Virtually every modern conservative theory of economics has been proven wrong

Consider the four pillars of conservative economics:

First theory: Expanding the monetary base and engaging in deficit spending will cause interest rates to skyrocket and inflation to increase.

Reality: The Fed has engaged in three rounds of quantitative easing and the current round isn’t going to end until after unemployment is back to normal, so they say. I think I’ve seen estimates that the monetary base has been expanded by more than a trillion dollars already and there’s more of that to come for at least four more years. Rather than increasing, interest rates have fallen and core inflation hasn’t budged.

Second theory: The big increase in the value of gold was intelligent and liberty-minded investors fleeing fiat currency and government debt due to out of control spending and fiscal irresponsibility; and gold is a better legal tender because it’s value will never collapse.

Reality: Gold plummeted from $1,600 an ounce to $1,350 in April. Anyone who invested savings and whatnot in gold thinking it’d be safer than the U.S. markets just lost 15% of their networth. It turns out that the big bubble in gold was just that: a bubble. And it just burst.

Third theory: Big budget deficits scare investors and business owners who halt hiring, investing, and spending, harming the economy. So reducing deficits will cause in increase in GDP and accelerated hiring.

Reality: The Pentagon cut spending by 22% in the fourth quarter of 2012 in anticipation of the sequestration cuts that eventually went through earlier this year. The result was a big drop on government contribution to GDP, enough to cause the economy to contract at the end of last year. There was good hiring in January and February, but it fell off a cliff in March, barely enough to keep up with growth in the potential labor force. A sharp reduction in government spending has almost instantly pushed the economy to the brink of recession.

Fourth theory: Reinhart-Rogoff is a serious (academic) 2010 paper and model that supposedly proved that high levels of government debt reduced economic growth.

Reality: It looks like R-R was badly flawed, with errors in the spreadsheet and mistakes in the analysis. There is no longer a single study that I’m aware of that supports the political theory of expansionary austerity.

In fact, I’m not sure the last four years haven’t put down every conservative economic belief that there is. All of it is wrong, and that’s because all of it was derived from political want and wish rather than from data, theory, and conclusion.

The idea that cutting deficits, not expanding the monetary base or engaging in stimulus fits the conservative issue of limited government. But that’s not an economic theory or argument, because the economics are actually the reverse of that. Stimulus grows the economy even if it means running up large deficits. The markets reward stimulus and stability by buying debt, pushing down interest rates.

And when an economy isn’t running at full potential (like ours because of 7.6% unemployment instead of 4%), a reduction in government spending creates a hole in economic output that causes bad and completely avoidable problems.

The last four years have been nothing short of a complete rebuttal of modern conservative economic theory, with R-R turning out to be the final piece removed that caused the whole thing to collapse in on itself.

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Paul Krugman put it better than I did in his Thursday op-ed:

One of the central facts about modern America is that everything is political; on the right, in particular, people choose their views about everything, from environmental science to gun safety, to suit their political prejudices. And the remarkable recent rise of “goldbuggism,” in the teeth of all the evidence, shows that this politicization can influence investments as well as voting.

It might be a good thing that faith-based living has made its way to investing. Like elections, investing results aren’t debatable. If you believed that all polls were biased towards liberals in 2012, the results of the 2012 election showed you that you were wrong, and there was no room for arguing.

Investing is just like that. If you were wrong, you’re going to see it definitively. And it’ll be better than elections because the repercussions are painfully personal: your money was at stake, you made the decision, and you lost it. That offers at least some hope that people will wake up and stop engaging in faith-based living outside of religion.

Faith-based governing, as we saw with George W. Bush, and faith-based poll analysis has been proven terribly damaging. Perhaps taking it in the wallet is what will finally end this madness.