In this weekend’s “strange new respect” news, someone at Newsweek… trumpets Hayek’s triumphant return? Apparently we aren’t all socialists now.
The big debate lately seems to be whether Bernanke’s second round of “quantitative easing” is helping provide liquidity, a la Milton Friedman, or just an attempt to reflate the bubble. If you read Amity Shlaes’ history of The Great Depression “The Forgotten Man” it becomes pretty clear Friedman was certainly correct about the deficiencies of contractionary monetary policy in that instance — the economy was so money-poor a couple hundred local scrips sprouted up across the land. That’s right, people were actually printing their own money just to have a medium of exchange.
Obviously we have nothing like that kind of cash shortage now. This isn’t the 1930s and the Fed is not pursuing the disastrous “real bills ” doctrine that allowed so many banks to fail that getting access to money was difficult. But the pendulum has swung too far and now printing money is seen as the solution to the problem du jour, whatever that may be.
Unfortunately the Keynesians have the gov’t now spending 45% of GDP, more than we spent sending millions of soldiers to Europe and the Pacific in WW II, and some lunatics like Paul Krugman think the gov’t should be given an even bigger share of the economy. Repeat after me, folks: the government does not grow the economy. Chasing aggregate demand with government spending is like trying to drink from a mirage and will only leave us thirsting for real growth.
The Austrians have it correct here: resources have been misallocated and only accepting some painful restructuring will put us back on the path to growth.
Of course, the main reason for this post is to allow me to plausibly link, again, these two incredibly awesome Keynes vs Hayek live rap battles.