Both Ludwig von Mises and Paul Krugman have failed America

Friedman and Krugman

OCALA, Fla., March 24, 2014 — Since the mid-twentieth century, two schools of economics have dominated the American sociopolitical landscape.

The first, championed by such figures as Ludwig von Mises, is the Austrian. It holds that a free and unfettered market allows a nation to actualize its full fiscal potential. This means minimal tax rates, no tariffs, trade embargoes, or even minimum wage floors.

The second, advocated by scientists such as Paul Krugman, is the Keynesian. This entails the government stabilizing the economy during hard times by infusing it with capital financed by higher tax rates for higher earners. More often than not, these are accompanied by tax cuts for the non-wealthy in order to spur mass growth in the market.

Historically, certain aspects of both schools have been incorporated into America’s mixed economy. During the World War II era, the military required so much funding and personnel that private companies (and consumers) were subjected to strict supply rations; too, many of the unemployed found jobs through conscription.

The government was employing so many people, and those who had never held a job before forced to take the place of soldiers, that suddenly money was everywhere. The wealthy were heavily taxed, as was most of the middle class, but so many people suddenly had so much cash that the economy was booming again.

Of course, the good days did not last forever. By the early 1960s, President John F. Kennedy was promoting income tax cuts and a Treasury, rather than Federal Reserve, -bound monetary policy. By easing governmental burdens and attacking inflation, he reasoned that capital would flow without obstruction.

After Kennedy’s assassination, his successor, Lyndon B. Johnson, reversed course and attempted to eradicate poverty by stimulating poor areas with grossly expensive public works projects. Dubbed the Great Society, his program was a colossal failure.

Richard Nixon, the next occupant of the Oval Office, shared Johnson’s Keynesian ideas. However, he was more moderate in approach and managed to get a great deal done, including fostering commerce with communist China and setting vigorous price controls for both the private and public sectors. He was ousted on corruption charges, sadly, and the next two presidents in line did even sadder jobs of stabilizing the economy, which quickly spiraled into a drain of inflation.

As a result of the election of Ronald Reagan, Austrian-like ideas flooded back to Capitol Hill. He slashed taxes and regulations while spending more on national defense concerns. Such a strange combination paved the way for a financial boom during the 1980s, but this busted spectacularly in the later part of that decade.

The unfortunate fellow serving as president while this took place was George H.W. Bush. Previously a fierce critic of his forerunner’s economic strategies, he nonetheless received a disproportionate amount of blame for them. He tried a myriad of steps to remedy the problems, but found less and less luck as those pages on the calendar kept turning.

Bush ran for a second term, but was defeated by Bill Clinton, who first employed a series of hardcore Keynesian moves which met with widespread public disapproval. Eventually, he devised a hybrid approach combining both Austrian and Keynesian elements. Streamlining wasteful public assistance programs that had devolved into career welfare opportunities and hiking taxes on the upper classes, Clinton made the government so austere that it finally had a surplus.

Austerity did not last for long. George W. Bush, H.W.’s son and a new president for a new millennium, transformed Clinton’s surplus into a staggering deficit by lowering tax rates while increasing spending. Though Bush II didn’t have much choice on the tax rates; as he plunged the country into war, America’s fiscal house began to crumble like the proverbial house of cards.

Total implosion took a bit longer, though; not until the global financial crisis of the late 2000s, skillfully maneuvered by the smartest guys in the room on Wall Street, that sent everything straight into the ground.

Fortunately, or so it seemed, one man had the ability to fix this all up with a brand of change that everyone could believe in. Barack Obama’s decidedly Keynesian plan, flavored by social justice principles, was never truly realized, however. Congress and the public had their own ideas, and a colossal bickering war erupted.

Of course, as the prolonged battle wore on, conditions on the ground worsened considerably. The economic stimulus package crafted to relieve many a woe turned out to be, in large part, an audacious bipartisan scheme to repay select special interest groups.

By the time Obama had been elected to his second term, nobody could really agree about anything, because no one wanted to listen to what the other side had to say. All Austrian, or all Keynesian; no Clintonian Third Way; never!

So here we are.

As any objective observer knows, neither Austrian nor Keynesian schools have all the answers. Combining them has led to great successes, though even this is not assured. What, then, can this country turn to for the challenging years ahead? Is there an economic philosophy capable of navigating our unprecedentedly rocky road?

Some of us believe that there is. Designed by some of the same people who designed this nation, it allowed for unsurpassed pinnacles of finance and entrepreneurship to be reached. For a system that helped a fledgling band of colonies transform into the world’s unquestioned superpower, its name is rarely mentioned.

Fittingly, it is this: the American School. What is it all about? We shall find out.

Much of this article was first published as Amerinomics, Part One: Going Back to School in Blogcritics Magazine.

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  • James R. Edwards

    With no evidence at all the author states that Austrian economics does not work by itself. That is patently false. Facts in this article are questionable at best. This guy always tries to position himself as teh reasonable one in the middle of the road, and particularly, those Tea Party/libertarian folks are crazy racists. If I wanted bad facts and a strong liberal bias, I can get that from the MSM.

  • MirriamE

    Clearly Reagan was more of a Keynesian than an Austrian because he massively increased defense spending.

  • 21st Century Pacifist

    Well, if we look at the past 30 years it is easy to see how the Austrian school of economics worked. It created the biggest income inequality in over 100 years. Maybe Mr. Edwards would agree with this, or maybe not.

  • Mark Andersn

    I’m sorry but the author is confused. Austrian School economics has not been a dominant force since the mid-twentieth century. Perhaps you are thinking of Monetarism. Monetarism, represented by Friedman, gets a lot of particular issues right. But one issue the monetarists get totally wrong is monetary policy. Monetarists are objectively the same as Keynesians. When was the last time the United States has been on a gold standard? How do you blame the gold standard (i.e. Austrian School economics) for booms and busts? How do you figure Reagan was an Austrian Schooler?