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Peter Crabb: A conservative economist responds to Lotterman

In a Idaho Statesman column last Saturday, economist Edward Lotterman said that economists who “support the historical values of the Republican Party ... need to make their voices heard.”

The column claims that a good portion of the electorate mistakenly believes tax cuts will increase tax revenues and grow the economy.

Lotterman says these voters need to be educated by economists opposed to Keynesian economic policies. He refers to adherents of opposing schools of thought, like monetarism and rational expectations, who he believes are too quiet today.

What Lotterman may not be hearing is really a very loud response from conservative economists: “The government should cut spending and reduce its involvement in the economy.”

Keynesian policies have not worked. Conservative economists simply want the government to get out of the way, or at the very least, practice real Keynesian economics. In today’s economic environment, Keynes’ theories call for less, not more, government.

Keynesian economics refers to the theories of Lord John Maynard Keynes. Following the financial crisis and drastic economic downturn of the late 1920s and early 1930s, governments responded with a large dose of Keynesian economic policy.

Before the promotion of Keynes’ theories, the government had little involvement with what is known as the business cycle — recessions and economic booms. Since that time, governments have practiced only half of what Keynes’ theories call for.

U.S. Government spending has risen dramatically during recessions, but government spending was not cut sufficiently when the economy grew.

Keynes’ treatise, “The General Theory of Employment, Interest and Money,” included as part of an overall theory of the business cycle the idea of “sticky wages.” According to this theory, an unexpected fall in prices from a drop in aggregate demand temporarily raises the real wages of workers. This drop induces firms to cut employment and reduce production.

In the recession that started in December 2007 and ended in 2009, we saw just what Keynes would predict. Rather than receiving lower wages, many workers were laid off and unemployment rose dramatically.

The government stepped in — as Keynes would propose — with massive spending programs and low interest rates from the Federal Reserve. These actions may have stopped the fall, but there has been no employment growth and little increase in production since.

Some now call for another round a government spending, but with employment stabilized and consumer demand picking up, Keynes’ theories suggest a different response: less government spending and a reduction in government deficits.

If Keynesianism were ever fully practiced, governments would cut spending and reduce deficits whenever the economy is growing. In the current debate leading up to Aug. 2 deadline for raising the federal debt limit, many policymakers are actually trying to put Keynes’ theories into practice. Calls for deficit reduction and lower taxes that will reduce the government’s share of the economy are completely consistent with Keynesian theory.

Conservative economists have spoken. They aren’t quiet. There is simply nothing more to be said.

Economist Peter Crabb teaches at Northwest Nazarene University in Nampa. His columns normally appear in alternate weeks in Business Insider magazine and on his blog at IdahoStatesman.com. Reach him at pcrabb@nnu.edu.

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