Do You Like Keynes or Keynes?

In this political season, we're being treated to a reprise of that great refrain from the 1992 campaign: "It's the economy, stupid." The two parties are arguing heartily over the state of the economy and, most importantly, what policies the next administration should pursue. Each is trying hard to convince us that their guy has the right answers, and the other guy is totally wrong.

The only problem with this picture is that they're both on the same side in terms of economics. Because they have to pretend to be different, this means that one side (in this case, the Democrats) gets to be honest about it while the other side (Republicans) pretend they believe something else.

The great debate in economics that the Republicans are trying to revive and use is the divide between John Meynard Keynes and Friedrich Hayek. For those not familiar with this argument, you can learn most of what you need to know in two rap videos here and here. Yes, I know that "rap video" and "economics" don't usually go together - but watch these. They're good. Produced by real economists!

Republicans have been talking a lot lately about the debt, and criticizing President Obama's stimulus package and auto industry bailout as having been fiscally irresponsible and counterproductive. This is a classic Hayek/Austrian School argument. Governor Romney got in a dig during his convention speech when he said, "Jobs to [Obama] are about government.".

The problem is, judging by their actions Republicans don't believe in Hayek either. In that very same speech Romney said, "I have a plan to create 12 million new jobs". This is not the kind of thing you say if you really believe that government doesn't create jobs, the private sector does.

This is also the same Republican party that, along with nearly universal support from Democrats, passed the first stimulus package back in the waning days of the Bush administration. The target of that package was the financial sector. To a Keynesian, stimulus is stimulus - you can argue over details, but pumping money into one sector is much like pumping money into another. And there is nary a member of Congress - from either party - who will oppose spending that goes to defense contractors in his or her district, in the name of "creating jobs".

To be fair, there is a wing of the Republican party that opposes all of these Keynesian efforts. That's the wing most consistently represented by Ron Paul. Paul has opposed nearly all stimulus efforts, derided the Iraq war as wasteful government spending, and called for an audit of the Fed. He managed to capture a few delegates through various primaries, but the GOP gave him no platform at the convention and effectively shut his supporters out. It's pretty clear what you party really thinks about Hayek when you would rather give the microphone to an old actor talking to an empty chair than to the most consistent spokesman for Austrian School economics in modern times.

In fact, the usual Republican vs. Democrat economics argument - tax cuts vs. government spending - is a tactical argument among Keynesians. Both tax cuts and government spending represent stimulus, just in different forms. Neither side, of course, is willing to criticize the Fed's "Quantitative Easing", which some have likened (with some fairness) to printing money on a large scale - a very Keynesian strategy.

So when you hear the parties arguing that they are fundamentally opposed to each others' economic philosophies, don't believe it. If you really think that Hayek is right, and Keynes is wrong, you're out of luck - you have no candidate to represent your views. Your choice is between one who is honest about following Keynes, and another who is trying to trick you into believing he's not on that same road. Even Richard Nixon admitted to being a Keynesian. Funny how his successors seem to have trouble being as honest as Tricky Dick.