Drinking the Austrian Kool-Aid

by Russ Roberts on August 21, 2011

in Politics, Stimulus, Uncategorized

Greg Ip of the Economist writes in today’s Washington Post that the Republican presidential candidates have rejected earlier Republican orthodoxy and have embraced some crazy economic ideas (Mises and Hayek, for example). The piece opens with how much John McCain 12 years ago appreciated Alan Greenspan:

When John McCain was running for the Republican presidential nomination nearly 12 years ago, he declared that Alan Greenspan was so critical to the economy that, if the then-Federal Reserve chairman died, he’d put sunglasses on the body, prop him up and hope no one noticed.

Yes, the Republican Party used to think more of the chair of the Fed than it does now. That seems pretty reasonable. A lot of sensible people think Greenspan helped create the housing bubble and the crisis by his interest policies of the early 2000s. Ip continues:

It’s safe to say that GOP opinions of the Fed have slipped a bit since. Texas Gov. Rick Perry, a newly declared candidate for president, said it would be “treasonous” for Greenspan’s successor, Ben Bernanke, to “print more money between now and the election” in an effort to boost the economy. Other candidates have been equally damning if slightly less extreme in their statements. Rep. Michele Bachmann of Minnesota has accused the Fed of “debasing the currency,” while Rep. Ron Paul of Texas has written a bestseller called “End the Fed.” The party’s economic standard-bearer in the House, Paul Ryan of Wisconsin, repeatedly charges the Fed with “bailing out” what he considers President Obama’s reckless fiscal policy and wants the institution stripped of its mandate to promote employment.

I am not a Republican and don’t think Bachmann or Paul have any chance at the nomination. I think treasonous is an ugly word. But the Fed is out of control. Literally. It is not responsible for its actions in any direct way. When it bailed out the creditors of Bear Stearns it overstepped its bounds. It has decided to pay interest rates on reserves which looks to me like a backdoor bailout of the financial sector. It has purchased a great deal of bad paper from banks and financial institutions which is certainly a bailout. It is non-transparent. I don’t know what they paid for those assets–it is not easy to find out. I also agree with Ryan (as do many but not all economists) that giving the Fed a mandate beyond inflation control is a recipe for disaster.

Ip continues:

If Republicans dislike monetary stimulus, they loathe its fiscal cousin even more, routinely labeling Obama’s stimulus as ineffective, or worse, counterproductive. They want balanced budgets, the sooner the better. Bachmann, for instance, has advocated an immediate 40 percent cut to federal spending by barring any increase in the debt ceiling. This, too, is at odds with the party’s earlier views. The administration of George W. Bush sold its 2001 and 2003 tax cuts as Keynesian-style economic stimulus. Lawrence Lindsey, a top Bush adviser, even likened opponents of the tax cuts to President Herbert Hoover, whose obsession with balancing the budget in 1932 worsened the Great Depression.

Well, yes, George Bush justified his tax cuts in Keynesian terms, particularly the 2008 cuts that Ip forgot to mention. The 2008 cuts accomplished nothing. They were simply rebates, something Keynesians think are effective. The 2001 and 2003 cuts were at least cuts in rates that could have incentive effects that would be characterized as “supply-side.”

Ip continues:

Certainly, some of this rhetoric is just political opportunism. The Fed and the stimulus package are handy proxies for Republicans’ real target, which is Obama in the 2012 election. But something more fundamental is going on: The economic ideology of the Republican Party has changed in recent years in an important and little-appreciated direction. Liberals and conservatives in the United States have long differed on how much the government should meddle in individual markets, whether for energy or health care. But they have largely agreed that the government should have at least some role in smoothing out the ups and downs of the business cycle — what economists call “macroeconomic stabilization,” that is, containing inflation in good times and boosting employment in bad.

But this is the consensus that many Republicans in effect now reject.

Yes, fair enough. But why have the Republican candidates rejected this view? The answer IS political opportunism, but not the kind Ip has in mind. The American people see unemployment over 9%. They see that there has been virtually no net job growth over the last two years. At the same time, the deficit has swollen, the US credit rating has been downgraded and we’re on the verge of a double dip. Certainly it is plausible to entertain the possibility that we don’t have the knowledge to steer the economy.

Ip goes on to give a stylized history of macroeconomic policy which I don’t agree with but you can read it yourself if you’re interested. He ignores the importance of Friedman’s (and Schwartz’s) assault on Keynesianism and blames the Republican candidate’s current views on a love affair with Mises and Hayek.

The real flaw in Ip’s argument is the dog that doesn’t bark. Why aren’t the President and the Senate pushing an activist agenda with the economy still struggling? Why isn’t anyone listening to Krugman and others who want even more government spending with borrowed money? Is it those crazy Tea Party-influenced Republicans who like The Road to Serfdom who are the barrier to old-fashioned mainstream economic policy? Well there are about 85 of those, maybe. That leaves 350 members of Congress and a Democratic Senate to craft some “sensible” stimulus. Why isn’t it happening? The answer is that Democrats aren’t so eager to swell the deficit further or bless additional quantitative easing. They want to keep their jobs. And they are as skeptical of Keynesian magic as the out-of-the mainstream Republican candidates.

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Subhi Andrews August 21, 2011 at 2:43 pm

Well stated, Russ.

Kevin Schmidt August 22, 2011 at 4:28 pm

Not well stated.

Krugman and others don’t want even more government spending with borrowed money on corporate bailouts. They warned the government that Wall Street bailouts would not work, and would create an even worse recession. They want government spending on creating jobs and bailing out Main Street. They want fiscal stimulus that has proven to work.

tkwelge August 22, 2011 at 8:00 pm

But lowering the interest rate and pumping money into “mainstreet” is still corporate welfare. Pretending that the money either goes to “wall street” or “main street” is nonsensical. There are plenty of “main street” boondoggles that are essentially “wall street” bailouts. Any time the Fed lowers interest rates, that is a bailout. Do you have anything but emotional terminology to add to the discussion?

Jack August 22, 2011 at 10:31 pm

Kevin: What are you talking about? When has Keyesian policy worked? It didn’t work in the 1970s or the late 2000s. Interestingly, when government spending was curbed in the early 1920s and the 1990s, it did wonders for the economy. The same can be said for post -World War II when spending was cut drastically. And remember, when spending was cut in the 1950s and 1990s, people like Krugman decried the pending doom that never happened. Even the downturn of 2000 was very mild…Please tell me when Keysianism worked? I really want to know…Good Luck and Thanks…

Jeremy D. Young August 21, 2011 at 2:54 pm

I’m curious whether you feel that Ron Paul *should not* be the nominee for the Republican Party, or that he will be opposed vehemently at every level from within and outside the party, and that his climb to victory is just that much steeper than the other candidates?

Comparing the organization and professionalism of the 2012 vs 2008 versions of the Ron Paul for President campaigns reveals significant differences. I think that Dr. Paul is bringing along people to help him run a much more significant campaign this time around.

Do you feel that Ron Paul actually holds to sound economic theories, and would be a good choice for our nation’s highest office?

Counterpoint August 21, 2011 at 3:59 pm

I’m curious as well. Paul has a deep understanding of Austrian economics. It surprises me that he does not get more attention from Austrian economists.

jjoxman August 21, 2011 at 4:42 pm

Ron Paul gets a lot of action from Mises Institute.

His monetary economics is mostly bad, though. I think he got it all from Rothbard. Now, I loves me some Rothbard, but he was a terrible monetary economist. Which is shocking, given how much time he spent on monetary history.

PK August 22, 2011 at 9:38 am

In the land of the blind, the one-eyed man is king.

Dr. Paul has clearly overdosed on Rothbard. But he still understands monetary economics better than all the other candidates in recent times.

Chucklehead August 21, 2011 at 5:52 pm

Considering Dr. Roberts repeatedly testifies before congress, and Dr. Paul is the Chairman of the House Financial Services Subcommittee on Domestic Monetary Policy and Technology, it may well be in his best interest not to respond, no matter what his position.

Chucklehead August 21, 2011 at 3:05 pm

This is all your fault. Your videos are directly responsible for the resurgence of the Keynes-Hayek debate, so much so that the LSE and the BBC could not ignore it any longer. GMU, Mercatus, Mises Institute , & and Hoover are largely responsible for the resurgence of the Austrian School in the 21st century. It has given intellectual legitimacy and arguments to instincts and beliefs that people have long held, but didn’t know how to express. This is a direct threat to monetary institutions and governments world wide, challenging their results and legitimacy.
You have got their attention. Keep up the good work.

indianajim August 21, 2011 at 3:12 pm


Eric Hammer August 22, 2011 at 4:37 pm

Well put! I would wager that the biggest boon to the study of economics in recent history will be how well you folks have brought the debate to the general public, and started people in all walks of life thinking and learning about it. Hopefully this will start to be reflected in the actions of politicians who will start to represent those who demand more responsible government, and in doing so realign some of the incentives of academic economists who currently pursue fame and influence by pushing the Keynsian “more government is better” line so hard.

Keep it up!

Jack August 22, 2011 at 10:34 pm

Yes, I agree: keep up the good work…

Steve August 21, 2011 at 3:32 pm


What is your opinion of Ron Paul?

Greg Webb August 21, 2011 at 4:17 pm

Russ, you and Don, along with certain others, have had much to do with the resurgence of the Austrian School of Economics. That, and the re-failure of Keynesian economics over the last few years. Thank you for your excellent work!

muirgeo August 21, 2011 at 4:50 pm

Couple of things. It’s always good to go back and look at what legislation was proposed but never made it to a vote. The 110th and 11 th congresses (Pelosi’s) put forth LOTS of legislation to address are economic woes and to provide much more stimulus then was ever allowed to pass. Massive obstruction and a record number of filibusters made sure that almost no legislation went to a vote and that which did was massively watered down.

Now with continued stagnation and a Republican / Libertarian lead propaganda campaign to falsely make issue number one the deficit no politician is willing to push the idea that we need to crank out more treasuries and invest them at the great rate of 2%. Also not to mention the democratic party does not any longer control the house and gets absolutely NO cooperation with the Tea Party or the non-Tea Party republicans.

The big thing about this Tea Party congress is to noet that they have not put forth ONE bill with the aim to improve jobs.

SweetLiberty August 21, 2011 at 6:49 pm

Muirgeo, you really don’t get the point here. The libertarian philosophy is not to put forth a bill to improve jobs, but rather to reduce government and attack harmful bills which they believe, right or wrong, will create the proper incentives for business to develop naturally. Libertarians argue that government doesn’t create private sector jobs – the best it can do is reduce the friction of natural development by largely getting out of the way. If politicians DO put forth” job creation bills”, then they are probably not true libertarians.

Chucklehead August 21, 2011 at 8:56 pm

How is this for a plan? “When you’re in a hole, stop digging. Stop running deficits of over 1.5 trillion dollars. Act like grownups and get your fiscal house in order. Stop spending 25% of what we produce. Stop wasting my money and giving it to your friends. Stop passing legislation that makes it hard to figure out what the rules of the game are going to be. Get out of the way. Make government smaller and give us a chance to do what comes naturally—seeking ways to make profit, avoid loss and work together. That is the only sustainable path to prosperity.” – Dr. Russ Roberts : opening remarks before the Subcommittee on Regulatory Affairs, Stimulus Oversight and Government Spending of the House Committee on Oversight and Government Reform, February 16, 2011 – Sound familiar ?

Ken August 22, 2011 at 12:18 am

“The big thing about this Tea Party congress is to noet that they have not put forth ONE bill with the aim to improve jobs.”

False. The house passed a bill to repeal Obamacare. Repealing this repugnant law will do more to improve the economy than anything Pelosi-Obama-Reid have ever or will ever come up with.

Additionally, the house voted to repeal the BULB Act, a noxious little bill that someone like you loves.

The house also voted to role back the FCC overstep when it tried to legislate net neutrality through regulations, attempting to bypass even the pretense of democratic rule making.

It’s like you don’t even know what the house republicans have done and make stupid assumptions, or something.


Andy August 21, 2011 at 5:52 pm

Would like to see a follow-up EconTalk with Scott Sumner to talk about the Fed.

Dennis August 21, 2011 at 6:42 pm

Dr. Roberts, you made some awesome points! This is a great piece that offers logical reasons as to why interventionism will never be a good thing.

To Muirgeo: Please read the piece titled, ‘Economic Ignorance,’ on this same blog dated August 21.

vidyohs August 21, 2011 at 7:10 pm

“When John McCain was running for the Republican presidential nomination nearly 12 years ago, he declared that Alan Greenspan was so critical to the economy that, if the then-Federal Reserve chairman died, he’d put sunglasses on the body, prop him up and hope no one noticed.”

And, from that Ip draws the conclusion that the Republicans loved Greenspn and the Fed? McCain is the Republicans, one man is the Republicans.

When a writer begins that weak, you know the rest of his stuff is not going anywhere worth following, even for the read.

Greg Webb August 21, 2011 at 7:31 pm

Good point, Vid. John McCain is the typical “applause”-seeking RINO.

Richard Stands August 21, 2011 at 11:26 pm

During the early 2008 caucuses in my state, I mentioned at one point that all of the candidates were worth reviewing. One man stood up and strongly disagreed saying, “Not all of them! There’s one I will NEVER vote for!”

I cringed, as I was a Ron Paul supporter and braced myself for the onslaught.

He was referring to John McCain.

McCain was not seen as a conservative’s conservative. Most of the base despised him…but they fell into line after he was nominated.

Vangel August 21, 2011 at 9:02 pm

But why have the Republican candidates rejected this view?

Ron Paul has always rejected government as a solution, central bank money printing, and unconstitutional actions by the federal government. Unlike anyone on either side, he has been very consistent in his views and has been warning about the bubble blowing activities of the central bank, the Oval Office, and Congress. As an outsider from north of the border I see him as the only good candidate on either side.

Satish August 21, 2011 at 10:05 pm

All that is great, but I have not seen any Austrian explanation of why the interest rates keep falling in the face of this massive stimulus and monetary injections and the inflation that was promised some how never seems to arrive. Do you mind explaining those please.

vikingvista August 21, 2011 at 10:50 pm

You expect monetary injections to *increase* interest rates?

Richard Stands August 21, 2011 at 11:42 pm

I always preface posts like this with the disclaimer that I am not an economist, but…

The first question I might ask is how we’re defining “inflation”. It was my understanding that the classic definition of inflation is “an increase in the money supply”. If that’s the definition, then we already have inflation, definitionally. Or perhaps “pre-inflation” because the Fed has increased the monetary base, but that has yet to ripple into the monetary supply.

I understand that a more contemporary definition is that “inflation” simply means “price inflation”.

In that case, I think we’re already seeing that as well. The CPI is tailored to look good for office-holders (which makes sense for them), but Shadow Stats posts a version which uses the old method of calculating inflation and things look a bit less rosy there.

Maybe other readers can correct me where I’m wrong here.

dsylexic August 22, 2011 at 4:44 am

when the supply of something increases,usually its prices fall down.you print trillions of dollars,people will not plan for the long term at all because they will see prices rising and therefore intend to spend those dollars before they lose their worth. this increasing prices is seen in hard commodities while the soft/financial assets keep deflating.

Tom of the Missouri August 23, 2011 at 2:37 am


Think of it this way. Low interest rates are a temporary perfect storm phenomena caused by even worse turmoil in the rest of the world causing massive uncertainty, additional uncertainty caused by an administration in hyper drive regulatory and anti business talk mode, and a worldwide flight to “safety” to U.S. Govt. securities caused by all of the above combined with past extreme Fed money money printing with the chance for even more as they consider QE3, QE4, to possible QE anyone’s guess.

One interest rate raising scenario is that eventually the continued printing will soon become unsustainable causing the dollar to collapse causing a complete loss of wealth to anyone holding dollars resulting in a severe depression and social unrest and possible societal collapse caused by the lack of any medium of exchange short of barter and/or theft with which to operate our society. At some point, assuming any lending will even be occurring, a huge interest rate increase will occur to cover the inflation cost of borrowing in dollars. If a tree falls in the forest and no one is there to hear it does it make a sound? If no one is borrowing or lending because of a depression and unaffordable interest rates are rates really high?

An alternative interest rate rising scenario is that the Fed will quit printing. This is and extreme version of what happend toward the end of the Carter years and the first two years of the Reagan administration. It is an extreme version because of the huge current national debt and the massive government deficit spending which is so beyond what we were dealing with in the late 70s when that recession hit. High interest rates will have to occur then to be able to attract bond buyers necessary to maintain the national debt and fund the government’s operations. These high rates will lead to wide spread business and bank failure resulting in a severe depression, huge asset deflation and social unrest and possible societal collapse.

This week the collapse is about to happen via the latter scenario due to events in Europe and due to the fact that the fed has recently said they stopped printing for awhile. To prevent the collapse and to maintin their recent 2 year interest rate promise the FED will likely try once again start up printing to resume bailouts. The purpose will be to bail out Europe’s failing banks and to bail us out of a pending 2nd dip recession via yet more large bank and big company bailouts. And so it will go back and forth like a hyper vacillating bipolar psych patient with intervals getting shorter and shorter until it it eventually stops working in total financial chaos.

Some people think the Fed can maintain and manage an equilibrium between the two above scenarios forever. I think that is wishful thinking bordering on fantasy. The current extreme financial market volatility is I think the precursor to the impossibility of this balancing act. I am very sad to say but I think the end is near. Please observe this week’s announcements emanating from Jackson Hole, Wyoming and watch what happens. Also watch the price of Gold as it passes though the before unimaginable $2000 range and heads to $3,000.

In either scenario the U.S. will still be populated immediately after the crash with modern factories, homes,cars, highways and very smart and capable people. How fast we recover and utilize those idle resources and begin producing new ones will depend on the government’s response. After restoring law and order and a food supply, if the government gets out of the way society will begin anew and rapidly begin to recreate wealth and someday soon get back to where we were. If the govt feels compelled to experiment with an unending spree of top down mandated programs (think industrial planning, price controls, trade wars, more fiat money creation, the outlawing of gold, make work projects, confiscatory taxation, etc.) creating massive uncertainty for investment the depression will last for very long time. See The Great Depression for an example of the latter or look at Cuba where they still drive 1958 Chevys. See many other severe recessions in U.S. history for examples of the former. With current levels of economic education in America and by observation of recent voting patterns and political decisions I am not optimistic Americans will make the right choice post crash.

vikingvista August 21, 2011 at 10:13 pm

Tax cuts as keynesian stimulus. I use hair shirt as keynesian stimulus. I wear the shirt all the time, except when I’m having a really bad day. Then I remove the shirt and poof! I’m simulated.

Guarded August 22, 2011 at 9:11 am

“It has purchased a great deal of bad paper from banks and financial institutions which is certainly a bailout. It is non-transparent. I don’t know what they paid for those assets–it is not easy to find out.”

On 21 July 2011, the US Government Accountability Office released a report on the Federal Reserve. You can download a copy here.

Table 8 on p.131 shows how much money the Fed lent to various institutions between 1 December 2007 and 21 July 2010. In total, the Fed lent out $16.1 trillion, most of which went to large US institutions, the biggest recipient was Citigroup ($2.5tr). Bear Stearns received $853bn.

But it also lent money to foreign institutions including Barclays, RSB, Deutche Bank, Societe Generale, etc.

Russ Roberts August 22, 2011 at 10:30 am

That report was a start. But the real subsidies are the purchases of the so-called toxic assets. I have no idea what the amounts and prices were. Would love to know.

John Shipley August 22, 2011 at 9:49 am

One small point to consider: the tea party is more than just 85 so-called tea party representatives. Yes, that is as big as the number gets in the House; however, imagine the incredible pressure long time Republican and Democrat representatives are feeling from the tea partiers? In every district, you have dedicated citizens bombarding these representatives with emails, letters, and telephone calls on a variety of measures. Senators are feeling this pressure, too. There might only be 85 acknowledge tea party responsive representatives, but all of them are getting pressured.

Additionally, I think you will find that tea partiers have assisted you over the last couple of years in your quest to educate the citizenry in economics. I, for one, have made some real small efforts to share with local and regional tea partiers by introducing them to liberty-oriented economists like yourself, Arnold Kling (actually in person once), and Mike Munger.

But you are right, Republican opportunists are reading the market place and they are responding by serving up Austrian economics to meet this growing demand for it. Thanks for what you do…

Robert Dell August 22, 2011 at 10:00 am

I believe Ip has not done his homework when he says, “President Herbert Hoover, whose obsession with balancing the budget in 1932 worsened the Great Depression.” See the graphs here: http://mises.org/daily/4350.

Federal spending and budget deficits increased moderately in fiscal 1931 and dramatically in fiscal 1932. Yet the economy continued to get worse.

Ian Random August 24, 2011 at 1:43 am

As already mentioned above, McCain aka McPain is hardly a conservative. He is soooo bad, I remember talk of barf bags for McCain so as to ease the voting process. Then there was the anybody but McCain slogan that was quite popular. Bush even joked about Democrats, Republicans and McCain, like he was a something that couldn’t be categorized.

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