John Maynard Keynes vs Ronald Reagan – The battle for your money Aggregate Demand vs Supply-side Economics

In the constant battle between Democrat vs Republican it’s easy to lose sight and even interest as it seems both parties are more focused on making the other party look bad and placing blame than on actually moving America forward. However one thing we are all interested in is what they plan to do with the money they take from us each week, month, and year. I think as American’s we have become so accustomed to taxes being taken out of our paychecks that often times we fail to even look at our check stub to see exactly how much is being taken from us, even worse we certainly don’t keep track of what exactly they are doing with our money.

Article I, Section 8, Clause 1 of the United States Constitution states –  The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States. So basically the money they take from you should be spent to fund the military, upkeep of infrastructure, and to care for those that can’t care for themselves, this an abbreviated definition but you get the point of the founding Fathers, which was to limit government taxation to only what was necessary to continue running the government and keeping it’s citizens safe. Unfortunately in modern times we have a lot of different opinions of how much should be taken from us and what it should be used for. There are 2 main sides and each has very strong and feelings associated with their beliefs, below we will examine both in depth and let you decide which makes more sense.

man person suit united states of america
Photo by Pixabay on Pexels.com

Keynesian Economics – Keynesian economics was developed by the   John Maynard Keynes during the 1930s in an attempt to understand the Great Depression, most economist were completely baffled by the great depression and could not fully explain it. Keynes thought that increased government spending and lower taxes would stimulate demand and could pull the global economy out of the depression. Keynesian economics can be summed up by saying that optimum economic performance can be achieved and economic slumps prevented by creating aggregate demand through government intervention and activist stabilization. Keynesian economics is considered a “demand-side” theory that focuses on changes in the economy over the short run. Basically Keynesian followers think that capitalism has it’s flaws and creates massive ups and downs in the economy, during these down turns Keynesian’s think that the government should step in and intervene by spending money and creating a false demand. This makes some sense because during an economic slump businesses close and people are laid off or let go, if the government infuses the economy with money through infrastructure building, it creates a need for the materials to be produced and the people to do the actual work, this in turn gives people more money to then go spend at local stores, which props up the economy even more. Then critics of this theory make 2 big points, one a free market will always correct itself and any attempt to manipulate it will result in greater problems down the road. Second since the government doesn’t actually create anything, the money it is using to prop up the economy is simply being taken from one person and given to another without actually creating a lasting need or supply and by creating a false demand that it will either have to continuously keep the infusing money or the false demand will collapse.

man hat usa portrait
Photo by Pixabay on Pexels.com

Reaganomics –  Ronald Reagan’s economic policy was built around a few key concepts, reduce the growth of government spending, reduce the federal income tax and capital gains tax, reduce government regulation, and tighten the money supply in order to reduce inflation. Ronald Reagan and his economic adviser Milton Friedman, figured that if you cut taxes on companies and the very wealthy, while also reducing  regulations on business, they would invest more, the economy would expand, and everyone would benefit. Of course, this approach, would require cutting government spending and the services it offered, which would affect low income Americans the most. Reagan thought the benefits to the rich would eventually “Trickle down” from those on the top of the ladder to those on the bottom.

administration america art banner
Photo by Public Domain Photography on Pexels.com

So there we have it, two very different ideas and approaches to how the government uses the money we give them. Both economic theories were founded during extremely difficult financial periods for the United States, Keynesian economics during the Great Depression and Reaganomics during the Cold War. Reaganomics initially created a huge surge for the economy much like the one we see today. It lowered unemployment and created a massive uptick in entrepreneurs starting new companies. However it took the federal debt from 900 million to over 3 trillion in just 10 years. Keynesian economics usually implemented by democrats often times has the same effect of creating an initial surge in the economy but is dependent on the businesses continuing to pay high taxes, however the higher taxes usually eventually cause the high earners to shelter money, and the businesses to move money elsewhere, while also not investing to grow the company, which halts job growth, this creates less tax money for the government to spend on it’s policies. Both sides have operated in a budget deficit the majority of the time in recent years and both added to the national debt. So what’s the solution? Which one should we go with? Well how about a little bit of both, how about we lower taxes on businesses and give them tax incentives to spend money here in America. Lower government involvement and regulations but offer tax incentives for companies to invest in the communities they inhabit and their employees live. No matter what we do, we will always be obligated to care for those that can’t care for themselves, while also trying to maintain and improve our great country for the next generation.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s