By Ben Cohen: The best way to know whether a theory works or not is to test it in the field. In economics we get to see this happen whenever a new government comes into power and implements their particular ideology. There are two major economic theories industrialized nations around the world subscribe to - 'Keynesian economics' or 'Monetarism'. The first involves the use of government to regulate and stimulate the economy, and the latter explicitly rejects the role of government and extolls the virtues of free markets. Generally speaking, Western countries have been fairly flexible when it comes to applying one model or the other, and many have done about turns when their economies have hit hard times. The US pulled out of a major depression through massive amounts of government spending in the 1940's that completely changed the country's industrial capabilities, and more recently countries like Brazil and Bolivia rejected neo liberal economics in favor of a Keynesian approach.
Throughout history, free market capitalism has been popular until markets collapse and government is forced to pick up the pieces. But in recent times, particularly in America and much of Europe, the belief in monetarism has been so extreme that even when markets collapse, economists have urged government to stay out and maintain their belief that markets will miraculously correct themselves.
President Obama defied the orthodoxy when he came to power in 2008, partly because George W. Bush had already authorized a huge stimulus package to bail out Wall St, but also because of the enormous recession that threatened to topple the country if left unchecked. Obama pushed through a $787 billion dollar package that amongst other things, bailed out the automobile industry and ensured states could go on paying policemen, firemen and teachers.
Given the crash in 2008 wiped upwards of $12.8 trillion off the economy, Republicans who believed in the power of markets to correct themselves found their pleas falling on deaf ears, with many accepting the need for some sort of intervention. Economists on the Left believed the stimulus was too small and would only lead to a partial recovery, while economists on the Right believed it would fail because government was the impediment to growth, not the engine.
The reality is that economists on the Left were right - Obama's stimulus and subsequent economic program has been moderately successful leading to a partial economic recovery and slow road back to stability. And while it hasn't been a roaring success, it is going in the right direction.
We're seeing the two theories tested in the field right now - Keynesian economic in America, and Monetarism in Europe. And the results are fairly conclusive. Europe is on the brink of disaster, while America is on a path back to growth. In America, this means Republicans are now facing the prospect of challenging Obama on an issue they were completely wrong about. Writes conservative commentator David Frum on CNN.com:
The nation's economy added 171,000 jobs in October 2012, for a total of almost 700,000 in the four months before Election Day. More than half the jobs lost in the crash of 2008-2009 have now been recovered, even as public-sector employment has shrunk by a net 500,000.
The economy is recovering because consumers are less burdened by debt. They are paying down their credit cards, building home equity and strengthening their personal balance sheets.
As household debt burdens become lighter, consumers express more confidence. They are allowing themselves to spend a little more. They are even buying new homes again. Housing starts in October 2012 rose to a level 41.9% over a year before.
Accelerating economic activity is rapidly reducing the budget deficit. The deficit has contracted since 2009 at the fastest rate since the end of World War II, faster even than during the late 1990s boom.
For many Republicans and Libertarians, facts do not alter their world view - their faith in markets is so strong that all evidence must be ignored. Outcomes have not been as important as being right, and the GOP pinned their electoral hopes on selling fantasy to voters still hurting from the devastation Wall St wrought back in 2008. As Frum points out, this cannot go on:
For too long, the Republicans have predicted apocalypse, debt crisis, the loss of freedom, the overthrow of the constitution. As the economy improves, that doom-saying will seem even more out of touch than ever.
Republican political chances will depend on the Republican ability to devise a positive program to address the country's fiscal problems in ways that improve people's lives. It's a new day, guys, and it demands a new game.
What will that new game be? Defying the hardliners and inventing a new economic philosophy (or at least reverting to an old one) is no easy task. Traditional conservatism doesn't rule out the use of government in stimulating or regulating the economy - after all, in 1971 Richard Nixon declared "Now I am a Keynesian," in response to widening poverty, and implemented a deficit spending 'full employment' budget. But the problem is, someone's already doing the more traditional type of conservative governing in Washington.
And that's President Obama.