When the first two stimulus packages were passed, many citizens were nodding their heads, saying to themselves it made sense. At the same time, most of political establishment did the same nodding, egging on the spending. It makes sense, right? Private spending is down, so the Federal Government spends big to cover at least some of the gap, therefore stimulating more spending? Not so fast, though. It’s actually not that obvious, and is hardly settled economic theory. It’s an old argument, too, going back to the first half of the 20th century, notably as a disagreement between the theories of John Maynard Keynes and Friedrich Von Hayek.
So, in the dawn of the second decade of the 21st century, how does one get caught up on these theories? YouTube, of course. A RAP video on YouTube.
Back? Good. Now, two years after the first stimulus under GW Bush, and a year after a much larger version under Obama, how’s the economy going? But don’t worry: they’re getting ready to pass a third one, if they can find the votes (watch for it under the term “jobs bill”). Does this invalidate Keynes’ theories? Maybe, but there’s a good argument to be made that Obama isn’t really following his proscriptions anyway. Money magazine has a great interview laying out this idea.
My opinion is this: as soon as Keynes came out with this spend big theory, politicians everywhere danced, laughed, and danced a bit more. This gave them a scientific excuse to borrow money that we don’t have to spend on pet projects, on what contributors would like pumped up, and on buying votes from eager constituents. It was a license to spend, and spend big, all under the cover of what the experts say should be done. This goes for both parties, so it’s not a partisan thing. So yeah, I’m a big fan of Hayek.
I’ll end with this: it can’t go on forever. It might go on for a long, long time yet, but you can’t keep increasing the national debt at rates like this and not have to pay a terrible price someday.