You have perhaps heard the complaint: Stimulus has not really been tried. The politics of recent stimulus packages worked up a mere weak sister of a Keynesian influx, a shadow of the full force required. Most of the money was squandered on the wrong things, much of it was tied up in strange timing protocols, wasted on “tax cuts,” and, besides, too little was dedicated to the task to do it right. We needed many trillions more!
Apparently, the many, many trillions in specifically monetary stimulus — bailouts, cheap interest rates, and quantitative easing — don’t count.
This echoes Keynesian special pleading regarding the Great Depression, insisting, in the words of one historian, that “[f]iscal policy . . . seems to have been an unsuccessful recovery device in the ’thirties — not because it did not work, but because it was not tried.”
What today’s Keynesians are saying — and what Keynesians have said in the past — is almost exactly what free-market economists have said about every bust-and-recovery after Warren G. Harding’s “austerity-plus-freeing-up-markets” approach in the early 1920s (when the recovery proved amazingly swift): The problem since 1929 is not that the free market failed, but that it was not tried.
As a matter of historical record, the latter case is hard to dispute (though you will still hear Progressives dispute it): certainly the Federal Reserve (established 1913) was not a free-market institution, but, instead, a classic Progressive Era program, and its 1920s’ policies were not strictly directed towards monetary stability; and certainly Herbert Hoover viewed himself as a Progressive (and could sport awesome Prog cred), priding himself that, after 1929, at least he did not do nothing. Indeed, laissez-faire proper has not been the general practice of any major modern world power since the beginning of World War I. (It has been, at best, a talking point for some Republicans and an element of the Republican legislative mix, which has also included deficit spending as well as increase in regulatory and redistributive bureaucracy and a massive increase in public debt.)
As a matter of historical record, the former case — that Keynesianism hasn’t really been given a chance to meet the needs of our beleaguered economy — seems a tad less certain, but let’s not argue that now. Let us grant to both sides their common complaint: Since the Progressive Era, neither laissez-faire nor Keynesianism has had free rein to respond to the conditions of economic depression in their ideal manner. The former has been relegated to conservative rhetoric and the latter has been limited by the requirements of special interest politics.
So I have a question:
Given the special interest politics at play in the U.S. and elsewhere, which policy is more likely to be achieved in something like its pure form?
Would it be possible to constrain desperate, on-the-make politicians, special interests, and entrenched bureaucracies from engaging in hysterical attempts to “save” the economy after every downturn, as would be required by free-market economics? — that is, particularly by the Austrian School economists?
We have excuse to express some doubt. We live in a government-drenched, unlimited, post-Constitutional quasi-republic, with vast “welfare state” programs that compete with regulatory demands from businesses as well as citizens’ groups, in a full panoply of confused cross-purposes best described by one theorist as “the churning state.”
How on earth could this political mess limit itself? The Constitution is de facto dead letter; limitations on power are so “old-fashioned.”
So is, then, Keynesianism the policy most likely to succeed in today’s political environment?
Well, let’s take a step back. Some readers are gasping at this point.
Keynesianism not a success? Why, Keynesianism was the dominant macroeconomic theory from the late 1930s to the early 1980s, when its rationale collapsed under the weight of that great anomaly, stagflation. Further, Keynesian policy dominated that period as well, around the world. When word leaked out that someone in the Nixon administration had said “We are all Keynesians now,” it was accepted as either the glad truth or the sad truth (depending on your politics) but as truth no matter what. Keynes had transformed economic policy in the 20th century, had brought an effective death to both laissez faire and fiscal conservatism.
So, in a period when Keynesianism reigned triumphant, how was it that Keynesian stimulus could not be achieved? Free markets were almost universally despised up until the 1970s, anyway. What gives?
Consider a possible answer. Keynesianism achieved its political hegemony by being bastardized. Politicians took from Keynes not what he offered, but what they wanted. Few politicians get re-elected by increasing taxes to meet every spending demand. Better to postpone payment, make some future politician deal with the costs. Politicians like going into debt. And Keynesianism seemed to be saying that debt was good, deficit spending was effective, and fiscal conservatism deadly. Politicians took Keynesianism as an eternal green light to spend without fiscal limits.
And if the central bank helps out by inflating the money supply? Better (because trickier) yet!
Now, it may be that there’s some sense to Keynesian policy. I’m not convinced; it seems a theory lacking insight into how investment and capital really work. But I could be wrong. Maybe it is all about “the circular flow” and keeping “spending up.”
Maybe Keynesian Viagra makes sense.
But the reality is that this policy can only be implemented in an open society with democratic and representative structures. Politicians will have their say, will try to please not only enough constituents for re-election, but enough special interests to pay for those re-election campaigns.
Which is why Keynes’s notion of accumulating budget surpluses during boom times was so rarely implemented. That part of the Keynesian prescription rarely gets mentioned. It’s inconvenient — and entirely unrealistic.
Even today’s latter-day Keynesian wizards ignore it. Instead, they now prescribe continual stimulus, managing boom after boom. There’s no let-up, no period of enoughboom to build up surpluses and pay off debt. The dot-com bubble spurred Keynesian guru Paul Krugman to advocate a housing boom with cheap money. That’s what we got in the oughts, and that’s what popped. To fill the balloon, Krugman and Keynesians and the like insisted on trillions of borrowed and specially created dollars to fill the balloon back up. When that pops, they’ll talk about more special stimulus. There’s no end, no reprieve.
Modern Keynesians sound like addicts, stuck on “stimulus.” Not normal investment. Not stability. To “something more.” All the time. Never a let-up.
They will always promote mounting debt. They will pretend, up until the moment of fiscal collapse, that debt does no harm, can do no harm. They are junkies hell-bound to overdose.
So, if you want rational policy, we have to go back to the laissez-faire prescribed by the greatest classical economists, and by Austrian economists such as Ludwig von Mises. We have to go back to limited government.
September 30, 2012
This column originally appeared on Townhall.com.