Friday, January 23, 2009

We Are (almost) All Keynesians Again

Or, if one prefers an alternate title for this seemingly rambling post, try “Keynes, Heinlein, Nixon, Muth & Obama” (sounds like the name of a K Street lobbying firm, doesn't it). Or for that matter, “Economic Esoterica” would work equally well. The reason I say “seemingly rambling” is that there is, indeed, a common thread that ties this disparate group together.

Our point of departure will be an article that appeared in Time Magazine way back in 1965 entitled “We Are All Keynesians Now.” I encourage readers to take a look at the article for themselves, as it encapsulates the conventional economic wisdom of the period.

So why were we all Keynesians? In The General Theory of Employment, Interest, and Money, his magnum opus published in 1936, John Maynard Keynes staked out the high ground for every big-government type to come down the pike in the last seven decades. Keynes’ theories (not that they all originated with him, mind you, but for sake of discussion we will use Keynes as shorthand) were used to justify the social welfare schemes and centralized economic management policies (and boy, do I use that term advisedly) implemented by the western democracies during the Great Depression and in the post World War II period.

Jump ahead to 1966, when sci-fi pioneer Robert Heinlein produced The Moon is a Harsh Mistress, in which he popularized the term “There Ain’t No Such Thing As A Free Lunch” and the acronym TANSTAAFL, meaning that you can’t get something for nothing (from what I can gather, both the term and the acronym actually date from the late 1940s). As we will see, this thought is completely anathema to Keynesian economics.

Out next stop is Richard Nixon, circa 1971, who famously reiterated the Time declaration from the previous decade. It should be remembered that Nixon, although a Republican, was hardly a conservative. Those of a certain age will remember than he implemented wage and price controls (which failed spectacularly) and greatly expanded the federal bureaucracy.

The problem was that, even at this point, the cracks in the Keynesian edifice had long since begun to show. Enter John Muth, who in 1961 published an article in Econometrica claiming that people made economic decisions based on their own “rational expectations” and that those decisions resulted in better economic outcomes than did Keynes’ government-centered approach. He thereby laid the foundation for supply-side revolution of the 1980s. See “Were Were All Keynesians Then” by Ike Brannon of the libertarian Cato Institute.

Which brings us to Barack Obama. To be fair, he is not alone in supporting some sort of New Deal II or Great Society Redux, but he is the point man for such efforts now. The current crop of folks in Washington, led naturally by the Democrats but, alarmingly to my sensibilities, abetted by some Republicans, is pushing for a return to the failed Keynesian nonsense of yesteryear.

Just think about it; the political class that in large part created this crisis to begin with is poised to throw trillions of dollars, that we don’t have, into pork-laden solutions in the hope that doing more of what got us to this point will miraculously solve the problem.

Yeah, right.

Here are some reading assignments to illustrate the folly of this approach:

No, Virginia, We’re Not All Keynesians Now” by Joseph Ben-Ami of the Canadian Centre for Policy Studies.

Remember, There’s No Free Lunch” by Jeff Jacoby in the Boston Globe

Government Spending Is No Free Lunch” by Robert J. Barro, who is on the faculty at Harvard and a fellow at Stanford’s Hoover Institution (and you through that California was just the land of fruit and nuts)

We Can’t Spend Our Way Out of this Quarmire” by David Rose and Lawrence White in the St. Louis Post-Dispatch

Finally, see this exchange between Glenn Beck, freshly ensconced in his new gig over at FOX News, and none other than Ron Paul, who to my mind is much more of a maverick than McCain ever thought of being:

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