Trickle-Down Recession

Nobody should care what I think about economics (or anything for that matter) but I wondered recently about the following.

Two competing economic philosophies are at loggerheads in our day.  One is the Keynesian model named after John Maynerd Keynes (1883-1946).  Keynes asserted that the burden for economic stimulus lay with the government.  The state must regulate interest rates and wages as well as create employment through infrastructure projects.  To stimulate growth Keynes argued the state must create consumers (not savers) by hiring bridge-builders or print stimulus checks, thus supplying more money to the system.  Generally speaking, the state creates and empowers consumers (demand) who then spend their money.  By increasing demand they drive up supply and its concomitant effects (employment, wages, etc.).

Were Keynes to have seen Field of Dreams he would say, “Buy what you want and they will supply it.”  This approach starts with the micro level (the individual consumer) to influence the macro level (collective companies and industries).  Through printing and taxation, the government increases the supply of money to the system.  The state must regulate the value of money through constant and reactionary (slow-moving) policies.  And in the end we’re at the mercy of a government we hope is not corrupt or tyrannical.

The other model is known as Say’s Law named after Jean-Baptiste Say (1767-1832).  This Law is more commonly known as “supply-side economics” or “trickle down economics” or more recently “Reaganomics” (named such for Ronald Reagan’s approach to economic stimulus).  As opposed to Keynes’ govermnent-based approach, Say’s Law is a market-based approach.  The government must limit its involvement in private industry and free up companies (via lower taxes, minimal regulation, etc.) to invent, manufacture and supply their goods.  As manufacturers/suppliers are in business to make money they are driven to supply what people will want to buy.  The success of their product then trickles down to the various wholesalers, retailers, service and repair folks.  The more money people make the more they buy and save.  The more they save the more banks have to lend.  The more banks have to lend the cheaper it is for companies to borrow for investment.  Eventually, the economic flood helps all boats rise.

If people don’t buy their goods then they must think of something else to supply.  By increasing supply (the freedom to invent, manufacture and provide goods/services) they welcome more demand which then creates more supply and so on and so forth.  Say would say, “Build (supply) it and they will come (buy).”  Begin at the macro level (companies and industries) in order to stimulate the micro level.  Through investment, business supplies money to the system.  The market then regulates the value of money through supply and demand principles.

Keynesians are on the offensive these days, decrying the damaging policies and failure of “trickle-down economics.”  But aren’t we in a trickle-down recession?  The ripple affect of GM or Microsoft laying off workers is tremendous.  It trickles all the way down to the local mechanic or computer repairman.  It would seem that the best way to correct a trickle-down recession is to embrace trickle-down economics.  Giving me (an individual consumer) $1,000 doesn’t make me want to go buy a Chevrolet.  It makes me want to save most of it because the government has no idea how to run business and will devalue my dollar.

This does not mean, however, the government loans phantom money to GM in Keynesian fashion.  It means rewarding innovation and removing the disincentives (via lower taxes, less regulation, less unionization, etc.) for building a better mousetrap in the local economy.  Let GM fail and there will be other smaller, more localized, more efficient entrepreneurs ready to pick up their scraps (and hire its employees, etc).  This will encourage more entrepreneurship and force the GMs and Microsofts to compete for our business rather than rely on a handout.

Of course, no system will fix what is fundamentally wrong with any economy: greed.  Only the gospel of Jesus Christ can do that.  So better yet, put down the economics book and read your Bible.  In it you’ll find Paul’s command to “lead a quiet life and attend to your own business and work with your hands” (1 Thess 4.11) so as to be generous to others and “eat your own bread” (2 Thess 3.12).  Paul didn’t care about Keynes or Say. But he did promote hard work, responsibility and generosity as a reflection of the gospel rather than lazy dependence on others.  What Say you?