such, policymakers would be well -served by taking into account a given country’s characteristics in evaluating the benefits of any fiscal stimulus package.

The findings of Ilzetzki, Mendoza, and Vegh suggest that in a country such as the United States the fiscal multiplier is virtually zero and, therefore, in addition to fiscal policy taking away the freedom to choose, robbing X to hand it to Y, and penalizing the very people that improve our lives, it also fails empirically.

Fiscal policy, the attempt to use government outlays and revenue to better the economy, simply does not work either a priori or in practice – but the Austrians already knew that.

[The original article as written by Sterling T. Terrell ( is presented here by the editorial team of (Your Key to Making Money!) and the FREE Market Intelligence Report newsletter (see sample heresign up in the top right corner) in a slightly edited ([ ]) and/or abridged (…) format to provide a fast and easy read.]