If you watch this Hayek vs. Keynes rap again, you’ll notice that very rarely throughout are the two men actually disagreeing with one another. They’re largely talking past one another, with Keynes speaking directly to the issue of recession and recovery, and Hayek speaking more along the lines of central planning, decentralized knowledge and the importance of stable rules and real market prices.
I tend toward the Keynesian view that we should run deficits during a recession and run surpluses during strong economic times. But that says nothing at all about how we should run deficits, or how we should enact stimulus. For instance, the best way to stimulate the economy is to get money into peoples’ pockets as quickly as possible. Tax cuts, and especially payroll tax cuts, can do this very quickly. So can checks in the mail. Infrastructure, while a legitimate expenditure, is bad stimulus. Direct grants to states (preferably with some sort of long-term strings attached) can also be reasonably stimulative, though you certainly run the risk of rewarding poorly managed state budgets with bailout money.
The safest way to enact what we may as well call Hayekian stimulus is to just give money directly to people. Don’t funnel it through state and local governments. Don’t funnel it through contractors. Don’t hide it behind “buy American” clauses. If you want stimulus, just pump it straight to the source. This avoids any issues with central planning, tinkering with favorites, protectionism and so forth.
Other ways to enact somewhat more libertarian stimulus? Remove trade barriers. Drastically raise the cap on the number of immigrants allowed into the United States. Major efforts to deregulate the healthcare industry, including drug patent law, monopolistic insurers, as well as a general frontal assault on patents (especially software patents) and other barriers to economic growth would also be stimulative. No more bank bailouts or auto-company bailouts. There are other ideas, and probably lots I’m not thinking of. And there’s always expansionary monetary policy.
What I think would be really bad, on the other hand, would be to get ahead of ourselves and raise taxes and cut spending when inflation is this low and unemployment is this high. Advocates of austerity in the short term risk winning the battle to lose the war. Long-term austerity, entitlement reform, and other important fiscal goals could go by the wayside if short-term austerity deepens the recession. I don’t think enough people on the fiscal-hawk team are thinking this through hard enough. For every action there is a reaction.