Who would Shel Silverstein like to have a beer with: Keynes or Hayek and Friedman?

Wikipedia says of Shel Silverstein's Where the Sidwalk Ends, "The book's poems address many common childhood concerns, as well as presenting purely fanciful stories."

When economists write fanciful stories about their concerns, they call it theory.

One such theorist was John Maynard Keynes. Keynes' theory generally goes as follows: during boom times, you save money, and during bust times, you spend it. The squirrel knows this. The farmer knows this. Your Grandmother knows this. Keynes felt that the government can--an should--act as a buffer: during boom times the government should have policies that inhibit growth and during bust times they should promote it. The government would run surpluses during the booms, and deficits during the busts. This fanciful story helped get us out of the Great Depression.

Then along came Hayek and Friedman. They disagreed with Keynes. They emphasized free markets and something called monetarism, which focuses on the supply and cost of money and currency. Essentially, they felt that the private market would do best if left to spend its money on its own, rather than have the government do it for. The Federal Reserve, through multiple instruments that they have been using a lot lately, could affect the cost of debt and money. In this way, they could encourage (or discourage) people to borrow money and spend it. Their story got us out of the 'stagflation' of the 70's.

So what happens now? What story do we have to guide us through these scary times?

When the cost of money went chaotic during the credit crisis, the Fed opened the spigots and used all their most powerful tools to stop it, but they could not. Banks refused to lend to each other and were hoarding cash, rather than using it to make the loans that would stimulate the economy. So what of Keynesian theory? Have you heard of 'ear-marks'? Everyone knows that earmarks are bad news. You end up building "Bridges to Nowhere" and expensive planetary projectors. However, these are the same tools we used in the Great Depression to get out of 25% unemployment. We use them differently now. This is where Barack wants to go: to tie in the War on Terrorism or National Security into energy independce, renewable energy and greenhouse emissions, but he could--and should--drop the last one. This would need to be a national effort, as opposed to the piecemeal process that we use earmarks for currently. So Keynes' tool box might work, but we would have to do some major 'job training' of the Congress to show them how to use the tools properly. And there are major pitfalls associated with Keynes.

Unfortunately, we don't have any savings. George W. Bush tax cuts during boom years took care of that. We have deficit spending, but then we might run into run into Hayek and Friedman. Huge deficit spending could cause bad things to happen to interest rates and currency exchange rates, such as working to further lower home prices, greatly increase inflation, and rapidly weaken the dollar's status as the reserve currency of choice.

So far, what we have actually done none-of-the-above. We are using the Chinese method in reverse. China is a mixture of state owned and privately owned companies. Currently, China is working to privatise its companies. In the US, we are now buying companies and turning them into state-owned enterprise to prevent the economy from collapsing.

So we are all concerned. Our staid theories and gospel stories are not working as they once did, and we have yet to create anything new.

We have arrived at the point where the sidewalk ends. I should would like to have a beer--or several--with Silverstein, Hayek, Friedman and Keynes.