Politicizing Economics

I actually hesitated to show this video, because I thought it gives too much credit to the Treasury Department's decision making process. I would prefer a chicken with its head cut off to corrupt politicians with the same decision making capabilities. At least the headless chicken wouldn't conscientiously run our country into the dirt.

Why is our government so good and making things worse?

One possibility is that politicians don't know any better. They think they can successfully run the entire economy by using centralized power.

In college, Keynesian economics is the major school of thought. So even though the stagflation in the 1970s should have put an end to Keynesian thought, it didn't happen.

Even though the theory required that the government must step on the gas and slam on the brakes simultaneously, it was nearly untouched.

This makes no sense from an economic perspective, but from a political perspective, it makes perfect sense.

Keynesianism focuses on short run policies only. If there is a recession, create immediate jobs by increasing government spending. For example, Franklin Roosevelt created the Civilian Conservation Corps in a desperate attempt to create jobs.

A competent economist would look at this situation, and immediately notice a problem. Where did the money come from to create these jobs? It comes from higher taxes or printing money. Neither of these effects are seen immediately, but in time, the economy will suffer from the decreased funding available in the private sector.

Fortunately for the politician, this problem will just be passed onto someone else. Long term consequences are irrelevant to politician's interests. If you are concerned with getting reelected, why do you care about the economic situation in 10 years?

If there is an economic crisis, the correct action might be doing nothing. While this may be the right action economically, it is suicide politically.

This is why Keynesianism is so popular in the political realm.

An odd example is that of Herbert Hoover. I say it's odd because of the misconception of Hoover's time in office. He was known to be the awful president who sat back and watched The Great Depression take place.

While this may have been the correct action at the time, it would kill his political career. Roosevelt was praised for doing the very opposite. He was a man of action. The actions themselves were irrelevant, people just wanted action.

The reason this is a misconception is because Hoover was a man of action as well. As a matter of fact, he laid the foundation for the New Deal. If he really was the free market ideologue he is known for, he wouldn't have created the Smoot-Hawley Tariff Act, the Revenue Act of 1932, the Emergency Relief and Construction Act, or the Reconstruction Finance Corporation. These are hardly free market policies.

Political gain is just one reason our wonderful politicians choose their policies. Later, I'll explain some other possibilities.

For now, all we can do is expect more of the same in the coming months. Expect messages of hope and prosperity, but get ready for inflation and unemployment. Be sure to thank your leaders in Washington.