Midterm Election Pitted Keynesians Vs. Hayekians, Again

BY Paul Solman  November 3, 2010 at 3:56 PM EST

“It’s the economy, stupid.” Bill Clinton, 1992

“Are you better off now than you were four years ago?” Ronald Reagan, 1980

“Defeat the New Deal and its reckless spending.”Alf Landon, 1936

“Hoover we trusted, now we’re busted.” FDR campaign, 1932

“Four more years of the full dinner pail.” William McKinley, 1900

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It’s useful to remember that economics has been a key feature of our collective American life from the get-go. In its crudest form – how do we continue to survive? – it drove Asians west across the frozen Alaskan land bridge 14,000 or more years ago; Europeans across the treacherous Atlantic shortly after Columbus.

I’ll spare you the usual quotes from DeTocqueville and countless others about what happened after we became the official United States of America. Suffice it to say the market economy marshaled our natural resources and nurtured economic avidity, making us, in the process, the greatest power the world had ever witnessed and a place so rich, immigrants have continued to risk life and limb to come here, in slow boats from China or suffocating trucks from south of the border, despite the notion that we’re slipping economically, and have been for years.

In other words, a major theme in American history is indeed “the Dream.” And, relating this to yesterday’s election, it’s a commonplace that the dream – of chickens in every pot, cars in every garage, iPhones in every pocket – is dissolving amidst harsh economic realities. The question on which the election turned was supposedly, “Why?”

To Democrats, following the prescriptions of the English economist John Maynard Keynes (1883-1946), the answer is: too little spending. Bailouts and stimulus saved us from Depression but timidity has us mired in Malaise. Mainly, it’s the fault of the Republicans and their misbegotten faith in deregulation and just saying “no.” If only we were to re-regulate the economy and goose it with more spending, we would put our idle resources back to work and revive the key to economic growth: confidence. America’s virtuous economic circle would then kick back in: more income leading to more consumer spending leading to more investing by business to satisfy consumers.

To Republicans following Keynes’ intellectual opponent, Friedrich Hayek, the answer is: too MUCH regulation, too much spending. Bailouts and stimulus DAMPENED confidence by increasing the national debt. Only by lowering our debt will collective confidence be restored, at which point business will begin to re-invest and the virtuous circle resume.

By this reading of current economic events, the Obama administration is caught in the cross-fire. It’s been politically hard-pressed (though some would say “unwilling”) to implement hard-nosed regulation or strong stimulus, disappointing the Keynesians. Yet it has run up the national debt and pushed through regulation enough to antagonize the Hayekians.

Whatever the reasons, the economic recovery has been feeble and, most importantly, jobless. As a result, the Obama supporters of ’08 – young people and minorities – stayed home yesterday. And the detractors of ’08 came out in force. The results were a surprise to no one.

But is there really a way out? With Keynesianism now off the table, at least for awhile, will fiscal austerity rule the day, as it seems to be doing in Europe?

Great Britain is said to be the case in point, but is America really going to follow their lead? From a colleague’s email the other day:

Cameron’s government has announced very big cuts -up to 500,000 public sector jobs could go by 2014-15. They are trying to balance the budget.

The Foreign Office [the equivalent of our State Department] will cut 24 percent and DoD 8 percent (less than most other departments but enough to mean 42,000 service personnel and civil servants will lose their jobs over the next five years) and high-profile equipment such as Harrier jump jets, the Ark Royal aircraft carrier and Nimrod spy planes will be scrapped.

500,000 public sector jobs in the U.K. is the equivalent of two million or more in the U.S. in the next few years. Is that what the electorate voted for yesterday? And what about taxes? If you lower taxes (or extend the Bush tax cuts), you INCREASE the national debt. Penny for penny. Dollar for dollar. In the long run, say conservative economists, the pie will grow. But in the long run said Keynes, as everyone now knows, we’re all dead.

One suspects that the vote yesterday had a lot to do with looking for a convenient alternative to the rather more nightmarish vision of American economic reality: that in the global economy, we really are undereducated, undermotivated, under-infrastructured, overpaid and overleveraged. By that reckoning, we have truly been living a dream. Not wanting it to end, the Keynesians urge us to regulate and spend.
The Hayekians counter: deregulate and save.

As of today, the Hayekians seem to have the momentum. Maybe a robust economic recovery will coincide with their ascendancy. Maybe that ascendancy will even revive the confidence so devoutly to be wished. But if not, said an eminent interviewee the other day of Keynesian persuasion, things could become so desperate that “You’ll be back here in a year, asking why a Republican-dominated Congress is pushing a new stimulus bill. And I’ll say: ‘I told you so.’”

After a career studying and reporting on economics, America and the world, I have come to a more equivocal place. As best I can tell, it’s a probabilistic universe but no one is reliably good at making the odds. Or, if anyone is, I’m not reliably good at finding that person before the fact. My best guess about next year, much less 2012, is that most people will express some surprise at where we are economically (and politically).

In which case I’ll say: “I told you so.”