Hayekian Stimulus

Erik Kain

Erik writes about video games at Forbes and politics at Mother Jones. He's the contributor of The League though he hasn't written much here lately. He can be found occasionally composing 140 character cultural analysis on Twitter.

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38 Responses

  1. mac says:

    Your description of a Hayekian stimulus sounds a lot like John Rawls’ plan for a universal safety net.Report

    • Mike Schilling in reply to mac says:

      Or the Friedman negative Income Tax. Index the tax rates to the unemployment rate, and you’ve got a lovely feedback mechanism. (Perhaps you need to add negative withholding to make it more timely.)Report

  2. James K says:

    The main reason Keynes and Hayek aren’t exactly disagreeing is that the two economic theories are quite different in how they view recessions. Keyensian theory sees them as an inherent instability that government must correct, while Austrian theory sees them as largely government-created problems that you just have to ride out. Hayek keeps going general because for him good policy is good policy – boom or bust makes no difference.

    A lot of the ideas you bring up may be good policy ideas, but they aren’t really stimulus per se. Stimulus is generally though of as a one-off temporary boost to the economy. Patent and healthcare reform are too structural to be properly thought of as stimulus.

    But you’re right about the timing. I’ll put together a full post on the US government’s fiscal issues in the next day or so, so I can go into more detail.Report

    • MFarmer in reply to James K says:

      You make a good point, James. Free market principles aren’t short term stimulus ideas, they are applied in good and bad times. There’s no Keynesian economics, Marxian economics, Hayekian economics, there is only economics. Central planning is central planning, and economics is economics.Report

    • E.D. Kain in reply to James K says:

      Thanks James. I think you’re right, though the tax cuts and direct payments would certainly act as stimulus I think.Report

    • Anderson in reply to James K says:

      James, so if Austrian theory works off the premise that recessions are created by governments, do they not believe a boom-and-bust cycle is natural to a market? My Austrian economics friends have told me that there would be no such thing as boom-and-bust per se if there was no government…yet I struggle to grasp the basis behind that sentiment. It seems oddly utopian and divorced from reality. But, then again, I have no way of empircally proving them wrong since there I cannot think of an example of that pure of a market. I’m honestly curious about this, any explanation would be appreciated.Report

      • Jason Kuznicki in reply to Anderson says:

        Ludwig von Mises certainly didn’t think so.

        He believed that banks would issue credit competitively, underbid each other on interest rates, and create speculative bubbles in the process. Eventually these would have to collapse, and interest rates would sooner or later return to tracking the rate of return on investments. A business cycle would still exist, but it would be a much smaller thing in a world of fully private banking. The passage is long and difficult to quote, but see The Theory of Money and Credit, chapter 19.

        Was Mises right? I have no idea. But it’s a serious misrepresentation of the Austrians to say that they blamed every business cycle on government.Report

        • James K in reply to Jason Kuznicki says:

          OK, that’s a nuance I wasn’t aware of, Austrian theory doesn’t get a lot of play at university these days (not at mien anyway).

          I think I got the prescriptive part right though – Austrian theory advocates riding out the bust, not taking stimulative action.Report

  3. Ryan Davidson says:

    I think time horizons are also in play. Keynesians generally say “There’s a problem now! We need to do something now!” Hayekians, generally of a more conservative bent, say “There’s a problem, to be sure, but we need to make sure that what we do doesn’t actually cause more problems down the road.” Keynesians, and liberals in general, seem singularly incapable of considering the long-term consequences of just about anything.Report

    • david in reply to Ryan Davidson says:

      The New Keynesians think the market can take it. The old Keynesians think the market is so dysfunctional that the long run is of permanently high unemployment, so we may as well act now. Either way…Report

    • E.D. Kain in reply to Ryan Davidson says:

      Well we’ve already bailed out the very rich. I suppose it only seems fair to act also on behalf of ordinary people…Report

      • wardsmith in reply to E.D. Kain says:

        This is deja vu all over again. I came to this site the first time to view this very same video and read that OP discourse. Nothing much has changed in the meantime, except multiple governments (following Keynesian theories) have gone bankrupt. The Pigis, Portugal, Ireland, Greece, Italy and Spain are all kept afloat only through the gyrations of EU central bankers. Those gyrations are devaluing the Euro itself and are by no means fixing the problem. What I predicted here is only beginning. London is just the tip of a massive iceberg.

        Keynes says to the junkie, “You’re having withdrawals, that makes you sick – here have more drugs!”
        Hayek says, “Wait, cure the sickness by going cold turkey”.

        At 7:24 he lays out the problem with Keynes (treating people like chess pieces) and the solution (stable rules and real market prices). Nature abhors a vacuum and business abhors uncertainty. ObamaCare created a ton of uncertainty while the country was already attempting to digest a massive shock. What is happening today is largely psychological, but emotion rules. Businesses are afraid to hire because they haven’t even seen the rules ObamaCare is going to inflict on them. There are government minions busily typing out the millions of pages of new regulations as I type these few words.

        Social tinkerers don’t think junkies should suffer and have been promoting Keynes for 50 yrs. Unfortunately as Hayek in the video says, starting around 5:30, top down economics decision making only benefits the few, the cronies in both wall street and politics who are in bed together. The “losers” were bailed out in ’08-09 but that was BS and solved nothing. However some of those “losers” were the Chinese and they were rather insistent that their “investments” be covered. Oh, and the Chinese I’m talking about here are the Communist Party elites, not the government bureaucrats stolidly investing in Treasuries. TARP should have been played exactly like Buffet’s investment in Goldman: Hefty dividends, advantaged warrants and buy back penalties. Done properly IT would be driving down our national debt while taxing NO ONE. But what are the odds the politicians would do that to their “friends”? Nope the politicians already had a rube in mind to pay off the bailoutReport

  4. Ryan Davidson says:

    So as I think about it, I think the two are actually disagreeing with each other pretty frequently. Or, rather, Hayek is regularly disagreeing with Keynes, who never actually manages to deal with any Hayekian arguments.Report

  5. Jason Kuznicki says:

    I tend toward the Keynesian view that we should run deficits during a recession and run surpluses during strong economic times.

    You realize, of course, that when this idea finds its way into politics, it morphs into “little deficits during good times, monster deficits during bad ones.”

    Surpluses are extraordinarily rare and happen by accident, not design. So when you advocate Keynesianism, what you get is the mess we’re in.Report

    • E.D. Kain in reply to Jason Kuznicki says:

      Well you’re probably right, at least here in the States. Keynesianism is hard, and nobody sticks to it. But the reverse is also true. Nobody goes clamoring to fix the deficit until we hit a recession. I guess I just don’t see the alternative.Report

      • Jaybird in reply to E.D. Kain says:

        There’s always the Austrian School.

        No, it’s not a Hitler joke, though it would be a funny one. Check out mises.org and specifically do a search on “business cycle”.

        Here’s the problem: everybody loves Keynes. Keynes says “we can always go on a diet tomorrow” and he’s right until, of course, he’s not… now the Austrians are probably best described as Cassandras given that they have no one with any power at all willing to listen to them and only people after the fact are willing to say “hit that one on the head, golly”.

        Read an essay or three on the cycle and, at least, you’ll see what’s likely to happen next.Report

        • E.D. Kain in reply to Jaybird says:

          I like the Austrian school quite a bit. Just not sure it offers a practical policy apparatus during a recession whether or not they’re right.Report

          • Jaybird in reply to E.D. Kain says:

            Jason, of course, covered this much, much better than I.

            I don’t know what can be done either.

            People did not evolve to go on diets tomorrow.Report

          • MFarmer in reply to E.D. Kain says:

            No, it doesn’t offer a practical policy apparatus during a recession, that’s for sure. Recessions are a good excuse to expand the power of the government, but between the healthcare plan and Dodd-Frank we shouldn’t have anymore inherited crises, so at least we have that to be grateful for.Report

        • Anderson in reply to Jaybird says:

          Not to be that guy again, but what’s the Austrian explanation of the U.S. economic recovery from 1939 onwards (U.S. budget deficit was greater than 15% of GDP for half of the 1940s)? That seems like “going on a diet tomorrow”, so to say, yet the economy was strong for 25 year after, allowing for budget surpluses in the 1950s. If the Austrian theory held to a tee, wouldn’t this run up of debt prolong any greater business cycle recovery? Granted, this strategy probably wouldn’t work today, politically or economically, and there’s a million historical caveats that come with it, but I can see why van Mises quickly fell by the wayside to Keynes. Until Friedman came along, that is, and displaced both of them.Report

          • Jaybird in reply to Anderson says:

            The US was the prettiest chick in the room. Europe was bombed and Asia was filled with people who were sure that they could make Communism work even if it killed 100 million of them.

            Since much of “the economy” is relative rather than absolute, the US was relatively freakin’ awesome until very, very recently.

            Luckily, it looks like Europe is in the mood to smell smoke again so we’ve got that going for us.Report

          • James K in reply to Anderson says:

            Aside from Jaybird’s point, recession to recover on their own eventually. The post-depression recovery was actually quite slow, relative to other recessions. Now that may just be due to its severity, but given it was especially fast, I don’t think there needs to be a explanation for the recovery. Recoveries are a natural part of recessions.Report

    • That’s more or less why I think Keynesianism is unworkable. If you had something like Tabarrok’s Unbalanced Budget Amendment (http://marginalrevolution.com/marginalrevolution/2011/07/an-unbalanced-budget-amendment.html), you might be able to combine Keynesian stimulus with sound budgetary practice.Report

      • E.D. Kain in reply to Christopher Carr says:

        I like it…sort of forces tough choices. Which means that it would be killed by a future Congress during boom times (and therein lies the Keynesian rub….)Report

        • Murali in reply to E.D. Kain says:

          Unless a constitutional amendment was made…

          Its not impossible for any government, just extremely difficult for a government which cannot reliably expect to be in power over the next 10 – 20 years.Report

          • James K in reply to Murali says:

            Not only would you need a constitutional amendment, you would need a Supreme Court that would enforce it. Remember that 100% of Supreme Court justices are appointed by politician.Report

  6. North says:

    Correct me if I’m wrong but as I recall tax cuts are generally considered rather weak stimulus in a recession/contraction. As I remember it the best stimulus are through things like unemployment, food stamps and the like which all get dispersed and passed through very quickly to the population and are spent very quickly. Obviously of course there’s an upper limit to how much you can send through those channels.Report

    • E.D. Kain in reply to North says:

      I think payroll tax cuts are pretty good stimulus, though yes unemployment and food stamps are at least good at staunching some of the bleeding (provided they don’t become too permanent).Report

    • James K in reply to North says:

      Not all taxes are equal in this regard. Cutting income taxes or capital taxes would be unwise as most of the money would just be saved. But cutting payroll taxes is effectively a subsidy on employing people, which makes it a good idea in a recession. Cutting consumption taxes also works really well (you can’t save the tax cut if the only way to get it is to spend), but since the federal government doesn’t have consumption taxes, that’s not an option.Report

  7. Katherine says:

    I’m no economist, but isn’t the issue with that kind of stimulus that if you give folks money during a recession, they won’t spent it due to a sense of economic insecurity? It would work if you specifically directed it to the poorest people, who need more money to spend on necessities anyway, but otherwise it’s more likely to just go into the bank.Report

  8. Teedjay says:

    “The safest way to enact what we may as well call Hayekian stimulus is to just give money directly to people.”

    At the heart of Keynes’ theory is a recognition of the fact that recessions happen because workers (and businesses) *have* money that they are unwilling to spend on goods and services, because they are uncertain about the future. And people choose to hold this money in liquid assets.

    Because workers (and businesses) spend less and save more in a recession because they fear unemployment (or already are unemployed) in the case of people, and invest less because they fear low levels of profits (in the case of companies) there is a general shortfall in demand.

    Because each person’s expenditure is another person’s income a shortfall in demand leads to a fall in income (a recession).

    I’m all for “Hayekian” stimulus, particularly if it’s on taxes which effect those with a high marginal propensity to spend (the poor). However in a time of economic uncertainty (a recession) people’s marginal propensity to save will increase and any tax-cut based stimulus will be less effective, ceteris paribus, than the equivalent amount of money spent by the state on stuff.

    Note also that “unemployment” is an incredibly unproductive industry – the state is basically paying people to sit around doing nothing whilst those people are annoyed because they don’t have a job. Much better to pay them to do *something* given the that the alternative is unemployment (as long as that something isn’t actively destructive like war).Report