The few thousand of us who teach introductory economics in this nation should express our gratitude to President Bush, Senators Daschle and Lott and Representatives Hastert and Gephardt.
Why? Because the president and Congress are simplifying teaching macroeconomics.
Teaching introductory macro requires one to present the ideas of John Maynard Keynes, the British economist who argued that governments could and should act to manage output, unemployment and inflation. But the president and Congress have just successfully proved why one of Keynes’ ideas is wrong—that governments can use taxing and spending policies to manage the economy.
When unemployment was high, Keynes argued that government should cut taxes and increase spending while the central bank increased the money supply and forced interest rates down.
Keynes, born in the 19th century, also argued that when inflation was a threat, governments should raise taxes and cut spending. The central bank should constrict growth of the money supply, which would raise interest rates.
Keynes died 55 years ago, but his ideas were amplified and popularized by many other notable economists, including U.S. Nobel Laureates Paul Samuelson and James Tobin. Millions of students were force-fed Keynesian ideas in Samuelson’s famous introductory textbook, surpassed only recently in total sales by other econ texts.
Keynesian Catechism
Indeed, virtually all of the millions of people who took any economics courses in college between 1955 and 1985 were drilled in the Keynesian catechism. Anyone now in Congress or who is a business or political reporter for a major newspaper, who took any economics at all, probably learned Keynes’ ideas.
There were critics, however, both theoretical and practical. Milton Friedman, a monetarist at the University of Chicago, argued against Keynesian orthodoxy in scholarly and popular publications. The basic gist: Monetarists never accepted Keynes’ argument for government intervention and preferred the traditional prescription of laissez-faire.
Other monetarists at other institutions buttressed his arguments. This minority argued strongly but never convinced the majority of their colleagues of any theoretical holes in Keynes’ arguments.
The monetarists’ intellectual children—rational “expectationist” economists such as Robert Lucas, Thomas Sergeant and Neil Wallace—succeeded in winning the theoretical battle. They proved how Keynesian policies pursued through the 1962 caused high inflation and persistent stagnation in the 1970s.
The idea that governments can and should manage inflation and unemployment with fiscal and monetary policies still dominates thought in politics, journalism, on Wall Street and among the general public.
The practical–rather than theoretical–criticisms of Keynesian policies have been more convincing to many, and the current debacle in Washington strongly underscores those criticisms.
Never a Slowdown
Critics also noted that while Congress is relatively quick to spot the need for stimulus, no elected official has ever stood up on the floor of either house and said, “We need to slow this economy down.” Others observed that for some strange reason, Congress has an unusual predilection to see need for stimulus in election years than at other times.
The farce that has unfolded in Washington in recent months verifies these criticisms in spades. The president asked for fiscal stimulus. Within days, every lobbyist in Washington came out of the woodwork with proposals for new spending or reduced taxes that would benefit his or her clients.
Die-hard tax cutters in both houses of Congress insisted on permanent tax cuts to provide temporary stimulus. Die-hard spenders argued for major new programs, the cost of which would grow over time, come prosperity or recession. The Republican-controlled House locked horns with the Democratic-controlled Senate, and no bill was passed.
The president has called for cooperation from both sides but is unwilling to exert significant pressure on members of his own party nor to concede anything important to Democrats. Elections are 10 months away, and both parties are in full campaign mode, playing for support from factions within their own party rather than seeking compromise.
This all may turn out to be very well. Even devoted Keynsians accept that a bad fiscal stimulus is worse than no stimulus at all.
Let us hope the recession will end soon. Recent indications are still mixed, with plenty of negative news amid increasingly positive signs. But let’s lay to rest the fantasy that the U.S. Congress and the Bush administration can actually implement the kind of countercyclical measures Keynes advocated.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.