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Dick Armey asks, "Was Keynes right?"

Thursday, February 05, 2009

This op-ed piece by former House majority leader Dick Armey is worth a look if for no other reason than its title contains the name of one of the most influential members of the Austrian School of economics - Freidrich Hayek.

Washington Could Use Less Keynes and More Hayek

"In the long run, we are all dead," John Maynard Keynes once quipped. An influential British economist, Keynes used the line to dodge the problematic long-term implications of his policy proposals. His analysis of the Great Depression redefined economics in the 1930s and asserted that increased government spending during a downturn could revive the economy.

President Barack Obama and congressional Democrats (very few of whom likely have read Keynes's 1936 book "The General Theory of Employment, Interest and Money") have dug up the dead economist's convenient justification for deficit spending in defense of their bloated stimulus legislation. But none ask the most important question: Was Keynes right?
Does it matter?

Nearly all of Congress is looking more closely at the next election than to the U.S. budget deficit or the Fed's balance sheet.

Until the shouts of "Do something to save my job" are drowned out by those calling for fiscal prudence and a plan that's viable over the long-term, nothing is likely to change.
Government spending is, according to Keynes's construct, a key component in determining aggregate demand, so more spending, even to resod the Capitol Mall or distribute free contraception, drives the economy in the short run.

A father of public choice economics, Nobel laureate James Buchanan, argues that the great flaw in Keynesianism is that it ignores the obvious, self-interested incentives of government actors implementing fiscal policy and creates intellectual cover for what would otherwise be viewed as self-serving and irresponsible behavior by politicians. It is also very difficult to turn off the spigot in better economic times, and Keynes blithely ignored the long-term effects of financing an expanded deficit.

It's clear why Keynes's popularity endures in Congress. Intellectual cover for a spending spree will always be appreciated there. But it's harder to see any justification for the perverse form of fiscal child abuse that heaps massive debts on future generations.
Future generations? They don't vote (yet). It's future elections that are important.

Our monetary system + our government + Keynesian economics = long run disaster

Keynes was certainly right in that, in the long run we are all dead.


Anonymous said...

OMG, there are signs of intelligent life from Congress (other than Ron Paul). You want stimulus? Eliminate income tax and fire 3/4 of the government.

Stim U. Louse said...

it ignores the obvious, self-interested incentives of government actors implementing fiscal policy and creates intellectual cover for what would otherwise be viewed as self-serving and irresponsible behavior by politicians

As if this doesn't happen already. Sure. Let's keep shoveling money down the rat hole that is the US "banks" and cut taxes so I can see an extra 20 bucks in my paycheck every other week. That's a way better solution.

Anonymous said...

I have not read all these theories, but, I know enough to be dangerous.

Frankly, I don't think anyone has any clue as to what will work. It is trial and error.

Clearly, the problem was created by a combination of ultralow interest rates (monetary policy), irreponsible fiscal policy (trickle down supply side economics - taken to the extreme), deregulation (taken to the extreme), excess consumption and greed by all people (including wall street bankers to common man), policies by other central banks such as China, and Japan, their export driven economies, creating huge current account deficits (or surplus) (essentially surplus huge trade imbalances) etc.

And, I have no idea how the problem will be resolved by throwing money at the problem - which was created by that in the front place. It is amazing no one has done any analysis to sort out which of these are independent variables from an economic perspective and finding the root causes.

Keynes, Friedman and Schwatz or even Austrian school would not have easy answers to solve the problem. Austrian school may think it has answers to avoid the problem in the first place, but, that is being proactive. I am not sure they have solution to solve once the crisis has happened.

It is funny - the simplest explanation may lie in what Andrew Carnegie - herbert Hoover's trasury secreatry said in 1931 - that there is nothing we can do about it. It is all because of the malinvestment in the previous decade. We have to let that adjustment happen.

Of course, we are actually trying both pills - Milton's hypothesis that the Fed Reserve made several mistakes, and should have been much more aggressive. I think Bernanake is living upto his reputation as Helicopter Ben - and making sure that they follow that advice. Our government is taking Keynes advice, and throwing so much money in all forms at the problem.

But, I am sure at the end of the day, someone will still claim that there was not enough stimulous, or Fed did not bring down the mortgage rates enough by buying those securitites, after we come out of this mess. Or someone would come up with another thesis that we should not have done tried both approaches.

May you live in interesting times. I don't think any asset class is going to be safe - even Gold. As I said before, the conditions during the depression were different because there was still gold standard. So, unless we see huge inflation showing up immediately, I doubt Gold is going to go up in a depression/deflation scenario.

The best is enjoy the ride. Stay away from this all...if you still have the job. Otherwise it is depression for you anyway. Like what the wise man said – when you your neighbor loses his job, it is recession, when you lose your job, it feels like depression.

Tim said...

Remember that after gold was confiscated in 1933, its price rose 70 percent - from $20 to $35, by government decree.
That had a big role to play in he recovery from 1933 to 1937.

Anonymous said...

Cognitive dissonance alert. Re: gold confiscation. How does a currency devaluation give rise to any sort of recovery? If it was a real recovery, why did it only last 4 years? Just because there is growth of some kind, doesn't mean it is a good thing. Cancers grow pretty fast.

Anonymous said...

even though I have not read and analyzed as much as Tim has done, but, I have been reading quite a lot since late 2004, and I believe US went off the gold standard, and I don't know whether recovery happened because of that or not or due to Tim's explanation. It would be too simplistic an explanation, I feel. I know that it was confiscated, and there was some arbitrary price set at $35. I don't quite understand what it means by that - when the government confiscated gold, and set the price at $35. Does it mean devaluation of your currency or I don't understand what it symbolizes from economics perspective. If I remember correctly, there was an article by Bernanke that looked at the impact of gold standard, and I think he claimed that getting off the gold standard was one of the reasons for the recovery, and even though I do believe the mess was created by these idiots at the Fed, I think he has done some good analysis with the gold standard. He (may be it is in the original Milton analysis) looked at different countries that came off the gold standard at different times, and tried to corelate that with their recovery. Of course, again, it is very unlikely that we can attach a single variable to the causes or recovery during great depression or for that matter until 1945. Sometimes, it is difficult to figure out the cause and effect as well when you start bringing in other things into the mix such as world war II. People often claim that the giant stimulous after the start of the war really got us out of the depression.

Anonymous said...

Tim, I like your blog and have read it a long time. But you should think twice about citing a serial liar like Dick Armey in support of your economic position.

Tim said...

I don't know much of anything about Dick Armey and am certainly not relying on him to support any position of mine - I'd be curious to know what position of mine you thought I was trying to support (I've never explicitly said I was pro-Austrian, though, if I HAD to pick one, I'd probably pick it).

As for this post, I just thought it was good fun that he cited Keynes and Hayek in the title - an indicator that people are really starting to question the different schools of thought. That back page of the WSJ op-ed section has become a real treasure trove.

Anonymous said...

you may not completely agree with his views, and his position or even his vested interest in selling his services that he has been doing for last few years now. Hey, everyone has a right to make a living... just don'e do it like Madoff:-) As long as there is a disclaimer, I feel he is doing great service by bringing in different points of view. And, you are free to read other material as well, can't u? Even though I would consider myself more liberal leaning, I am really partially libertarian, partially liberal, and partially conservative. Some people would deride that as without a firm position. But, unfortunately, it is rarely black and white. There are shades of grey.

I am happy that he is doing research and bringing it to his blog. enuff for today...

Anonymous said...

Hey no one is right or wrong all the time. Nothing wrong with Armey's reflections here. All I know is what happened in the last 10 years is so far from normal, we have no idea what normal is anymore. Do you think being able to buy houses zero down and no docs is normal. My little voice says there is going to be hell to pay for all of that and you can run but you can't hide. The bunch that got rich throwing the party, a real house-wrecker of one too, is now trying to make everyone else pay for it. Don't let'em do it. First, no bail out and no more last resorts lending. The rest we can figure out because we'll at least be able to see straight.

Your Portland Financial Advisor said...

This PBS video series Commanding Heights at is a great program to freshen up on your hayek and keynes.

ndd said...

"James Buchanan, argues that the great flaw in Keynesianism is that it ignores the obvious, self-interested incentives of government actors implementing fiscal policy and creates intellectual cover for what would otherwise be viewed as self-serving and irresponsible behavior by politicians."

Unsaid in the article is that Buchanan's public choice theory also assumes that, unlike government bureaucrats, corporate executives are zealous fiduciaries of corporate profits and shareholder wealth.


Garbage in, garbage out.

AJ said...

It's not Keynes' fault that Bush kept deficit spending while there was no recession.

Anonymous said...

well, maybe if those with capital would move it into industries and uses that improves the productivity of the country rather, than pushing it all into gold we might get somewhere - without the government having to do it.

Tom R. said...

Anon 10:37

People push their capital into gold when they realize that the capital marketplace is so distorted that there is no place to put it other than gold. You have the causality exactly backwards.

Where are you going to invest when government backs failed institutions at the expense of the functioning ones???

Anonymous said...

Anon 1037,

Too much spending is the reason we are in a mess. In aggregate, we get out of this by spending less not more. BTW, more spending does not equate to higher productivity.

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