Before the Keynesians put us out of business

Barbarous Relic

Joseph Salerno, professor of economics at Pace University and author of Money, Sound and Unsound, recently taught a course in Austrian Macroeconomics at the Mises Academy. For a $59 registration fee that included all the reading material, anyone with access to the internet could sign up. As with all Academy courses, the lectures were recorded and are made available to students indefinitely.

In his final lecture Salerno presented the Austrian Business Cycle Theory and showed how, during a recession, the policy prescriptions of the Austrians differs from those of the Keynesians. The chart below summarizes and contrasts the policies.

What follows is my understanding of the chart, and any errors of interpretation are mine alone. In English, the chart reads as follows:

Fiscal policy, Austrians: Lower Taxes (down-arrow T), reduce government spending (down-arrow G), and balance the budget (Taxes minus government spending equals zero). Note: Paul Krugman would likely condemn this policy as “fiscal austerity,” and it is - for the government. But obviously not for the taxpayers.

Fiscal policy, Keynesians: Lower taxes, increase government spending, and run deficits (government should spend more than it collects in taxes). Note: Lowering taxes in a recession is the one area where Austrians and Keynesians agree, though President Obama, who in other ways follows the Keynesian playbook, has raised taxes.

Monetary policy, Austrians: Freeze the money supply M (delta M equals zero), let the interest rate adjust according to the time preference of market participants.

Monetary policy, Keynesians: Goose the money supply (up-arrow M), annihilate the interest rate (down-arrow i).

Microeconomic policy, Austrians: Repeal all laws keeping the market from clearing, including policies that prevent wages W and prices P from adjusting to supply and demand.

Microeconomic policy, Keynesians: Use the power of government to keep wages and prices from adjusting to market conditions.

Regulatory policy, Austrians: Remove government regulations and allow the market to perform its regulatory function instead.

Regulatory policy, Keynesians: More government regulations, especially in the financial sector.

No one in the seats of power saw the financial crisis coming because, we’re told, financial crises are a lot like “earthquakes and flu pandemics,” difficult to predict. Not coincidentally, none of those in power are Austrians. After five years of Keynesian and other anti-market “remedies,” Europe overall is in recession, while U.S. growth in the last quarter of 2012 declined by $4.9 billion even with a $165 billion “stimulus” behind it. Before the Fed and the government decided to “do something” about a floundering economy, crises lasted on average 18 months to two years. Although this last one was officially over in 2009 - see Robert Murphy's take on what this means - unemployment is still high, while optimism among consumers and small business owners remains very low.

I don't recall reading any restrictions that would've prevented central bankers and senior government officials from registering for Salerno's course. It's too bad for them but especially for us, because given their track record we can expect even bigger calamities down the road. If they found the registration fee too pricy but would otherwise be willing to take the course, I would be glad to empty my piggy bank on their behalf the next time it's offered.

We need to let the market breathe before the Keynesian maestros put us out of business.
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