Monday, June 28, 2010

Robert Samuelson's Unintentional Case for Austrian Economics

In his Washington Post column discussing a crisis of confidence among economists, Robert Samuelson correctly notes that Keynesians don't seem to have the right answers. But he concludes that other schools of thought are similarly befuddled by current events. What he writes is not terribly objectionable, but it's almost as if he thinks the fiscal debate in the economics profession is limited to the spend-now-and-forever Keynesians and the all-that-matters-is-the-budget-deficit proponents of "austerity" (which often is just an excuse to raise taxes, as I explain here). I gather Samuelson's not familiar with the Austrian theory developed by scholars such as Mises and Hayek. Unlike the Keynesians and the crowd at the IMF, the Austrian school is not baffled by world events. The Austrians are not so foolish as to think they can predict the economy's short-term fluctuations, but they were the ones who correctly warned against the intervention and spending that created the current mess and they can take a certain grim satisfaction about being proven correct. And they have the only intelligent prescription for what should be done now - namely, that politicians should get out of the way. After all, the crowd in Washington created the mess by doing too much and doing more of the same bad policies will - at best - further reduce the economy's long-term prosperity.
Economics has become the shaky science; its intellectual chaos provides context for today's policy disputes at home and abroad. Consider the matter of budgets. Would bigger deficits stimulate the economy and create jobs, as standard Keynesianism suggests? Or do exploding government debts threaten another financial crisis? The Keynesian logic seems airtight. If consumer and business spending is weak, government raises demand through tax cuts or spending increases. But in practice, governments' high debts impose financial and psychological limits. ...There's a tug of war between the stimulus of bigger deficits and the fears inspired by bigger deficits. ...The disconnect between theory and reality seems ominous. The response to the initial crisis was to throw money at it -- to lower interest rates and expand budget deficits. But with interest rates now low and deficits high, what happens if there's another crisis?

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