Economic Theories and the Conservative Case Against Big Government Spending
- BCRP
- Aug 8, 2025
- 4 min read
BCRP, 08August2025
Across political and academic lines, there is widespread disagreement about how governments should manage the economy. The most influential economic theories— Keynesian economics, Austrian economics, and Modern Monetary Theory (MMT) —offer radically different views on the role of government spending, money creation, and debt. These competing ideas help explain the sharp divide between progressives who favor active government involvement and conservatives and libertarians who believe in restrained fiscal policy, sound money, and limited government.
What Is Keynesian Economics?
Keynesian economics, developed by British economist John Maynard Keynes during the Great Depression, argues that government should play an active role in managing the economy—especially during recessions. Keynes believed that economic downturns occur when aggregate demand (total spending by households, businesses, and government) falls short.
To counter this, the government should increase spending and reduce taxes to stimulate demand and restore employment. Deficit spending during a recession, according to Keynes, isn’t just acceptable—it’s necessary.
Keynesians also embrace the concept of the "multiplier effect," where one dollar of government spending generates more than one dollar in total economic activity. They argue that markets don’t always self-correct quickly, especially when wages and prices are “sticky” and slow to adjust. Thus, fiscal intervention is viewed as a necessary tool to maintain economic stability.
Austrian Economics: Markets First, Government Last
In sharp contrast, Austrian economics —led by thinkers like Carl Menger, Ludwig von Mises, and Friedrich Hayek —champions the idea of free markets, individual decision-making, and strict limits on government.
Austrians argue that government spending and money creation distort natural price signals, misallocate resources, and create harmful boom-bust cycles. According to Austrian Business Cycle Theory, central banks like the Federal Reserve fuel unsustainable booms by artificially lowering interest rates and expanding credit. When these malinvestments inevitably collapse, recessions follow.
Austrians reject deficit spending and government stimulus as both economically dangerous and morally questionable. They emphasize “sound money,” often advocating a return to the gold standard or systems that limit the government’s ability to inflate the money supply.
Modern Monetary Theory: A Radical Alternative
Modern Monetary Theory (MMT represents an even more dramatic departure from traditional economics. MMT claims that countries that issue their own currency—like the U.S.—can never run out of money the way a household or business can.
According to MMT:
Government spending is not constrained by revenue or borrowing.
Taxes are not needed to fund spending, but to manage demand and control inflation.
The real limit on spending is inflation, not deficits or debt.
MMT advocates believe that the federal government can fund ambitious programs like universal healthcare, green energy, universal basic income, or job guarantees simply by issuing new money—so long as inflation remains under control.
Why Conservatives and Libertarians Reject Keynesianism and MMT
While MMT has gained traction among progressive policymakers, conservatives and libertarians strongly reject both it and Keynesianism.
From the conservative viewpoint, high federal spending and large deficits increase the size and scope of government, create dependency, and reduce individual responsibility. More importantly, conservatives worry that excessive borrowing can crowd out private investment, raise interest rates, and burden future generations with debt.
They advocate for:
Balanced budgets
Lower taxes
Private-sector-driven growth
Libertarians: Even More Skeptical
Libertarians go further. They view most government spending as a violation of liberty, regardless of economic consequences.
For libertarians:
Taxation is coercion
Wealth redistribution is unjust
Free markets allocate resources better than bureaucrats
They support eliminating entire government departments, abolishing the Federal Reserve, and returning to commodity-backed money like gold. Growing support for sound money is evidenced by KY Republican lawmakers 2025 enactment of House Bill 2 preventing the taxation of bullion, currency, and coins. This bill was enacted despite an attempted veto by the Governor and reinforces the earlier exemption established in the 2024 session.
Money Creation and Inflation: The Conservative Concern
Both conservatives and libertarians are especially wary of money creation by the Federal Reserve, which they argue causes:
Inflated asset bubbles
Weakened currency value
Long-term economic instability
When the Fed creates money—by lowering interest rates or buying government bonds—it increases the money supply. When combined with aggressive federal spending, this floods the economy with liquidity. If that money chases limited goods and services, it creates inflation.
This was seen during the COVID-19 pandemic, when trillions in new money and deficit spending increased demand while supply chains were disrupted. The result: the highest inflation in over 40 years—proof, conservatives argue, that unchecked money creation has real consequences. Known as the "hidden tax", inflation diminishes the value of personal savings through erosion of each dollar's purchasing power.
Final Thoughts
While Keynesianism and MMT favor aggressive government action to stabilize the economy and achieve social goals, conservatives and libertarians, drawing on Austrian economics, argue that this approach undermines fiscal responsibility, economic freedom, and monetary stability.
In their view, the path to long-term prosperity lies not in printing and spending, but in discipline, liberty, and trust in free markets.
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