The Heart of the Matter: Keynes vs. Hayek

My brother said an interesting thing yesterday about the stimulus. A rock-ribbed conservative Republican, he surprised me when he said that he was glad that GOP Sens. Susan Collins (Maine), Olympia Snowe (Maine) and Arlen Specter (Pa.) voted for the bill. “This way, Republicans don’t own it anymore. They couldn’t filibuster it. This thing will pass, it won’t work, and Democrats will get the blame when it fails.”

Of course, nobody wants this legislation to fail, because if it fails to work, it could mean serious consequences for the country. But, as currently designed, it will most likely fail because most of the money is wasted on spending programs that won’t spur private-sector expansion.

Republicans don’t believe it will work, and have offered alternatives to make it work better. Democrats rejected those suggestions because, as they put it, they won the election.

Our new president has mouthed the word bipartisanship, just as he has launched a campaign-style PR offensive aimed at bludgeoning any opposition to his bill.

Mr. Obama has dared not defend the specifics of the plan, instead invoking “fierce urgency of now” rhetoric that makes it seem that any who oppose him are being not only stupid, but also unpatriotic.

This is a philosophical struggle more than a political struggle. It is a battle of Keynes vs. Hayek. Keynesian economic philosophy puts more power in the hands of politicians (so they tend to really like it) by saying that the way to economic salvation is to spend more money. Hayek’s economic philosophy puts more money and power in the private sector, to create private-sector jobs.

Keynesian philosophy has a spotty track record, at best. It helped prolong the Depression, for example. It helped cause stagflation in the ’70s. It inspired socialist governments that have kept economic growth low and unemployment high in Western Europe for decades.

Hayek’s way, on the other hand, works. It worked when Kennedy cuts the capital gains tax in the ’60s. It worked when Reagan cut taxes in the ’80s. It worked when Bush cut taxes after Sept. 11, 2001.

President Obama, who campaigned as a centrist, and Nancy Pelosi/David Obey (who campaigned as leftists) are now fully embracing the Keynesian approach and condemning the Hayek approach. As Obama put it, “We tried their way and it failed.”

Well, not exactly. What caused this failure was an easy monetary policy that made credit too cheap and easy, stupid government policies that skewed the housing market and an insider game that created a regulatory black hole in the hedge fund/derivative world.

The big problem that our country faces is that we are going broke, not only at the federal level, but also at the state and local levels. As my brother pointed out to me, states and localities are coming to the federal government for a bailout, because they have too many employees with too many pensions that they can’t pay for. Having the federal government bail out the states will only put off the day when these local officials will have to right-size their spending. That day will come someday, perhaps when we have out-of-control inflation and a stagnant economy.

Most Americans don’t understand how the government can get away spending trillions more when it is already broke. They know it is wrong to deal with problems with debt by getting another credit card. At some point, we are going to have to raise taxes to pay off this spending spree. Obama doesn’t seem to acknowledge that fact.

Democrats own this problem now. Let’s hope their plan works, but I wouldn’t bet on it.

Visit www.thefeeherytheory.com.