• John Maynard Keynes believed government stimulus spending is the best way to end a recession.
• Friedrich Hayek believed less government intervention increases consumer and business confidence.
• Voters likely will decide this debate during the November midterm elections.
In 1932, John Maynard Keynes ignited a debate among economists and policy makers that still burns to this day. In a letter to the Times of London, Keynes proposed using federal deficit spending to reduce the length and severity of the Great Depression.
He argued that deficits in consumer and business spending lead to recession and that government intervention is needed to hasten recovery and buy time for confidence to recover. “Government spending will lead to increased economic production,” says Mike Schenk, vice president of the Credit Union National Association’s (CUNA) economics and statistics department. “Demand will create its own supply.”
Soon after publishing Keynes’ letter, the Times printed a dissenting view from Austrian economist Friedrich Hayek. An austerity proponent, Hayek believed government intervention simply prolonged needed economic adjustment and rebalancing.
“Hayek argued for less government intervention and fewer new policies and regulations to decrease uncertainty among businesses and consumers,” notes Steve Rick, CUNA’s senior economist. “That would increase confidence and, consequently, spending.”
Fast forward 78 years. The Obama Administration passed a $787 billion bailout package to stabilize the financial system and sidestep another Great Depression. Detractors say the measures succeeded only in saddling future generations with massive debt.
Schenk and Rick hold the following hypothetical debate to help credit union leaders decide which approach is most likely to fix the economy.
Next: What's the right path?
Bill Merrick is deputy editor of Credit Union Magazine. Follow him on Twitter via @CUMagazine.