Keynes and Hayek, Obama and the Republicans

Liberal economists like Paul Krugman and Robert Reich tell us that British economist John Maynard Keynes (1883-1946) “was right.”  In a December 2011 New York Times column, Krugman reminded us that Keynes stated that in hard economic times like the Depression (or, for Krugman, the present) the government should be stimulating the economy.  But instead in 2011 “our political elite obsessed over short-term deficits that aren’t actually a problem and, in the process, made the real problem—a depressed economy and mass unemployment—worse.”  In earlier columns, Krugman had criticized the Obama administration for being insufficiently Keynesian and believed that the Obama economic stimulus package had been much too small.  In late December, however, Krugman wrote that “the good news, such as it is, is that President Obama has finally gone back to fighting against premature austerity—and he seems to be winning the political battle.  And one of these years we might actually end up taking Keynes’s advice, which is every bit as valid now as it was seventy-five years ago,” in the midst of the Depression.

Krugman has also reminded us that in 1937 Franklin Roosevelt inadvertently proved Keynes right “by trying to balance the budget too soon.”  In his Franklin Delano Roosevelt (2010), historian Alan Brinkley sums up well the results of Roosevelt’s action, which came after four years of helping the country climb upward from the depths of the Depression. 

In 1937… Roosevelt decided that the economy was strong enough to justify cutting government spending so as to reduce the national deficit.  In reality, the recovery of 1937 was fragile and incomplete, and the spending cuts contributed to a deep recession that wiped out nearly all the economic gains of the New Deal’s first four years.  Unemployment rapidly grew from a Depression low of 14.3 percent in 1937 to 19 percent in 1938.  The gross national product, which had grown by 5.5 percent in 1937, declined by 4.5 percent in 1938.

Despite his 1937 mistake, however, FDR is usually associated with a Keynesian approach to economic policy.  As Brinkley also notes, “the idea that federal fiscal policy was an effective tool by which government could regulate the economy, an idea associated with the British economist John Maynard Keynes, became one of the New Deal’s most important policy innovations and one of its most significant legacies”

FDR’s New Deal programs included public works projects, Social Security, unemployment compensation, and greater government regulation of financial institutions.  In addition, he suggested an even greater role for government.  In his State of the Union speech to Congress in 1941 he said, “We look forward to a world founded upon four essential freedoms.”  One of those was “freedom from want.”  Three years later, he told the Congress that “freedom cannot exist without economic security and independence,” and he called for a “second Bill of Rights” that would include “the right to a useful and remunerative job”; “the right of every family to a decent home”; “the right to adequate medical care”; “the right to adequate protection from the economic fears of old age, sickness, accident, and unemployment”; and “the right to a good education.”

In that same year, 1944, there appeared a book that continues to appeal to conservatives opposed to FDR’s expansion of government.  It was The Road to Serfdom by the Austrian economist Friedrich Hayek (1899-1992).  Krugman may be correct when he contends that Hayek does not compare with Keynes as an economist but that Hayek has been important politically.  He emphasized the importance of property rights for freedom and criticized socialism and any attempt by governments to redistribute wealth.  He thought that to maintain freedom, free-market capitalism had to be allowed to operate unfettered.  Government officials who disrupted the spontaneous economic order in the name of “social justice” (which Hayek labeled a myth) were to him a great threat to freedom. 

Thus, by the end of World War II two competing visions of freedom were available—Roosevelt’s, which believed government programs were important to extend freedom, and Hayek’s, which viewed governments that attempted to create more economic equality as the greatest threat to liberty.  Despite the complexities of their thought, Keynes and Hayek came to represent these competing visions, as applied to the economic role of federal governments.  A recent book, Nicholas Wapshott’sKeynes Hayek: The Clash That Defined Modern Economics (2011), indicates how the clashing ideas of these two economists are still most relevant today.

Along with Milton Friedman (1912-2006), whom he joined from 1950 to 1962 as a professor at the University of Chicago, Hayek has been the most influential conservative modern economist.  Despite some economic differences with Hayek, Friedman was also a critic of “big government.”  As his book Capitalism and Freedom (1962) suggested, one of his main concerns was the “promotion of human freedom.”  Like Hayek, he advocated a strong free-market economy with little government interference and was critical of the twentieth-century trend toward big government, centralized planning, and the welfare state.  Like Hayek, he believed that free markets would do more to aid people than many laws designed to overcome social injustice.  When asked at the end of the century whether he would keep or eliminate fourteen U. S. cabinet departments, he responded he would eliminate most of them, including those overseeing commerce, education, energy, and labor, but he’d keep the State Department and those overseeing defense, justice, and the treasury. 

The thinking of these two conservative economists influenced the economic policies of the Reagan presidency in the United States and the Thatcher government in Great Britain during the 1980s, and of course on long-time Federal Reserve chairman Alan Greenspan.  Hayek’s and Friedman’s ideas also inspired the economic policies of Chile’s General Pinochet, who in 1973 came to power in a coup that overthrew an elected leftist government.

One of Reagan’s foreign policy advisers, historian Richard Pipes, quoted Hayek extensively in his 1999 book Property and Freedom.  “For as Frederick Hayek has pointed out, every expansion of the scope of state authority, in and of itself, threatens liberty.”  Pipes saw programs such as affirmative action and school busing as impinging upon freedom and believed that “the entire concept of the welfare state . . . is incompatible with individual liberty.”

From the Reagan years to the present, conservatives have been fond of quoting Friedman and Hayek.  Their influence can be seen in such documents as the Republican Party’s 1994 “Contract with America,” which pledged to shrink big government.  By the summer of 2010 Glenn Beck, then still a Fox News celebrity, was according to one poll “the most highly regarded individual among Tea Party supporters,” and his praise (in early June of that year) of Hayek’s The Road to Serfdom  helped the decades-old book sell over 100,000 copies within weeks.  Earlier in 2010 a conservative Texas Board of Education approved a new social studies curriculum that added Friedman and Hayek to the list of economists who should be studied. 

Although President Obama has by no means been a consistent Keynesian, his chief economic advisers have sided much more with Keynes than Hayek or Friedman.  In July 2009, Obama’s Office of Management and Budget Director, Peter R. Orszag, stated:

The consensus from economists across the spectrum was that the government needed to bolster macroeconomic demand—jumpstarting economic activity and breaking a potentially vicious recessionary cycle.

Simply, and to a degree that we had not experienced in more than half a century, we needed to bring the economy back from the brink.  It became—in a sense—the return of Keynes. . . . And the lesson most taken to heart from Keynes’ writings was that now was the moment for massive government stimulus to plug the gap in economic performance that I just described. But there was another task for the government—one that was equally important and also recognized by Keynes—and that was restoring confidence.

A few months later, Obama’s director of the National Economic Council, Lawrence Summers, declared that

During the past two years, the ideas propounded by John Maynard Keynes have assumed greater importance than most people would have thought in the previous generation.  As Keynes famously observed, during those rare times of deep financial and economic crisis, when the “invisible hand” Adam Smith talked about has temporarily ceased to function, there is a more urgent need for government to play an active role in restoring markets to their healthy function.  The wisdom of Keynesian policies has been confirmed by the performance of the economy over the past year.

In November 2011 Wapshott, the author of Keynes Hayek, described a debate about to take place in New York between “two teams of economists, one representing Keynes, the other Hayek.” He added:

The Keynes-Hayek debate has never been so topical.  Today the fault line between Right and Left can be defined as the difference between those, like President Obama, who believe that the broken economy can be fixed by the government providing a giant fiscal stimulus, and those, like all the Republican presidential contenders, who believe government in America is too big and should be dismantled to make way for the operation of the free market.  While Obama pushes his Jobs Bill, which would inject about half a trillion dollars into the economy, the GOP in the House is preventing any such manipulation of the economy from taking place.

On the last day of 2011, The New York Times editorialized:

The way to revive sustainable growth is with more government aid to help create jobs, support demand and prevent foreclosures.  As things stand now, however, Washington will provide less help, not more, in 2012.  Republican lawmakers refuse to acknowledge that government cutbacks at a time of economic weakness will only make the economy weaker.

Thus, as we embark upon the election year of 2012 we have a battle between two economic visions that also reflect two different views of the role of government.  The Democratic one under President Obama advocates an active government role, including more spending.  The Republican one wants to shrink government’s role—at least when it comes to matters such pumping money into the economy, aiding poor people, environmental protection, and regulating the financial industry.  While these differences may reflect genuine opposing economic and political philosophies, Republicans are certainly aware that unemployment rates are likely to remain high for at least the rest of the year if the government does too little.  Many of them undoubtedly believe that continuing economy misery will help their party and defeat Obama in November—and unless the president can convince a majority of the electorate that the fault lies primarily with them, the Republicans will probably be right.  

Senate Republican leader Mitch McConnell was quoted in 2011 as saying we can’t get “this country straightened out if we don’t do something about spending, about deficit, about debt.”  But he also said that defeating Obama in 2012 was his “single most important political goal.”  Perhaps being “obsessed over short-term deficits,” to use Krugman’s words, provides cover for preventing economic recovery before the election.  What is most important to most Republicans:  Helping the country recover from economic misery in 2012 or defeating Obama?