When Economists Divorce . . .

We were watching a debate on TV between a Tea Party economist and a more traditional Republican one. They were feuding over whether or not the Austrian economics of the Tea Party was better than the Supply-side economics of the Republican Party. Renee remarked they sounded less like economists debating and more like a husband and wife bickering over a divorce.

Austrian economics is the “tough love” school of economics, emphasizing the importance of a balanced budget over all other things. Supply-side economics is the “growth” school of economics, emphasizing the importance of lowering taxes over all other things.

Unlike religion, which provides guidance for most all situations on most all days, economics is not religion. It is more like situational ethics.

When the economy is dead, Keynesian economics (read: massive deficits) is appropriate. To repair the government, Austrian economics is appropriate. To rev up a stalling economy, Supply-side economics is appropriate.

Instead of debating which view of economics is “right”, the debate should have been which school is appropriate for right now. Last year, we needed Keynesian economics and got it. This year, we need Austrian economics and hope we get it, which means both tax increases and spending cuts, especially in entitlement programs like Social Security, Medicare, and Medicaid. Once we have healed the government, the tax increases will be stalling the economy, and it will then be time to implement Supply-side economics.

So, who “won” the debate between the two economists? Like divorce, they both lost . . . because they accepted their economic beliefs as religious beliefs, forgetting they are just situational ethics.

Deja Vu....?.

The scientific term for the stock market during May was . . . lousy. The S&P was down 8.2%, the worst month of May since 1940, when it dropped over 20%. Of course, it was reminiscent of September in 2008, following the collapse of Lehman, there are differences. The U.S. economy is now rebounding nicely. Take a look at this chart on S&P profits:
It shows the most dramatic fall in profits, followed by the most dramatic rise in profits. While some of this is certainly the result of the Stimulus bill, it nonetheless shows real strength in the U.S. economy.

In September of 2008, the world feared a collapse of the U.S. banking system. Today, the world fears a collapse of the European banking system. Make no mistake, this would certainly have a huge impact on us but would not kill us. I don’t foresee the dark days of 2008 coming back to haunt us.

Plus, I suspect investor sentiment is heavily influenced by two other events. First, many investors were terrified by the “flash crash” on May 6th ,when the Dow briefly dropped 9.2% for a few minutes before recovering most of that loss. On May 28th, there was an even worse “flash crash”. Of course, that was in 1962. Since that time, the market continued to improve nicely. Fear is paralyzing. Hint: Think Long Term!

Second, I think the emotional impact of the BP oil spill should not be quickly dismissed, as it is creating a general malaise over the country. The heavy drumbeat of bad news is taking a toll on us. Remember: Think Long Term!