The Keynes-Hayek showdown
By Nicholas Wapshott The views expressed are his own.
Eighty years ago an anguished debate between two economists began in Britain — and came to shape the politics of the world after World War Two. The differences between John Maynard Keynes and his nemesis Friedrich Hayek sharply described alternative approaches to addressing the ebb and flow of the business cycle, with Keynes arguing that to put the jobless back to work governments could and should intervene in the market and Hayek insisting that such actions were based on an inadequate understanding of how economics really worked and would only delay the day of reckoning.
That snarky disagreement was so vicious and ill-mannered that one old-school economics professor described it as “the method of the duello” being “conducted in the manner of Kilkenny cats.” On Tuesday, in the Asia Society on Park Avenue, New York, two teams of economists, one representing Keynes, the other Hayek, will slug it out before an audience of 250 and bring the debate to America. Seventy years ago, Keynes’s ideas were eagerly embraced by young American economists who began implementing the Cambridge economist’s ideas first in Franklin Roosevelt’s administration, then in every government until Jimmy Carter, when Hayek’s disciple Milton Friedman introduced monetarism as a guiding principle.
The Keynes-Hayek debate has never been so topical. Today the fault line between right and left can be defined as the difference between those, like President Obama, who believe that the broken economy can be fixed by the government providing a giant fiscal stimulus, and those, like all the Republican presidential contenders, who believe government in America is too big and should be dismantled to make way for the operation of the free market. While Obama pushes his Jobs Bill, which would inject about half a trillion dollars into the economy, the GOP in the House is preventing any such manipulation of the economy from taking place.
The belated American Keynes-Hayek debate was provoked after the stock market crash of 2008 and the freezing up of the banks and Wall Street financial institutions the following year. A trillion-dollar Keynesian stimulus was quickly followed by a Hayekian wave of buyers’ remorse that deemed that the swift reduction of the national debt was more important than giving jobs to the unemployed. Congressman* Paul Ryan’s economic plans urging fiscal continence without delay were supported by the Tea Party movement that demanded that new government borrowing cease. Last summer’s debt ceiling talks continued the battle and was met by Obama’s doomed Jobs Bill by which the president is attempting to pin blame for joblessness upon his opponents.
The Reuters debate will put such practical prescriptions and counter-arguments into perspective. Four Keynesians – economist James Galbraith, son of the high priest of Keynesianism, John K. Galbraith; New Yorker columnist John Cassidy, Sylvia Nasar, the historian of economic thought and author of Grand Pursuit; Steve Rattner, the architect of Obama’s auto company bail-out – will slug it out with four Hayekians – Economics Nobel Prize-winner Edmund Phelps; Professor Lawrence H. White of George Mason University; Diana Furchtgott-Roth, a senior fellow at the Manhattan Institute; and Stephen Moore of the Wall Street Journal. If this group of distinguished thinkers follows the spirit of the original debate, the usual academic civilities may soon make way for acerbic fireworks.
The spirit of the original debate is likely to inform Tuesday’s lively discussion, framed like an Oxford Union debate and presided over by Sir Harry Evans, Thomson Reuters’ editor-at-large. Keynes and Hayek first argued over whether deliberately creating new demand in an economy — by cheap money lent by banks, by slashing taxes, and by governments directly investing in public works programs –- could be sustained, or whether, as Hayek argued, such measures would only in the long run delay the day of reckoning. Keynes’s famous riposte was that even temporary jobs were worth having because “in the long run we are all dead.”
What happens after Obama’s jobs bill dies?
By Nicholas Wapshott The opinions expressed are his own.
You can add to the list of hollow cries from history–such as “Ban the Bomb!” and “Bring the Troops Home!”–the president’s favorite refrain, “Pass the Jobs Bill Now!” Like the rest, Obama’s oft repeated demand is a sham, a mere slogan. Neither he nor his party, and certainly no Republican, believes Congress is going to pass even a small part of the bill, for it combines two elements his opponents detest the most: public works and higher taxes on the rich.
While the GOP squabbles over which of a barely electable field to pick as its candidate, Obama has already begun his reelection campaign in earnest. The simple message he is taking on the road is that Congress should “pass the jobs bill now!” That’s a plea he knows is sure to be ignored, leaving him in a position, he believes, to blame persistent joblessness on the Republican obstructionists. He is onto something. As Jimmy Carter found out, Americans hold their presidents to account when the economy is tanking; they expect them to improve the economy and are prepared to fire them when they don’t. It is a lesson for conservatives who believe that governments can’t and shouldn’t attempt to change the economic weather. Voters blame the government anyway, whether they intervene or not.
Obama, like Franklin Roosevelt, believes in trying to fix the symptoms of a broken economy, while his GOP opponent, whoever it turns out to be, must hold to the Hayekian orthodoxy insisted upon by the Tea Party and the Republicans’ fiscally conservative wing that there is nothing much governments can or should do to improve the economy and that stimulus spending either does not work at all or will only make the smallest of differences in the short term. As Obama gleefully knows, a rival promising austerity, the long haul, a far worse economy before it gets better, and a dim light at the end of a long, long tunnel will be running against the spirit of optimism that Americans feel and like to hear from their leaders.
Obama’s American Jobs Act is a thinly disguised second Keynesian stimulus designed to pump $450 borrowed billions into the economy to raise aggregate demand and give jobs to some of the 9.3 percent of Americans out of work. Obama’s task is to convince the American people that stimuluses work. The results of his first hurried stimulus, all $814 billion of it, are mixed. It set off a burgeoning cottage industry among conservative economists taking it in turns to prove that the stimulus did nothing or little to improve growth or job creation. Take Alan Reynolds of the Cato Institute: “There’s no evidence for the theory that state spending has shortened this or any other slowdown.” Or this, from John F. Cogan and John B.Taylor, of the Hoover Institution: “Beware of politicians proposing public works and other government purchases as a means to stimulate the economy. They did not work then and they are not working now.”
It is easier to show that Obama’s initial stimulus did not work well – the money went to pay off private debt, or went into private savings, or was spent on foreign goods, or replaced state and local government borrowing with federal government handouts – than the broader point: that stimuluses don’t work in any circumstances. So, will Obama’s stimulus work? We will never know, because it will not be enacted. If the president is reelected he will have to propose a new stimulus to suit the conditions of November 2012.
That leaves a whole year for his economic advisers to come up with a stimulus that works. There can be no excuse next time that the stimulus was flawed because to avert an imminent economic crisis it had to be brought in quickly without adequate planning. There is no need to find elusive “shovel ready” public works projects that can be started immediately as there is a whole year to find and design job-creating schemes that will not entail pouring billions into the sand. There is a whole year to find ways of giving cash only to those who will spend it on other Americans, not blow it on foreign consumer goods or hoard it as has happened the last time.
After the disaster of GWB he had the right plans to deal with the problems, but he was to nice, he tried to find consensus, he should not have…..In his road towards the next election he should include a lot of the principles behind the occupy movement, in my opinion that will strike home with a hell of a lot of American people. And he should go back to his initial plans for job creation and push them hard, after all he can now straight forward GOP and right wing democrats for the failure to do just that. May-be he could also bring forward the idea of doing away with lobbying, which after all is legal corruption.
Tea Party has morphed culture wars into economic combat
By Nicholas Wapshott The opinions expressed are his own.
As Margot Channing put it in All About Eve, “Fasten your seat belts. It’s going to be a bumpy night.” The battle over Obama’s jobs bill marks the opening of the Keynes Hayek election, which, if the poisonous duel between the two giants of economics is anything to go by, will be a down and dirty clash of opposites. Obama will champion intervening in the economy to get Americans back to work, while his rival will demand a shrunken government and the speedy repayment of the national debt.
The first shots in this snarky contest have already been fired. Take Obama’s dismissal, in his speech to both houses of Congress, of the Hayekian notion that government is too costly and largely unnecessary: “This larger notion – that the only thing we can do to restore prosperity is just dismantle government, refund everybody’s money, and let everyone write their own rules, and tell everyone they’re on their own — that’s not who we are. That’s not the story of America.” Obama finds himself defending the whole of the Democrats’ progressive record, from Roosevelt’s New Deal to Johnson’s Big Society.
Most aggressive in his assault upon Keynesianism is Rick Perry, who declared in the Reagan Library last week that Obama “has proven for once and for all that government spending will not create one job. Keynesian policy and Keynesian theory is now done. We’ll never have to have that experiment on America again.” Gingrich, too, thinks “the American people create jobs, not government.” Most Hayekian is Ron Paul, who said his first act in the White House would be to “bring a course in Austrian economics to teach the people the business cycle and why the Fed creates inflation and depressions and all our unemployment problems.”
The GOP, once the home of Chicago School economics, has drifted away from what in retrospect looks like the sweet reason of Milton Friedman. Fed chairman Ben Bernanke, a devout Friedman acolyte, is still reeling from being accused by Perry of being “treacherous” and “treasonous,” and finds himself now on the hit list of most Republican champions, who take it in turns to boast they would fire him because, in Newt Gingrich’s words, “his policies have deepened the depression, lengthened the problems, increased the cost of gasoline, and been a disaster.” Even the once moderate Romney says, “I’d be looking for somebody new.”
To become the nominee, the wannabes have first to please the Tea Party that has taken over from the Christian Right as the main drivers of Republican sentiment. Devotion to economic conservatism and a tilt toward libertarianism has replaced social conservatism as the loyalty test by which contenders are judged. Perry launched his campaign with the boast that he wanted to “make Washington, D.C., as inconsequential in your life as I can.” Paul went one further, declaring, “We don’t need the government running our lives” and even saying that “9/11 came about because there was too much government.”
Not even the most ambitious Republican candidate is expecting to reach a government-free nirvana in a single term, but from their utterances we are now getting a good glimpse of what, if the tide has really turned against Keynes, a small-government America might look like. First, there would be no universal health care, the touchstone pledge of all who want to reverse eighty years of government big spending. Second, the federal government would devolve as many powers as possible to the states, which would slash the costs of mandated programs then further minimize influence on people’s lives wherever they could. Third, Social Security would be privatized and pension provision left to individuals. Fourth, welfare would be cut and good works for the poor and the needy left to charities and churches. Fifth, government departments such as Homeland Security and agencies like the TSA would be disbanded. Sixth, America would cede its role as the world’s policeman and withdraw smartly from Afghanistan and Iraq.
One party is asking what their government can do for them and the other believes asking not what your government caan do for you, but what you can do for your government! (JFK by the way-he’d be a Tea Party leader in todays world!
The fight of the century: behind the scenes
Keynes and Hayek are back. As rappers. For those who don’t know about these two economists, or can’t keep their philosophies straight, there’s a great rap video just out that clearly explains the warring ideologies of those two men, titled “Fight of the Century: Keynes vs Hayek Round Two.” And it is the fight of the century, or at least, right now. If Hamlet were giving a soliloquy about the economy, it would start, “to spend or not to spend. That is the question.” For John Maynard Keynes, the answer is to spend. For Friedrich August Hayek, the answer is to not.
What is interesting, and less known, about this economic rap video is that the idea for it didn’t come from an economist. Or anyone remotely close to being one. Instead, it came from a video producer named John Papola, who went to Penn State for film. And despite having worked at MTV after graduating from college, it’s also his first dive into rapping.
Papola become interested in economics partly because of the Ron Paul campaign in 2007. He was struck by what Paul was saying and how the economy played out in 2008. “Nobody else was saying what [Ron Paul] was saying,” Papola says.
With his growing interest in politics and the economy, and a sense that what was unfolding following the collapse of Bear Sterns was history in the making, Papola started to listen to audio books about American history and important political figures like John Adams and Ben Franklin on his two hour-plus commute between Vernon, New Jersey and Manhattan. He also listened to various podcasts, including’ EconTalk, Russ Roberts’ “economics podcasts for daily life”.
“You start to get a little bit of history under your belt and it comes alive,” Papola says. “Those were real people going through real life, and it makes for great stories — and movies. (I don’t know why it makes for such bad lectures).”
And bring history alive is what Papola has done with Roberts. Both of their “Keynes vs Hayek” rap videos make tangible what is happening in the economy and what Keynes and Hayek believed should be done about it. Despite no longer being alive — Keynes was born in 1883 and Hayek in 1899 — their philosophies are quite relevant today. For what we are seeing now is not much different from what happened in the 1920s. And the US economy may soon look like it did in the 1970s, when the we had high unemployment and low production.
Economists never had a debate on whether or not to ignore the depreciation of Durable Consumer Goods. They just did it. But then they make a big deal of this trivia like it is important.
How many trillions of dollars have gone down a rat hole while economists pretend it does not matter?
Anti-Keynesians and falling commodity prices
Policymakers’ new enthusiasm for cutting budget deficits will slow growth across the advanced industrial economies, cutting the outlook for commodity consumption and prices over the next 2-3 years.
For the past year, investors and commentators have been trying to guess how quickly extraordinary stimulus provided during the 2008-2009 crisis would be withdrawn.
Most attention focused on the timing of interest rate increases and measures to mop up excess liquidity provided by central banks. Instead tightening is set to commence from the fiscal side.
Until recently, most commentators saw government spending as part of the solution, and worried about withdrawing fiscal stimulus too quickly, risking a double dip recession. Now deficit spending is seen as the problem, risking a financing crisis. Keynes is once again unfashionable and the bond market vigilantes are in the ascendant.
AUSTERITY IS FASHIONABLE
Governments in Germany, Portugal, Spain, Italy, Greece and Ireland have already outlined austerity measures, while the United Kingdom and France have also promised unspecified efforts to cut deficits and restore public finances.
OECD Secretary-General Angel Gurria has endorsed the approach, albeit with phased implementation. At a conference in Montreal this week, he urged policymakers “Make sure you give signals to the markets about fiscal consolidation.” But he suggested delaying implementation. “Do we have to start now? No. Do we have to announce now? Yes.”.
What did Keynes or Hayek say about Demand Side Depreciation?
It is 42 years after the Moon landing. The economics profession cannot specify what has been lost on the depreciation of automobiles each year for any country or for the planet. So if planned obsolescence has been going on how would that affect the figures?
But we are supposed to care about these pseudo-debates about the ideas of a man who died 23 years before the Moon landing? We don’t even know the depreciation during those 23 years.