Applied Randology #1: Hayek Anxiety

The 2012 election is heating up, so it’s time to start applying this book club to real life. Today, even though I vote Democrat, I’m going to explain how conservative economics makes liberal sense. Sort of.

Disclaimer: I’m not formally versed in economics, I just read this book recently. But if you are so versed, and want to school me in the comments, by all means. And if you aren’t and things get confusing, read yesterday’s primer on Keynes & Hayek for context.

Alan Greenspan

To get a sense of the strange ways Ayn Rand has impacted American politics, look no further than the arguments between Alan Greenspan and Ron Paul during Congressional oversight hearings, excerpted in Paul’s book End the Fed.  Greenspan was a member of the inner circle that workshopped drafts of Atlas Shrugged with Rand herself. Paul named his son Rand. Yet despite their shared philosophical background, they are completely at odds over the economy.

Greenspan, of course, ran the Federal Reserve from 1987 to 2006, and Ron Paul hates the Fed. A lot. During the GOP debate on 1/23, he spoke about how the government doesn’t manipulate the economy through price and wage controls (aside from a minimum wage, I suppose), but it does manipulate the economy by controlling interest rates and money supply. That’s the Fed. Paul’s economics are pure Hayek, so he thinks we shouldn’t do that. Peg the value of the dollar to gold and leave the economy alone. After all, since capitalism is undeniably the most efficient system for creating vast amounts of wealth, we should want the market to be as free as possible.

Being richer than your parents: The Everywhere-but-America-n Dream

Income Growth in America, 1979-2005

But some people aren’t so sure the wealth capitalism generates will automatically get distributed on the merits, and the libertarian vision is completely neutral to outcomes. Increasing income inequality and declining social mobility are only the technical terms for, I don’t know, the Death of the American Dream, but to a pure libertarian the American Dream was only possible thanks to the nation’s laissez faire roots, so as long as the system goes back to that model the socioeconomic outcomes will be right by definition, no matter what they are.

America's Lovable Crackpot Grandpa

Which means if Ron Paul became president and had a Tea Party congress to back him up in liquidating the national debt and dismantling the Fed, the global economy would undergo a severe contraction, but that would just prove the whole arrangement was built on an illusion in the first place and any terrible consequences caused by ending it would be necessary adjustments to get back on a sustainable track. From the perspective of the people in this hypothetical whose lives were okay until Ron Paul’s policies rocked the world, this logic seems obviously insane.

Despite that, Ron Paul is vital to national politics because of his extreme ideological purity. People criticize the Republican party for prizing ideological purity over all else, but the real problem is that mainstream Republican ideology is not pure, it’s a sick, self-contradictory mess. Ron Paul’s system of belief is internally coherent even if it’s externally problematic: he has integrity.

For example, Ron Paul’s policies for restoring American prosperity are not aimed at lowering unemployment, because under pure Hayekian liberty the unemployment rate at any given moment always reflects the best the economy can do; anything better is just a bubble waiting to burst. Can’t find work? Tough shit. Put down the bong and learn how to compete for the jobs that actually exist, or prove your ideas are valuable in the free market and create some jobs yourself. That part sounds Republican enough.

Yet in the same debate where Paul talked monetary policy, Newt Gingrich and Mitt Romney were in a rhetorical arms race over who could create more jobs by cutting Mitt Romney’s taxes from 15% to zero. That isn’t honest Hayekian politics, it’s pandering. The rich donor class likes the tax cuts, the struggling masses in the voting class like hearing ‘job creation.’ But cutting taxes to promote job creation is actually Keynesian.

Professional Bullshit Artists

After all, insofar as people spend their untaxed money it will stimulate demand, which will boost the economy and thus, eventually, employment and tax revenues. JFK did this. Granted, those were demand-side “trickle-up” cuts, not supply-side “trickle-down” cuts. But either way the law of diminishing returns applies. Cut taxes too much and the growth won’t produce more tax revenues on the other end. It becomes fiscally irresponsible.

The key to all of Keynes’ ideas is that they’re cyclical guidelines, not hard and fast rules. The economy crashed? Cut taxes and spend money until it fuels a positive feedback loop. But once the loop is running, STOP. If the economy is booming, raise taxes and save a budget surplus. That way, next time the economy hits a negative feedback loop, we can cut taxes and fund public works out of the surplus and not rack up such a big deficit. Fiscal responsibility! Conservative and liberal policies are both right, they just need to take turns.

Now, Keynesian spending can be a problem — flood the economic engine with too much money and it stalls out (stagflation). Or even worse (and this was Hayek’s fear), it can make the up and down swings sharper instead of smoother. Like, say, if you give tax deductions and tax dollars to home-owners who can’t afford a mortgage, that creates a bubble. Or if you give out massive tax cuts during a boom, that explodes the deficit. But neither Barney Frank nor George Bush was masterminding an evil conspiracy. They don’t even like each other. It’s just the same mechanism at play as in lobbying: systemic corruption without widespread individual corruption.

So clearly politics gums up the Keynesian On/Off switch. Once politicians hand out Keynesian dollars, it’s very hard to stop. They’d lose votes! What if the business cycle slumps when they’re up for re-election? They’ll overuse Keynesian tools to stay in office! Indeed, this is part of why our tax code is a mess of deductions. Look no further than President Obama’s well-received State of the Union Speech. Great speech; I liked it. But it involved a lot more tax complicating than tax simplifying.

Chemo treats cancer, but it also makes you sick.

Once Keynesian spending becomes never-ending and aimed towards specific interest groups by career politicians, it actually could trigger Hayek’s Road to Serfdom feedback loop. But as we see today, private enterprise is part of that. It’s the corporatist-lobbyist-politician loop. George Orwell himself pointed out in his review of Hayek’s Road that the people are right to fear corporate serfdom as well as state serfdom. Fascism is both, after all. It’s a balancing act.

Hayek actually considered himself a liberal, but in classical terms, where it’s defined by economic liberty and only out of that can social liberty grow. He said of conservatives that they are only as good as what they’re conserving. Today’s Republican policies would conserve deficit-expanding tax cuts and a 70-year bipartisan tradition of endless deficit spending on the military-industrial complex. If Hayek’s Road to Serfdom is a vision of a bankrupt police state, the conservative party in America today is steering a course down that very road.

What then of the Democrats? They use the language of Ayn Rand’s villains, the language of social justice. And they’re part of the corporate-lobbyist-politician axis too. Yet neither group is full of secret nihilists; Rand is way too cynical there. Voters on both sides aspire to live by their principles and are maybe a little naive about policy, or like Rand’s heroes they simply can’t fathom their enemies or see their own flaws.

The reason I vote the Democratic side of the not-backed-by-gold coin is that the Democratic party’s parallels to the Randverse are straightforward and end there. Rand nails the naive self-defeating angle, and I get that. But that holds for the GOP too, and then on top of that the language of the Republican party has gone disturbingly meta. Conservative rhetoric uses Rand/Hayek arguments in ways that would produce the Rand/Hayek nightmare scenario. It’s not just self-defeating, it’s self-contradicting. It’s a Jim Taggart move if ever there was one. Except in our world it’s Rand’s language playing the role that social justice language plays in the Randverse. Ironic, idn’t it?

The Debt: Both parties, finally working together.

Standing in the middle of all this is Ron Paul again, who demonstrates both the incoherence of mainstream politics and the inability of a rigid ideology to solve the problem. He is anti-Keynes, so he’s in the party that calls itself anti-Keynes. But both parties use (and abuse) Keynesianism.

Basically Keynes is like a drug. Drugs can be medicine. They can be a social lubricant. But you need to use them in responsible moderation. Hayek doesn’t want us to overdose or drive drunk or end up broke and homeless (oops!). So credit where it’s due: Keynes is the most influential economist since Adam Smith, and not without reason. Hayek was an economist, sure, but his truly important legacy is his political philosophy, which warns us about the dangers of Keynes’ powerful insights.

And even Hayek cuts across today’s political lines. In his last major work, The Fatal Conceit, Hayek was as radically libertarian as ever. He suggested we should privatize pretty much everything. But he also said the state should enforce a universal health care mandate and guarantee unemployment insurance, even if private companies supply them. That way, maybe, even at the bottom of the business cycle, people wouldn’t be desperate enough to vote for a well-meaning party that would accidentally turn the country into a militarized police state. Maybe.

So yeah. Conservative economics makes liberal sense. Sort of.

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