Tuesday, July 19, 2011

The dangers of being wrong on Keynes

There was a poll on Instapundit today which asks what outcome do you think is more likely.  There were 5 or 6 choices.  One of them was phony cuts and that was the one I selected.  Others were phony cuts and higher taxes, for example.  Another was just increased taxes and so forth.

I wrote earlier today that I thought Keynesianism was the problem, not the solution.  It so happens that there's an article written by Ezra Klein in the Washington Post that warns about being wrong on this point.  But it doesn't warn on the other side of that.  The other side is this: what happens when budget deficits get out of control and spending increases without restraint year after year, which finally results in national bankruptcy?

We may not have any reasonable way out of this because there are those like Klein and Krugman who favor Keynesianism.  These folks happen to have like minded people at the controls right now in the Senate and the Oval Office.  We are not likely to see sharp cuts, nor higher taxes.   Instead, we are likely to see some kind of deal which pretends to solve the problem, but really doesn't.  Hence, some version of the status quo.

If there is no deal at all, we will have some sort of partial government shutdown.  It will be interesting to see if the Republicans can keep their caucus together long enough to get through the roughest part of a chaotic environment that is likely.  I am thinking that the odds are against that.  It may even result in a panic and the Republicans may fold, like they did in 1995.

So, what to do?  I would suggest status quo.  A clean bill.  Don't do anything, because politically it isn't possible to do anything.  Whatever they do, don't raise taxes.   That's the worse thing that they can do.  The only way they can do that is if they get all the other things they say they want.  The taxes would be the price for all that.  I am sure that if they made that offer to the Democrats, they would turn it down.  At least make that offer, then go back to a clean bill if it won't pass.

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