THE ECONOMY: PART 2

Modified from the Motley Fool, Industry Discussions/Real Estate Inv. Trusts: REITs Board. Post # 61219 (February 6th, 2010):
　
John Maynard Keynes gets a bad rap. People accuse him of government deficit spending. It may be true practically that a government will not pay back the debt run up he recommended for bad times, but that is not what Keynes wanted. Keynes said that over a business cycle the budgets should be in balance. It isn't Keynes fault that governments can't discipline themselves. Incidentally, Keynes was a bond trader and did very well.

Our government has run up deficits pretty regularly. Eisenhower had a positive cash flow in 3 of his 8 years. Surprisingly, Johnson had positive cash flow in one year. Clinton had positive cash flow in 4 years out of his eight (one without the Social Security surplus). That is it. Carter came close but no cigar. If Ford had won reelection, he might have because he was a budget balancer, but he lost the election. Perhaps Nixon was trying, but he got upended by Watergate (Though I think that Nixon’s impoundment of funds was more responsible for his resignation.). Reagan and Bush-43 never tried. Bush-41 should get a lot of credit for raising taxes as should Clinton, but it was too late to balance the budget for Bush-41. Contrary to the belief by many, there is little evidence that raising taxes ruins the economy or that lowering taxes helps the economy.* In fact, if Bush-41 and Clinton had not raised taxes, there would probably have been no positive cash flow in the 1990s. Combined they also decreased Federal employment by more than a million.

So with continuous huge deficits in the 1980s and the first decade of this century and some in between, why aren't we having raging inflation right now? Why hasn't it been going on for years? What is it Greenspan liked to say, "That’s a conundrum."

* The reason that lowering personal income taxes have minimal positive benefits to the economy is that the poor do not pay income taxes, the middle class tends to pay off debts with the new money, and the wealthy buy Treasury bonds, chalets in Switzerland, Bombardier personal jets from Canada, and islands in the Bahamas. Though some of these benefit the global economy, they do not aid the American economy. Alan Greenspan, when he was chairman of the Federal Reserve expressed the worry of the wealthy buying too many Treasury bonds with their tax savings. As I said in the post below, there probably is a optimum tax level to maximize Federal revenues, but I do not know what that level is.