In history, there have been various economic theories which have come and gone. In general, the modern economic theorist falls into one of two camps; those who follow the work of Dr Frederich Hayek and those who follow the work of John Maynard Keynes. Hayek argued for government restraint while Keynes promoted for government engagement in the economy.
The problem comes in that Hayek’s work — in particular the form of his economics promoted by Milton Freidman and his Chicago School of Economics — when it was tried, has never worked. While it produces a strong short-term surge, over the long period the underlying foundations of the economy erode and a systemic collapse is inevitable, such as you found in Argentina and Chile during the last century. Akin to taking a shot of adrenalin or steroid for a short term athletic boost, the long term damage is never worth the short term gain.
But, it is this flawed premise which the Romney campaign continues to cling to in order to make the case that he should replace Barack Obama for President of the United States. You can read his economic teams case here:
It boils down to this: we just did not do enough of deregulation and Laissez Faire economics, we must have more! Just because it caused the last recession doesn’t mean it will cause another one. And they point to the previous recessions of the past 50 years as their proof.
Instead, noted Harvard economists released this paper, discussing the differences between the recessions of the past 50 years and the one which gripped the world in 2007. The difference boils down to a single word – Systemic:
The underlying problem is not a bad performing sector dragging down the economy, it is that the system itself is sick and cannot absorb the shock when such a sector appears. This allows a single sector to take down the entire structure. To recover requires far more time — five or more years — based on historical comparisons. In effect, rather than recover, the economy needs to rebuild, to restructure. One must restore the system or else the underlying issues will appear again.
Romney’s proposal addresses none of this; it is based on the idea that if they just believe, it will work. All evidence points to the contrary, but they still cling to their laissez faire, calling it Free Market, and claim that “this time it will work, they’re sure of it!” You just have to believe in it!
Belief is good for fairy tales, it is not good for economic policy.