Austrian Economics vs. Keynesian Economics

I wish you and all our readers a Happy Holiday’s. I will be defending the Austrian Economic Theory thought this debate. Introduction Keynesian Economic Theory (KET hereafter or KT) is built on the principle that productive activity is influenced by aggregated demand (total spending in the economy) and that demand does not necessarily equal aggregated supply. Instead, it is influenced by a host of factors sometimes behaving erratically; including, but not limited to, inflation, employment, and productivity. Advocates of Keynesian Economics favor a mixed economy between the private sector and the public sector and with strong government intervention during a recession. The KET has stood as the policies of FDR and Obama. C1) Economic Stimulus Keynesian Economists believe that there should be a strong government involvement in offsetting the effects of a depression or a recession by stimulating the economy. We saw examples of government stimulation during the Great Depression and the 2008 Great Recession. However, when government attempts to stimulate the economy, it creates economic uncertainty that paralyzes business decisions. During the Great Depression, John Keynes wrote [1]: You are engaged on a double task, Recovery and Reform…. Even wise and necessary Reform may, in some respects, impede and complicate Recovery. For it will upset the confidence of the business world and weaken their existing motives to action, before you have had time to put other motives in their place. It may over-task your bureaucratic machine, which the traditional individualism of the United States and the old "spoils system" have left none too strong. And it will confuse the thought and aim of yourself and your administration by giving you too much to think about all at once. These failures are easily manifested in simple graphics[2]: During the 1930s, New Deal lawmakers doubled federal spending--yet unemployment remained above 20 percent until World War II. Japan responded to a 1990 recession by passing 10 stimulus spending bills over 8 years (building the largest national debt in the industrialized world)--yet its economy remained stagnant. In 2001, President Bush responded to a recession by "injecting" tax rebates into the economy. The economy did not respond until two years later, when tax rate reductions were implemented. In 2008, President Bush tried to head off the current recession with another round of tax rebates. The recession continued to worsen. Now, the most recent $787 billion stimulus bill was intended to keep the unemployment rate from exceeding 8 percent. In November 2009 it topped 10 percent. Conclusion The Keynesian theory that government needs to be involved in stimulating the economy has failed. Throughout the past, we have seen stimulus packages fail and unemployment sky rocket, despite record-setting government spending. C2) Austerity Austerity measures is defined as a state of reduced spending and increased frugality in the financial sector. These measures refer to the measures taken by government to reduce expenditures in an attempt to shrink their budget deficit. [3] These measures apply to solving debt crisis and are characterized by lower spending via reduction in the amount of benefits and public services. Because spending is lower, times of Austerity are period of low or reduced government spending, they are often at a point of low taxes as well. According to John Keynes, “The boom, not the slump, is the right time for austerity at the Treasury. ”[4] Contemporary Keynesian economists argue that budget deficits are appropriate when the economy is in recession, to reduce unemployment and help spur GDP growth. However, I believe that Keynes is wrong. I believe in low taxes and low government involvement within the economy. Consumers contribute ~70% of the GDP whilst investors contribute ~10-15%. These consumers and investors feel more secure when both spending and taxes are low. When these groups feel more secure, they spend more and thus stimulating the economy: "Writing in the Wall Street Journal, Alesina points to the reason for these findings: Spending cuts “signal that tax increases will not occur in the future, or that if they do they will be smaller. A credible plan to reduce government outlays significantly changes expectations of future tax liabilities. This, in turn, shifts people’s behavior. Consumers and especially investors are more willing to spend if they expect that spending and taxes will remain limited over a sustained period of time. "[5] Here is some empirical evidence for this: "I’ve studied every 3-year peace-time period since the U. S. founding in 1790, and in cases when federal spending declined, real GDP over the same years grew by 11%, on average, not materially different from the average growth rate recorded in periods of rising spending. Government spending cuts have not been bearish for growth. From 1840 to 1843 U. S. federal spending was cut by 51% while real GDP grew by 11%; from 1866 to 1896 spending declined 38% as GDP grew by 9%; from 1874 to 1877 spending fell 20% as GDP advanced by 9%; from 1899 to 1902 spending dropped by 20%, but GDP rose by 13%; finally, between 1921 and 1924 spending decreased 43%, yet GDP climbed by 23%. No 3-year spending cut has occurred since 1949, and since then, GDP growth has slowed. "[6] So, in reality, austerity measures are best all the time – especially in times of economic downturn for at least 3 reasons: first, if you want to stimulate the economy, you need to have consumer confidence (which we see austerity measure bring); second, investors are a huge part of stimulating the economy and helping businesses to grow feel more safe and comfortable when spending and taxes are both low; and third, it helps offset the debt that helps create these crises. For these two contentions, I feel that Keynesian economics is officially dead. I am so busy during the holiday season that I have not been able to write out a full opening statement. In the next round, I will expand on these two contentions and add a few more. Onto con. [1] . http://newdeal.feri.org... [2] . http://www.heritage.org... [3] . http://www.investopedia.com... [4] . http://en.wikipedia.org... [5] Quoted on . http://debate.org... [6] Ibid. Thank you Ron-Paul for these two quotes from your debate.