“There's a difference between interest and commitment. When you're interested in doing something, you do it only when circumstance permit. When you're committed to something, you accept no excuses, only results.” – Unknown
Today’s Atlas Liberty Café featured a talk by George Mason University professor of economics Peter Boettke. Dr. Boettke gave an interesting lecture on the history of the Keynes-Hayek Debate and its reemergence in the context of the recent financial crisis. The policies of the Keynesian era during the Great Depression were largely ineffective then, and they remain so today. While Dr. Boettke’s lecture was not specifically tied to the Sound Money project here at Atlas, he did point the standard Keynesian formula of policy: “Deficit, Debt, and Debasement”. It is this standard formula that the Sound Money project attempts to undermine.
The Keynesian view of recessions as a fall in aggregate demand leads to the idea that the way out of a recession is to raise aggregate demand through government spending. The oft used strategy for this spending is through the deficit. When the government runs a deficit, it has three options for repayment. It can tax, borrow or inflate. Taxes are notoriously unpopular in the political spectrum, making them difficult to implement. Borrowing is only a short term solution as eventually the loans are just a continuation of the debt extended into the future. (I should mention here that Dr. Boettke also mentioned that repudiating the debt is one option.) The most likely source of financing the debt is through debasement of the currency, or inflation.
We have already begun to see the policy in action, as the Federal Reserve has started its quantitative easing, or buying the US debt with newly printed money. Though in “normal” times inflation is seen as detrimental to economic health, in a time of crises there is a need to take drastic action. The rules need to be broken, so to speak. At least this is the idea being pushed through in terms of policy.
Does it make sense to make such a claim? As Dr. Boettke said today, it is in times of crises that rules become the most important. When people are frightened, that is the time to keep them from taking rash actions that lead to catastrophes in the future. So far, we have failed to prevent the political sphere from making these mistakes. We have had the massive stimulus plans, the low interest rates, and the quantitative easing. Those in Washington continue to claim that the free market has failed. While I will not argue that point here, I will say that the political system has failed. They allowed fear to overtake them, and the current economic policies have left us with massive debts, dramatic and hasty regulations and, even now, the potential for both of those to grow. In their rush to do something, anything, Washington fell back on the economics of convenience, forgetting all that has been learned about the inadequacies of those policies.
What will the outcome of these policies be? At least in terms of money, we will see inflation, distortion of the price mechanism, confusion in production, and, eventually, the next crash. How do we minimize these distortions and the damage they cause? Once again, Dr. Boettke said it clearly: “Fiscal responsibility and sound money”.
So how do we get there, and, just as importantly, how do we keep the political system from failing again? The Sound Money project has wrestled with this idea since its beginnings. There are a number of offered suggestions: the gold standard, free banking, monetary rules. These are all possibilities. There are pros and cons of each. Or perhaps, there are solutions that we have not yet considered. Whichever the case, it is time that we seriously consider the problems that we face.
Sound Money Fellow
Atlas Economic Research Foundation