The only reason Keynesianism is still in vogue in Washington is because it reinforces the delusion of politicians that they can effectively be in ‘control’ of a growing economy. If Keynesianism is accurate, then the best way to ensure economic growth is for the anointed in government to pick ‘the right’ winners and losers. They will then ‘spread the wealth around’ and everyone will benefit. Regrettably history disagrees with this view.
In spirit anyway, the same is true at the Fed with the Monetarist school. That economic school reinforces the belief that it’s the Fed policymakers ‘in control’ of a growing economy instead of the politicians. The FOMC board will control the cost of capital and that will cause less enlightened businessmen to increase or decrease their economic activity accordingly. The truth however doesn’t seem to want to cooperate with that view either.
In reality, the tools of Keynesianism are excellent at understanding the parts of an economy, but are insufficient to understand the economy as a whole. It really never addresses the issue of what happens tomorrow, and is therefore profoundly short-sighted. Using Keynesianism to direct an economy from the top down is like trying to drive a car on the highway while looking through a microscope. You may in fact get it right, but the cause won’t be what you think it is, and the effect will be little more than a happy accident.
Now we’re learning about the limits of the monetarist school as well. Like Keynesianism its major problem is one of short-sightedness. In a ‘normal economy’ in can stabilize prices, minimize inflation and increase confidence in the monetary base. But when things become extreme, the tools of the monetary school begin to fall apart. To use the same analogy, it’s like putting down the Keynesian microscope and driving the same car in a heavy fog. So long as the road is straight and there are no big surprises things are fine. But when the highway bends, you have to either live with slowing down, or expect to end up in a tangled metal heap.
In the end I think both of these views were typified by Clint Webb who said it best when he described himself as having a ‘sociopathic narcissism’. This left him with the feeling that everyone would be better off if he were in charge of all of their decisions. Congress believes that, the Fed governors believe it, and lord knows the President and his team of fawning sycophants believe it as well. So instead of trying to look objectively at our economy and to determine the best course of action, they have each simply embraced the school of economics which helps them support their individual nihilistic view.
Right now, Ben Bernanke is projecting himself into the future and trying to manage his legacy. He doesn’t want to preside over another great depression so he’s not going to allow deflation under any circumstances. Neither does he want to be remembered for putting the world’s most dynamic economy into a Japanese style ‘lost decade’. That means that he’s going to do everything he can to ensure that we return to vigorous economic growth. That is, he’ll do everything he can short of promoting policies which will involve him surrendering control. The same can be expected of Congress and the President.
When those roads runs out is anyone's guess, but there is no doubt that they will each end eventually. And that highlights the problem with Austrian school Economics. the Austrian school puts forward the broadest and most consistent of all economic views, but it doesn’t offer much in the way of timing. While history tends to hold it correct eventually, it tends to be so far sighted a perspective that it's impossible to tell when the piper will finally demand payment. It could be tomorrow, or next year or 50 years. One never really knows.
But our rulers don't care about that.
The simple truth is, we’ll never see an Austrian school policy adopted. It may be right or it may be wrong; it may provide good solutions to our economic problems or bad ones. Our rulers don’t really care one way or the other. But what they do care very deeply about is that to adopt an Austrian school policy, they would have to surrender control. And that's something they will NEVER accept. So Congress and the President will continue to be Keynesian and the FOMC will continue to be Monetarist. And we individual Americans can expect to end up with either a happy accident, or a tangled metal heap.
For me, hope is just great, but I’m still buying insurance.
0 comments:
Post a Comment