From Smith to Keynes: A History of Economic Policy

The economic history of the past hundred years can be divided into three periods, each guided by one of two different economic theories: classical and Keynesian economics.

Economic Policy Through the Lens of History

At the turn of the 20th century, classical economic theory was dominant. There was fairly universal consensus that when it came to markets, the government had no place. This of course doesn’t mean that the economy at the time was in a constant boom; on the contrary, it repeatedly fluctuated between panics and periods of growth. Economists and politicians accepted this pattern, known as the business cycle, and were perfectly content to wait out the bad times with the knowledge that good times were just around the corner. Nevertheless, in response to a particularly nasty recession, the Federal Reserve Act was passed in 1913*, creating a lender of last resort for banks in the hopes that it would prevent, or at least mitigate, future panics.

Of course, October 24, 1929* changed things a bit. As bank after bank closed and the unemployment rate steadily rose, it became clear that this economic panic would be bigger and more devastating than any before. In response, FDR, Congress, and the FED began experimenting with new means of stimulating the economy. The FED used its newly-established power of monetary policy and unfortunately, made some misguided decisions. In an effort to curb inflation and discourage banks from making poor investments, the FED raised the interest rate, decreasing the money supply. However, this action not only discouraged general investment (which decreased total output and further increased the unemployment rate), but also prevented banks from borrowing money to stay in business and caused more of them to fail. Congress, on the other hand, made things slightly better. FDR’s famed alphabet soup programs increased government spending, creating jobs for many unemployed workers, and benefits for ordinary citizens. And with these programs, fiscal policy was born.

We don’t know just how successful FDR’s fiscal policy was because World War II came after only 9 years of a plateauing depression and created a sudden demand for jobs, businesses, and investment. There is little doubt among economists that the war which claimed so many lives was also largely responsible for restarting the economy. But the lesson of the depression had been learned, and from 1946*, the government turned to the ideas of a British economist named John Maynard Keynes.

*Source: US Economic Timeline

Keynesian economics is fairly straightforward: it claims that the government is responsible for controlling the economy, creating jobs for the unemployed, and countering the effects of the business cycle. In times of economic expansion, the government should keep the economy from growing too fast by raising taxes and cutting government spending. In times of economic recession, the government should stimulate the economy by cutting taxes and raising government spending. Monetary policy works similarly, with high interest rates in times of expansion (to discourage investment) and low interest rates in times of recession (to encourage investment). (Here’s a useful link that helps explain fiscal and monetary policy.)

The Great Depression had taught politicians that the economy cannot go entirely unregulated; however, a new debate had sprung up over how much regulation was needed. In the 1990’s in particular, many so-called “classicalist” economists insisted that there was too much regulation, and successfully pushed for less. Furthermore,while contractionary fiscal policy may be good for the economy, it does not sit well with the public or politicians. (Because how many people can get elected campaigning for more taxes and less government spending?)

Another issue with Keynesian economics is that it focuses largely on the demand side of the economy. Until the mid-1970’s, economists looked largely at output (fiscal) and the demand for money (monetary), but when the oil shocks of 1973 and 1979 came, this was no longer the case. The attempt to keep oil prices low further decreased supply and caused greater shortages.

In case you haven’t picked up on it, most economic models were developed as a result of major crises. With each panic, recession, or depression, fiscal and monetary experiments allowed economists and politicians alike to learn how to stroke the economy’s fur in the right direction.

 

 

Read More

Gun Control Part 2: Current Policies and Problems

Last week I did some research on whether we actually do need gun control laws. And while I understand that for many people, the debate ends there, this week I would I like to entertain the idea that we do need gun control laws, and see what the current policies and problems are.

“A well regulated militia being necessary to the security of a free state, the right of the people to keep and bear arms shall not be infringed.”

Second Amendment of the Constitution

When it comes to gun control, the first place people typically look is the Second Amendment. And while the amendment itself consists of two independent clauses, the belief that the right to bear arms is encapsulated in this document rests on interpreting the second clause by itself, rather than as a continuation of the first. And thus, the controversy arises.

Surprisingly, this controversy only came about fairly recently. According to the New Yorker, for the better part of American history, “The courts had found that the first part, the “militia clause,” trumped the second part, the ‘bear arms’ clause. In other words, according to the Supreme Court, and the lower courts as well, the amendment conferred on state militias a right to bear arms—but did not give individuals a right to own or carry a weapon” (So You Think You Know the Second Amendment). It wasn’t until the late 1970’s that members of the National Rifle Association began to push for the new interpretation of the amendment. Though the idea met a lot of criticism at first, it quickly grew among Conservatives who put weight on politicians and courts. Eventually, the idea became law in 2008. The Supreme Court Case District of Columbia v. Heller held that the Second Amendment protects an individual’s right to possess a firearm for traditionally lawful purposes (i.e., self-defense within the home and within federal enclaves).

But the Supreme Court’s ruling did hit a bit of a snag. When the Second Amendment was written, the rifles used in militias were also the rifles people typically had in their homes and used for hunting. However, there was no way the Supreme Court could authorize civilians to possess contemporary military weapons, so Justice Antonin Scalia ruled that D.C. could not ban handguns because “handguns are the most popular weapon chosen by Americans for self-defense in the home, and a complete prohibition of their use is invalid.” So while the government can’t ban handguns*, it can ban other weapons…which leads to further controversy.

*It is worth noting that after D.C. passed a handgun ban and trigger-lock law in 1976, the murder rate averaged 73% higher than it was at the outset of the law, while the U.S. murder rate averaged 11% lower. (Source: Gun Control – Just Facts)

When it comes to right-to-carry laws, these are typically in the purview of each state. Right now, each state has right-to-carry laws that generally fall into one of three main categories:

1) “shall-issue” states, where concealed carry permits are issued to all qualified applicants

2) “may-issue” states, where applicants must often present a reason for carrying a firearm to an issuing authority, who then decides based on his or her discretion whether the applicant will receive a permit

3) “no-issue” states, where concealed carry is generally forbidden

Another form of gun control– which in my opinion is both the trickiest and the most promising– is background checks. I found a lot of information regarding this particular subject, but rather than including it all, I am going to merely list some of the facts I found to be interesting (for more information, check out this link).

  • During 2002 and 2003, out of 17 million background checks resulting in 120,000 denials, the federal government prosecuted 154 people (about one-tenth of 1% of the denials).
  • According to federal agents interviewed in a 2004 U.S. Justice Department investigation, the “vast majority” of denials under the federal background check system are issued to people who are not “a danger to the public because the prohibiting factors are often minor or based on incidents that occurred many years in the past.”
  • As of 2010, federal law does not prohibit members of terrorist organizations from purchasing or possessing firearms or explosives.
  • Between 2004 and 2010, 1,225 firearm and 3 explosives background checks for people on terrorist watch lists were processed through the federal background check system. Of these, 91% of the firearm and 100% of the explosives transactions were allowed.
  • To undergo a background check, prospective gun buyers are required by federal regulations to present “photo-identification issued by a government entity.”
  • Using fake driver’s licenses bearing fictitious names, investigators with the Government Accountability Office had a 100% success rate buying firearms in five states that met the minimum requirements of the federal background check system. A 2001 report of this investigation states that the federal background check system “does not positively identify purchasers of firearms,” and thus, people using fake IDs are not flagged by the system.

What does all of this information tell us? It means that our current background checks are pretty much worthless. The rate of denial is fairly low and fake I.D.’s are good to go. It means that even bans on guns, such as the 1976 D.C. ban, are actually correlated with an increase in crime, and that right-to-carry laws are drastically different from state to state. Furthermore the gun controls that are actually in place are not properly enforced (check out this article for some truly disappointing facts about the state of our gun control laws).

So where do I stand on this? As far as the Second Amendment is concerned, I believe that it should be interpreted in its entirety. However, I do believe that civilians should have the right to own handguns. I support the “may issue” right-to-carry laws, though I worry about giving gun sellers too much leeway in picking and choosing who can buy (given their additional motives as businessmen). As far as background checks are concerned, I believe there needs to be stronger enforcement and a more homogenous, simplistic process. With so many particulars, forms, and requirements, people are inadvertently pushed towards acquiring weapons on the black market or cheating the system, simply out of convenience.

Read More

Do We Need Gun Control?

With the tragic events that have recently unfolded in Newton, the debate over gun control has been furiously rekindled. Advocates for tighter gun control laws have taken the deaths of each innocent person as a symbol for their renewed fight, treating them with a sort of martyrdom that can guilt trip almost anyone to support their cause. Gun control, in all honestly, has never been a prevalent issue for me. I guess I have been lucky enough not to ever experience a situation where I had to use a gun. So decided to do a little research to form my opinion, and found many interesting aspects that go into this complex issue.

 If roads were collapsing all across the United States, killing dozens of drivers, we would surely see that as a moment to talk about what we could do to keep roads from collapsing. If terrorists were detonating bombs in port after port, you can be sure Congress would be working to upgrade the nation’s security measures. Only with gun violence do we respond to repeated tragedies by saying that mourning is acceptable but discussing how to prevent more tragedies is not. “Too soon,” howl supporters of loose gun laws. But as others have observed, talking about how to stop mass shootings in the aftermath of a string of mass shootings isn’t “too soon.” It’s much too late.

http://www.washingtonpost.com/blogs/wonkblog/wp/2012/12/14/nine-facts-about-guns-and-mass-shootings-in-the-united-states/

I thought this article did a very good job of describing a correlation between gun violence and gun possession. And while I understand that the media has bias, that correlation does not imply causation, and that even statistics can be twisted to form an argument, in this case, I chose to believe that the studies lead to a logical conclusion.

In fact, it matches up with what I learned in my AP Psych class, going way back to my sophomore year of high school. In that class, I remember discussing a study which stated that people who possess weapons in their household are more likely to respond violently to provocation. Though my old Psych textbook is now most likely in the hands of an underclassman at my old school, Google turned up a plethora of research behind this assertion. One study claimed:

“Keeping a gun in the home carries a murder risk 2.7 times greater than not keeping one, according to a study by Arthur Kellermann. The National Rifle Association has fiercely attacked this study, but it remains valid despite its criticisms. The study found that people are 21 times more likely to be killed by someone they know than a stranger breaking into the house. Half of the murders were over arguments or romantic triangles. The study also found that the increased murder rate in gun-owning households was entirely due to an increase in gun homicides only, not any other murder method. It further found that gun-owning households saw an increased murder risk by family or intimate acquaintances, not by strangers or non-intimate acquaintances. The most straightforward explanation is that the presence of a gun increases the possibility that a normal family fight or drinking binge will become deadly. No other explanation fits the above facts.”

http://www.huppi.com/kangaroo/L-kellermann.htm

 

I also learned about a famous incident involving this psychological phenomena, the Amadou Diallo shooting (http://topics.nytimes.com/topics/reference/timestopics/people/d/amadou_diallo/index.html). Basically, four policemen were doing rounds when they saw a man that matched the description of a serial killer and rapist. They loudly declared themselves as NYPD and the man, Amadou Dillo, ran to his apartment, and came back out with his wallet. In the dim lighting, one of the officers, seeing a small square object, yelled “Gun!” and all four policemen opened fire. Dillo, an immigrant from Guinea, did not know English and was trying to show the police officers that he had documentation as an immigrant. The resulting scandal largely surrounded the idea of subconscious racism, however, many psychological studies of the incident focused more on the circumstances that the officers were in, and how they led to violence. Two of the conclusions that we learned about in class was that because there were four officers, as opposed to two, and because they all carried weapons, they were more likely to respond violently.

So maybe the Newton shootings should re-ignite the debate over gun control laws. But what types of laws should we pass? What policies would actually be effective? And what would be an unnecessary infringement of our second amendment right?

Hopefully, next week I will have some answers to these questions.

 

Read More
Skip to toolbar