Tea Party cools as Keynes makes a comeback

By Nicholas Wapshott
August 30, 2011

By Nicholas Wapshott
The opinions expressed are his own.

Is the Tea Party running out of steam? I ask because there appears to be growing evidence that the Mad Hatters’ wild ride, culminating in Obama’s defeat last month over the debt ceiling at the hands of the Tea Party in Congress, has slowed to a trot. Exhibit one, the entrails of the most recent Pew poll where there is a startling finding. Just two months ago, those who believed trimming the deficit was the nation’s top priority outnumbered those who wanted more spending “to help the economy recover” by ten percent. Today, the number who advocate more government spending to fix the lackluster economy are neck and neck with those who wish to cut the budget deficit without delay.

Why the shift? Well, it seems that some Americans have changed their minds over the issue that lies at the heart of our politics. Today’s great political debate divides along the lines established eighty years ago by John Maynard Keynes and Friedrich Hayek. In 1932, when one in four Americans was out of work, Keynes suggested a mixture of policies to pump money into the economy to increase demand and get people back into jobs: keep the cost of borrowing cheap so that businesses could expand; invest in public works that directly employs the jobless; and cut taxes to put cash into people’s pockets. Hayek countered that such expansionist policies were unlikely to work and would have unintended consequences. At the very least they would in the long run fuel inflation and, when the government took its foot off the gas, cause businesses artificially boosted by the measures to go bust.

When Obama was elected in November 2008 he faced an economy that was teetering on disaster. His answer was a Keynesian stimulus package that meant plunging the nation even deeper into debt than George W. Bush had left it after bailing out the banks, enacting a huge tax cut and funding two overseas wars. No sooner had Obama adopted a Keynesian remedy than some of his opponents demanded a Hayekian antidote: paying down the debt as soon as possible. This outbreak of electors’ remorse gave rise to the Tea Party whose argument appeared to be that if a family has to pay off its overdrafts and credit card borrowings when it is going bankrupt, surely a nation should do the same. The 2010 midterms saw the election of a wave of Tea Party candidates, most of whom had pledged not to agree to anything that would either raise taxes or fail to address the national deficit. The raising of the debt ceiling, which had always been a routine matter between the two parties, became a pitched battle, with the president having to bow to the Tea Party’s principles or allow America to default on its debts.

But the tide may well have turned. If the trend Pew has spotted is genuine and continuing, what a month ago seemed like Obama’s Waterloo is looking increasingly like the Tea Party’s Chancellorsville. The devil is in the details. Not surprisingly, Democrats still favor spending over cuts by two to one. Nor has the Tea Party shifted: four out of five thought deficit reduction the most important issue in June; the same proportion thinks so today. But moderate Republicans have shifted. While two months ago they divided two to one in favor of cuts over spending, now they divide 55 percent to 40. Independents, too, are on the move. Two months ago they favored deficit reduction by 54 percent to 39; today they are evenly divided.

What has caused such an about-turn in the center ground? Perhaps Americans have been taking a second look at Keynes, though I doubt it. Keynesians are in full retreat, battered and bruised by a savage campaign that has painted them as self-serving spendthrift brigands. Few Keynesians can be found arguing their hero’s corner right now. Perhaps, on closer examination, Americans have concluded that cutting public spending when the economy is teetering on a downturn is a guaranteed way of ensuring a double dip recession. (If you want to see what that looks like, go to London, where a Hayekian experiment is in full swing.) Perhaps an idea that seemed good when discussed around the kitchen table doesn’t sound so great from the mouths of Rick Perry and Michele Bachmann. What exactly is going to be cut? Education? Social Security? The armed forces?

It is rash to invest too much meaning into one set of poll figures. Americans are in an agitated state about jobs and the economy and could easily swing back toward the Tea Party. But if the trend keeps up its momentum, like the demotion of Hurricane Irene to a tropical storm, we may have witnessed the ebbing of a populist movement that for a while caused the nation to batten down the hatches and await an unkind, uncomfortable fate.

Nicholas Wapshott’s “Keynes Hayek: The Clash That Defined Modern Economics” is published by W.W.Norton in October. Read an extract here.

22 comments

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I’m no economist – have been become a somewhat reluctant student of economic theory in the last year or so!

My general understanding of Keynesian strategies suggests that bailing bankers, who then hold funds, is *not* in the spirit of Keynesian theory, which emphasized getting money into circulation. So I don’t count bailing bankers as “Keynesian”.

In fact, bailing bankers seems more in line (in outcome at least) with Hayek’s views (i.e. unfettered accumulation of wealth will ‘magically’ create prosperity for those who’ve been disenfranchised by withdrawal of funds from ‘commons’ investments, such as public health, education, utilities, etc.).

The fundamental questions remain: “Who are we as a species?”; “What is our unique promise relative to other life forms?”; “What is ‘an economy’, why do we have one, and is it meant to serve humanity’s promise, or is humanity meant to serve the mechanisms of ‘an economy’?”; and – “What stewardship practices do 21stC national and global conditions (including earth itself) require in order that humanity may rise to its potential?”

There are many more questions of this type that we ignore at our peril. What are the motivations of Group X, Group Y, when they promote economic solutions? How comprehensive to ‘best potential for all’ is their thinking? What are their beliefs about potential of each child born?

Economic solutions to resource access and management are constructs, designs. None are ‘sacred’. We are free to design and adjust these as we see fit.

“Social Darwinism” is a ‘belief’; it is challenged by in-born urge to ‘community and social beingness’, which are best served by empathy, which – until we learn to abandon it, is also ‘inborn’. (I’m a retired long time teacher of young children – I’ve witnessed natural empathy and have seen it eroded.)

American founders recommended attention to common weal for a reason.

In our ‘resource insecurity’, all of us (as humans, with human psychology), are susceptible to “turning on one another”, discounting one another’s humanity. This does not bode well for us. Enough research has been done on inequality (Wilkinson and Pickett’s “Spirit Level” for a start) for us to have guidance.

Our choice, always.

Posted by MaggieMP | Report as abusive

This is not an argument between Keynes V. Hayek, or Tea Party V. Obama. It’s at the end of the day really Big Business/Corporations V. the Taxpayer. Guess what? The Taxpayer is losing. Endless Bailouts/Bonus payments to the ones that screwed it all up in the first place. If both Keynes & Hajek were alive today they both would be equally horrified to see what has happened. Keynesian worked in the 1930′s because Gov Debt levels were very low. The country was a surplus country going into the great depression. It is totally different today as debt levels were obese going into the great recession. The Austrian method would have worked 30 years ago when the global financial system wasnt so interconneced. Both are excellent ideas in theory but life is not theory. There is no easy way out of this mess except time.

If an argument needs to be made, its not an argument between Keynes V. Hajek but Keynes V. Milton Friedman. The Monetarists have lost, you can’t simply control the economy and prices via the Interest Rate/Money Channel. This idea has been soundly defeated as Monetary Policy in a balance sheet recession is totally impotent. We need fiscal policy. Europe needs a sound unified fiscal policy out of their mess.

Posted by JayTrader | Report as abusive