Keynes vs. Hayek: The Great Debate About American Future

The stimulus package passed by the Obama administration has failed.  By definition we’re witnessing the complete death of Keynesian macoro-economics.  Although Reagan and the ‘supply-siders’ drove the stake into the heart of Keynes, it has become quite apparent to those in the know, that governments can tax and spend but they cannot make people buy, risk, invest, borrow and consume.  This becomes all the more glaring when a political economy changes from a command to a decentralized economy aided by inclusive electronic media.

Before I outline the general differences between Keynes and Hayek, let’s look at where the U.S. is now after a 8 Billion dollar dud.

Congress continues to insist in quantitative easing (print money Congress cannot cover in claimed taxes) for STATES that are spendthrift!  Yesterday, Congress appropriated 26 Billion for States especially for Medicare and Education.  Their remains hugh Constitutional issues because States themselves are responsible for appropriations.  Nevertheless, this Congress is driving States to spend more money they don’t have, essentially hijacking State budgets.

What should the Democratic Party be doing?

Demand that public employee unions adjust their rich benefit packages.  But no, Democrats are rewarding their own political funders, essentially postponing a fiscal day of reckoning to hang on Republicans.

How has the Federal Reserve enabling a reckless Congress?

By assisting in more quantitative easing.  Even though all such fiscal endeavors fail.  The only institutions who will win are large Wall St. firms who can assist themselves in profiting from extra liquidity.

The Federal Reserve has kept interest rates at ZERO percent for 20 months, this is unprecedented monetary stimulus.  The Federal Reserve is not shrinking its balance sheets, instead its re-investing expiring mortgage backed securities to buy Treasury Bills, giving the Treasury Department more liquidity.  EVERYONE IS MAKING MONEY BUT THE PEOPLE!

As Gerald O’Driscoll has revealed in his extensive research regarding the differences between Hayek and Keynes, the availability of easy money is not the problem.  The private economy of citizens has no confidence in this administration.  The public will address this issue in November; a spendthrift Congress will face a reckoning, consequently so will the Federal Reserve!

Two men have spent most of their lives educating the public about the mandates governing the Federal Reserve, the consequences of a spendthrift Congress, and highlights of Reagan’s supply side economics that saved America before:  Gerald P. O’Driscoll and Allan H. Meltzer.  Both men understand the intricacies grounding both Keynes and Hayek.  Hayek has ruled the discipline of macro-economics since the success of Reagan.  Politically, Washington prefers to administer more ‘rent-seeking’ in the form of confiscatory taxation than accept the reality on the ground that the American worker/consumer is the centerpiece of American macro-economics.  The lethal intellectual debate between Keynes and Hayek reveals a distinct politics that threatens the life of the status quo in Washington.  But make no mistake.  Hayek has already won this debate.

Let me explain.

Dr. Allen H. Meltzer is the distinguished Professor of Political Economy at Carnegie Mellon University, he remains the single most significant living economist since the death of Milton Freedman.  He is the author of the ‘History of the Federal Reserve’ and resides at the American Enterprise Institute in Washington D.C. where he regularly meets with the great Paul Volkler to discuss policy matters.  For Meltzer, given the change in our political economy over to permanent decentralization, he cannot see the validity for Keynes as an informing authority on macro-economic matters.

Dr. Meltzer revealed three points of interest when discerning the politics governing the economic thinking of either Keynes or Hayek.  Even though both firmly believed that depressions are caused by a spending deficit, both had different empirical conceptions of such causes.  For Keynes, his empirical concept informing a depression is government spending.  For Hayek, the empirical concept informing a depression was confiscatory taxation that hampered a individuals ability to spend.  However, Meltzer details the most compelling here:  (concerning a depression or excessively long, deep recession)

1.  Not spending money permits deflation.

2.  The form of spending is inconsequential, whether tied to consumption or investment.

3.  THE THIRD AND GREATEST DISAGREEMENT BETWEEN KEYNES AND HAYEK WAS OVER THE BENEFITS OF GOVERNMENT SPENDING FINANCED BY DEFICITS.  Let me explain:  Congress weakens currency when it spends more than it confiscates in taxes.  It must borrow against future gains through excessive taxation and printing money (quantitative easing).  All depress individual initiative and create dangerous inflation as conceived under Hayek.)

Remember the 1970’s STAGFLATION.  Hayek and Reagan’s ability to break THAT KEYNESIAN DEADLOCK implied bringing new intellectual ideas into macro-finance.  Those new ideas were Hayek. (Actually, Hayek was only bringing in the old ideas of the  British/Scottish industrial enlightenment, meaning low taxation, no welfare, no subsidies, tight control of money supply out of central banks and an extremely tight fiscal Congressional Budget: all dominated by a strong Executive that was Reagan!)

Dr. Meltzer has written such in his Wall St. Journal article on June 30 “Why Obamanomics Has Failed”.  For Meltzer, it will continue to fail for neglecting Hayek, while demonizing businesses, creating new regime uncertainty through new burdensome regulations, high taxation and costly subsidies and welfare payements.

How do we get out this?

Sound monetary policies, sound (tight) fiscal spending in Congress, the end of ‘to-big-to-fail’, no more quantitative easing, eliminate taxation.  In a sentence, the path to recovery is the path toward thrift and prosperity.  But we must first acknowledge the intellectual ground that gives credence to such a prosperity.  It begins with Fredrick Hayek.

The great debate really has ended.  What’s required is the political fortitude to enact the policies that enable wealth creation.

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About William Holland

Systematic Theologian/International Relations
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