These are two totally irreconcilable views of the world. You can't have Keynesianism and Hayekianism in the same country at the same time. —Nicholas Wapshott, author
President Barack Obama and Republican challenger Mitt Romney are facing off in the 2012 presidential election, but two other figures may prove to be omnipresent despite not appearing on the ballot — twentieth century economists John Maynard Keynes and Friedrich Hayek.
"Right now, Congress should pass a bill to help states put thousands of teachers, firefighters and police officers back on the job," Obama said during his weekly address Saturday. "They should have passed a bill a long time ago to put thousands of construction workers back to work rebuilding our roads and bridges and runways."
"The president and many of his allies seem to measure success on how many people are dependent on government programs," Wisconsin Gov. Scott Walker said in the Republican rebuttal. "Those policies have failed. In contrast, I and many other Republicans define success just the opposite way, by how many people we can free from government dependency by growing the private sector."
The arguments laid out most recently in the dueling Saturday speeches are an example of two divergent viewpoints that have found their way into the national debate as Obama and Romney face off. Both parties believe that more can be done to create jobs, but differ on what that more is.
Nicholas Wapshott, author of the book, "Keynes Hayek: The Clash That Defined Modern Economics," predicted during an NPR Planet Money podcast in October 2011 that the election would come down to this very issue.
"We've already started what is inevitably a Keynes-Hayek election," Wapshott said at the time. "On one side there's a party that says we've got terrible unemployment, we need to do something about it, and the best way to do it is for the government to start intervening ... the other side says no, the government should do absolutely nothing, or as little as possible, and what's more, we should shrink the government. Let's get the government out of people's lives."
John Maynard Keynes and Friedrich Hayek were twentieth century economists with two fundamentally different views of how to deal with a weak economy or a recession. Keynes believed that unemployment could be affected by aggregate demand, and that if the private sector wasn't buying things, the government ought to step in to buy things and employ people.
In contrast, Hayek believed that the price system, or free markets, could coordinate people's actions into the spontaneous order of the market system. Fiddling with the market could have unforeseen consequences, such as increases in the money supply that could make credit artificially cheap, leading to busts.
Or, as Russ Roberts, an economist at George Mason University, and John Papola, a producer/director, suggested in a Keynes vs. Hayek economic rap video, Keynes and Hayek would argue thus:
Keynes: "You see, it's all about spending, hear the register cha-ching. Circular flow — the dough is everything. So if that flow is getting low, doesn't matter the reason, we need more government spending. Now it's stimulus season."
Hayek: "The place you should study isn't the bust, it's the boom that should make you feel leery, that's the thrust of my theory. The capital structure is key, malinvestments wreck the economy."
During a recent Q&A with reporters, Obama again said that Congress can takes steps to help the economy, including hiring teachers, police officers and firefighters, "all of which, by the way, when they get laid off, spend less money buying goods and going to restaurants and contributing to additional economic growth."
"Everybody know that government creates jobs," Sen. Sherrod Brown, D-Ohio, told Greg Sargent of The Washington Post. "We hire private contractors. That creates other jobs. It builds an economic foundation for job creation."
The government doesn't create jobs, Romney has argued. Instead, it creates a climate that is either favorable or harmful for actual job creators.
"The president said that if we let him borrow $787 billion for a stimulus, he'd keep unemployment below 8 percent, nationally," Romney said during a prebuttal speech prior to Obama's recent economic speech in Ohio. "We have now gone 40 straight months with unemployment above 8 percent. But then he'll say, well, but the things he's been doing have been good and helped to create growth and put people back to work. Oh really? Go check on that."
Romney's economic plan, released in September 2011, calls for a flatter, easier tax system, regulation changes and a smaller, simpler government. Romney has also given his support to Wisconsin Rep. Paul Ryan's Path to Prosperity budget.
The two differing philosophies have developed into lines of economic attacks, with Obama seeking to draw attention to Romney's work as a businessman at Bain Capital, and Romney seeking to highlight the Obama administration's government interventions, such as the Department of Energy loan guarantees to companies like Solyndra.
"When you look at (Romney's) career in business, which is the credential that he's hung his hat on, there's no evidence of that," David Axelrod said. "His business career was not about job creation. It was about wealth creation for himself and his partners ... there's nothing in his business record that would suggest that he's a champion of creating an economy that works for the middle class."
"At the core of the private-vs-public-equity debate is a fundamental difference," Daniel Stone wrote at The Daily Beast. "Romney, as a corporate executive, was trying to create profit for him and his shareholders. Obama, as the nation's president, was trying to create broad economic activity, and, in effect, jobs. Both men made risky decisions that led to slimming down uncompetitive companies and industries. Romney's goal was actually to lay people off to make a business more lucrative. But Obama's job cuts were byproducts of more well-meaning goals."
The goal of a private-equity firm is to "maximize profits," Obama said, drawing contrast to being president where, he said, "your job is to make sure everyone has a fair shot."
"The reason it has taken so long for this recovery to gain traction and put people back to work is in large measure because of (Obama's) policy choices," Romney countered. "I don't believe in the government picking winners, or in the case of our government, picking losers."
"Since taking office, Obama has invested billions of taxpayer dollars in private businesses, including as part of his stimulus spending bill," Marc Thiessen argued at The Washington Post. "If Obama wants to attack Romney's alleged private equity failures as chief executive of Bain, he'd better be ready to defend his own massive public equity failures as chief executive of the United States."
Thiessen's list of Obama's "public equity failures," included Raser Technologies, $33 million; ECOtalitiy, $126.2 million; Nevada Geothermal Power, $98.5 million; First Solar, $3 billion; Abound Solar, Inc., $400 million; SunPower, $1.2 billion; Brightsource, $1.6 billion and Solyndra, $535 million.
"Like Mr. Romney, Mr. Obama has presided over bankruptcies, layoffs, lost pensions, run-ups in debt," Kimberly Strassel wrote at The Wall Street Journal. "Yet unlike Mr. Romney, Mr. Obama's C-suite required billions in taxpayer dollars and subsidies, as well as mandates, regulations, union payoffs and moral hazard."
With the economy consistently ranked as one of the top issues on the minds of American voters, both parties are seeking to emphasize their own solutions to the ongoing economic problems.
Romney, currently on a six-state "Every Town Counts" bus tour, is pushing forward with an economic message that lambasts a regulatory and bureaucratic maze that makes it difficult for businesses to grow and hire people.
Obama, on the other hand, is continuing to push his "to-do list," which includes rewarding businesses that move operations back to the U.S., creating new legislation that gives a 10 percent income tax credit to firms that create new jobs or increase wages in 2012 and investing in clean energy manufacturing.
On Tuesday, the Energy Department announced the awarding of $54 million for 13 projects across the country. The awards include Air Products and Chemicals, Inc., $1.2 million; American Iron and Steel Institute, $7.1 million; Delphi Automotive Systems, LLC, $3.7 million; General Motors LLC, $2.6 million; Lyondell Chemical Company, $4.5 million; MEMC Electronic Materials, Inc., $3.6 million; MIT, $1 million; PolyPlus Battery Company, $8.9 million; Research Triangle Institute, $4.8 million; Teledyne Scientific and Imaging, $2.1 million; The Dow Chemical Company, $9 million; The University of Utah, $1.4 million and Third Wave Systems, Inc., $4 million.
"Collectively, these projects are part of the Obama administration's effort to support the creation of good jobs by helping U.S. manufacturers reduce costs, improve quality and accelerate product development," the announcement said. "By strengthening the competitiveness of U.S. manufacturing, these projects will help lay a foundation for an American economy built to last."
The debate over the two paths laid out by the candidates shows signs of success and dangers for both.
In a Democratic focus group by James Carville's Democracy Corps, the final report said that, "despite Romney's clear weaknesses, when asked whether Romney or Obama would do a better job on the economy, more chose Romney. That is some measure of the challenge we face, since many have heard the president's economic message."
"We will face an impossible headwind in November if we do not move to a new narrative, one that contextualizes the recovery but, more importantly, focuses on what we will do to make a better future for the middle class," the report overview said. "It is elites who are creating a conventional wisdom that an incumbent president must run on his economic performance — and therefore must convince voters that things are moving in the right direction. They are wrong, and that will fail."
The Christian Science Monitor suggested that Obama's attacks on Bain Capital may be working, with a Purple Poll survey showing that 47 percent of likely voters agree with the statement that private equity firms "care only about profits and short-term gains for investors. When they come in, workers get laid off, benefits disappear and pensions are cut. Investors walk off with big returns, and working folks get stuck holding the bag."
In contrast, 38 percent agreed that, "private investment and equity firms help the American economy grow. They launch new companies and rebuild existing ones, including some of the biggest employers in America. Their work has created millions of jobs, and will help drive America's recovery."
Choosing between the Keynes and Hayek models has proven to be both difficult and contentious for decades, and will likely be no different in the 2012 election.45 comments on this story
"If it was as simple as saying, 'Well, that's plainly the truth and that makes no sense at all,' it would be easy, but it's not like that at all," Wapshott said on NPR. "At the same time, these are two totally irreconcilable views of the world. You can't have Keynesianism and Hayekianism in the same country at the same time."
Or, as the two economists would argue in another Russ Roberts and John Papola Keynes/Hayek rap video, the choice between the two views may be summed up like this:
Keynes: "So what would you do to help those unemployed? This is the question you seem to avoid. When we're in a mess, would you just have us wait? Do nothing until markets equilibrate?"
Hayek: "I don't want to do nothing, there's plenty to do. The question I ponder is who plans for whom? Do I plan for myself or leave it to you? I want plans by the many, not by the few."