Keynesian vs. Austrian Debate on Deficits

Recently there are a lot of debates between the Keynesian and Austrian economists on the skyrocketing government deficit.

My opinion is this:

In general, government spending is wasteful.  To expect governments to efficiently allocate capital is a larger mistake than to believe in Bernie Madoff.

Keynesian policies only makes sense if consistently followed.  The true Keynesian policy maker would save money during good times and spend money during bad times.  The intention of such policy is to smooth out the business cycles.  Unfortunately, our government hasn’t been saving money during good times, therefore to spend now requires the nation to elevate its debt level.  And high government debt would easily lead to money printing & hyper-inflation.  The solution to too much debt is not be accumulating more debt.  If there is no saving, there should be no spending, especially when the spender has a tendency to be very wasteful.  In the U.S. case I would side with the Austrians.

The Chinese government, on the other hand, is also spending a lot of money to stimulate the economy.  Fortunately for the Chinese, they were saving a lot of money during their economic boom.  And now in a global recession, they can snatch up assets and resources for cheap.  This investment mentality is what drives the “easy-money” policy in China right now.   Therefore, in China’s case I would side with the Keynesians.

2 thoughts on “Keynesian vs. Austrian Debate on Deficits”

  1. doug says:

    The way I understand it, Austrian economics trumps Keynesian by not providing the fuel for the boom and bust business cycle. So if the Austrian method were followed, there would be no need for Keynesian policies.

  2. admin says:

    I think in Austrian economics, booms and busts are inevitable. For the lack of perfect information or accurate fortune telling, there will be a natural over-investment during the booms and liquidation during the busts.

    Keynesian economics wants to smooth out the booms and busts by expanding the role of governments. More specifically: Save during the boom and Spend during the bust. And therefore, ideally, a government should run a budget surplus during a boom and a deficit during a bust. In this scheme, the size of the government should shrink during booms and expand during busts.

    Unfortunately, Keynesian economics fails to discount the tendency of governments to always expand. Once a government starts a new social program, it is very hard to abolish it. Once government gets its feet into a private industry, it tend to keep it there for as long as it can. And here is where Keynesian economics fail.

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