The big economic issues of 2012 will be the same as last year's-the deficit and whether to increase it with more "stimulus" spending, the Wall Street protests, the European crisis-but the overall debate is likely to shift.
Notice that I said "debate," not debates. The issues are complex but they all boil down to the same question: How much should the government intervene in the markets? The conventional wisdom is that in a crisis, the government needs to "prime the pump" by, among other things, providing plenty of funding for the banking system and using public money to create jobs. In this "Keynesian" perspective-after John Maynard Keynes, the British economist who defended this strategy during the Great Depression-government must keep a heavy hand on the reins. Today's Keynesians argue that we need massive new stimulus spending and shouldn't worry about the growing deficit, since economic growth will follow if the government leads. They interpret the Occupy Wall Street movement as confirming that the government needs to control the economy.
The opposing view is sometimes called Hayekian, for Friedrich von Hayek, the Austrian economist who argued that markets are nearly always preferable to government planning. Today's Hayekians condemn the bank bailouts, arguing that the creative destruction of bankruptcy is a better solution than propping up inefficient banks. They also criticize the financial reforms enacted in 2010 for singling out "systemically important" financial institutions for special government attention, and thus creating a European-style partnership between the government and the biggest banks. Hayekians fear that this partnership will make it difficult for smaller banks to compete, and will discourage competition in financial services.
Those of us who lean toward the Hayekian perspective on these issues have an uphill battle in troubled economic times. Hayekian remedies are hard medicine in the short run: Their benefits only emerge over time. Keynesian solutions, by contrast, have precisely the opposite quality: Spend now, pay the bill later. This often makes them irresistible. Newt Gingrich wasn't crazy when he touted the benefits of the 2009 stimulus for his clients in the electronic health records industry. Why eat broccoli when you can go straight to dessert?
The good news is that broccoli may start looking a lot better in 2012. The crisis has now lasted long enough to reveal some of the downsides of government management of the economy. The Obama administration is patting itself on the back for having "rescued the economy" through its stimulus and other interventions, but the benefits of this "rescue" are hardly apparent. The job market remains awful, especially for the young: This is why many of them are out protesting. Anyone who has recently applied for a mortgage or business loan knows how far things are from anything resembling normal. It's extraordinarily difficult to get a loan, even for those with pristine credit.
In this environment, the Hayekian perspective cannot be so easily dismissed. Perhaps the government shouldn't have been so quick to bail out the troubled banks. Europe might be better off had Greece been forced to restructure its debt severely, and temporarily leave the euro. A new stimulus could make things worse rather than better. These remedies, painful in the short run, might have set the stage for robust economic growth by now. We're learning that while government might have a role to play during a crisis, we should take seriously the possibility that sustained government involvement will crowd out private investment and retard recovery.
When Ronald Reagan ran for president in 1980, he famously asked Americans to consider whether they were better off than they had been four years earlier. In 2012, Americans will ask the same question about government management of the economy, and many will conclude that stagnation is not good enough.
-David Skeel Jr. is the S. Samuel Arsht Professor of Corporate Law at the University of Pennsylvania Law School
Coming to power in the midst of an economic crisis, the Obama administration projected in January 2009 that its stimulus plan would keep unemployment under 8 percent. Unemployment instead rose much higher than that. The unemployment rate has fallen some this year, but it remains at historically high levels:
2011 (Nov.): 8.6%
- By The Editors