Comparing Obama/Biden and Romney/Ryan economics, people name John Maynard Keynes and Friedrich von Hayek. Having looked at Hayek several weeks ago, let’s turn to Keynes now.
During 1934, with unemployment high and production low, British economist John Maynard Keynes was reported to have crumpled up a pile of towels rather than just one after washing his hands in a U.S. restaurant. His goal he said (if this really happened and no one is sure) was to create more jobs.
More than businesses though, Keynes (1883-1946) believed that a contracting economy needed the job creation that government could provide through deficit financing. Government spending would then multiply as it passed from hand to hand. Just pay a worker, he spends his income, the recipient then spends it, businesses have to expand and an inflated total of spending enters the GDP.
Like the New Deal, it was okay to have people plant pine trees and build airports. It was ideal to establish a social security program that provided incomes people would spend. The Keynesians believe that when government diminishes unemployment, consumers spend more and businesses, feeling some optimism, expand. Then tax revenue increases, government repays the money it borrowed and the deficit shrinks.
By contrast, Friedrich von Hayek said prices are the key. During his 1920s/30s dialogue with John Maynard Keynes at the London School of Economics, Hayek reminded us that during a recession the price of labor falls, the price of capital declines, interest rates sink. Lower prices ultimately transform the price incentives that generated the recession. They become enticing messages that say, “Hire, Expand, Borrow.” According to Hayek, rather than government and politicians, only the individual business people that hear that message know the appropriate answers. (Please see EconLife entry on Paul Ryan’s economic muse.)
Supporting a Keynesian approach, President Obama proposed the American Recovery and Reinvestment Act of 2009, the $787 billion bailout program that ballooned to $840 billion in 2011. As a Congressman from Wisconsin, VP candidate Paul Ryan voted no. Currently, the Romney/Ryan team says it is time to inspire the private sector with less government.
Sources and Resources: There are lots of excellent articles on John Maynard Keynes. For a readable summary, this John Cassidy New Yorker article is very good, I got my “towel story” here from WSJ.com, and econtalk has a good discussion of the Wapshott book on Keynes and Hayek. For the American Recovery and Reinvestment Act of 2009, the NY Times has the spending details, this government site gives an overview, and EconLife has some analysis.
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