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Keynesian Luxury

07/10/2015

If you’re a hammer, then all problems look like nails.  When the U.S. economy began falling into serious depression in 1929, the hapless President Hoover only had one tool, Austrian economics, and he used it, getting Congress to pass the Smoot-Hawley Trade Bill in 1930, despite a signed petition from 1,028 leading economists to veto the bill.  The economy shifted from a severe recession into a severe depression.

You will recall that the Austrian school of economics argues for a balanced budget every year, with strong limitations on spending.  The hardship of the Great Depression gave birth to the Keynesian school of economics, which argues that budgets only need to be balanced over the business cycle and that deficit spending is an appropriate tool against depression.

When President Roosevelt took over, he slowly began this process of stimulating the economy with deficit spending and was beginning to see real economic growth.  However, it was the massive deficit spending of World War II that really kick-started the U.S economy.

The current debate in Europe over Greece is another version of the old battle between the Austrian and Keynesian approaches.  The Austrian version was forced upon Greece in 2010, whose economy promptly shifted from a severe recession into a severe depression.  Greece argues that a Keynesian approach now makes more sense with large deficit spending to boost the economy.

The difference is this:  The U.S. had minimal national debt before the Great Depression and could afford massive deficit spending.  Greece already has WAY too much national debt and cannot afford the luxury of more deficit spending.  By allowing their debt to spiral upwards already, the Greeks have forfeited the benefits of Keynesianism.

There are other schools of economics, such as Supply-Side, Monetarism, etc, but   they offer little in the way of a solution for Greece.  While Europe will likely postpone the harsh reality, I do suspect Greece will need more humanitarian aid than financial aid.

Now, here’s the real problem:  At $18 TRILLION of national debt, has the U.S. also forfeited the benefits of Keynesianism?

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