If the average person wanted to understand an economic issue better 40 years ago, all he had to do was subscribe to Newsweek. One week, MIT economist Paul Samuelson – a Keynesian, Democrat and 1970 Nobel Prize winner – would lay out his views. The next week, University of Chicago professor Milton Friedman – a monetarist, Republican and 1976 Nobelist – would give his. If you read both, you at least had a good idea of what the major issues of the day were and what most economists from both sides of the political divide thought about them. That is not true today.
Things were simpler a half-century ago. Economists were less heterogeneous in their thinking. U.S. economics was divided into two groups. Keynesians thought government should take an active role in moderating the business cycle. Monetarists opposed such discretionary micromanagement and emphasized the importance of stable growth of the money supply. Those two groups probably covered 98 percent of the discipline.
Most economists who were Democrats were also Keynesians. Most monetarist economists were Republicans. But there also were many Republican economists who accepted Keynes’ views. And there were a few monetarists who were Democrats.
Keynesian ideas dominated the undergraduate textbooks studied by future politicians, journalists and business executives. But the monetarist critiques of orthodox Keynesian theory and policy were coherent and understandable enough that they merited respectful consideration.
In government, the Keynesian approach of varying monetary and fiscal policies to counter the business cycle was accepted implicitly or explicitly by both parties. And the idea of “sound finance” – that if you wanted to spend more you had to tax more –was a consensus view among business Republicans and fiscally conservative (often Southern) Democrats.
Things are less clear today. Economics became less homogeneous after 1975. Keynesian theory became less predominant and its practitioners more defensive. The “rational expectationists” incorporated monetarist skepticism about the role of government in the economy and the dangers of too-rapid money growth. But they also constructed a coherent and complex explanation of why the collective actions of millions of rational, satisfaction-maximizing individuals within society would render Keynesian economic management not only ineffective but also counterproductive.
And there were the supply-siders who also opposed Keynes, arguing for reduced regulation of economic activity, lower marginal tax rates on high-income individuals or businesses and no attempts to micromanage the business cycle.
Within the discipline, in recent decades, the rational expectationists dominated cutting-edge theoretical work even if Keynesians of one stripe or another remained more numerous within the discipline. However, the supply-siders had little more weight than other groups including sundry die-hard monetarists or the Austrians, or other minor groups.
In policy making, the reverse was true. Keynesian ideas remained dominant within the Democratic Party. The Republican Party adopted supply-side rhetoric even as Republican presidential administrations and the Federal Reserve governors they appointed remained largely Keynesian in practice. And rational-expectations views were hard to find.
Unfortunately, the rational expectationists remained largely unseen and unheard outside academia. That has become a tragedy, as their voice is missing at a time when it is needed for the citizenry to understand the choices they face.
The key division among economists remains as it has for the past 75 years. Is it beneficial for government to try to offset fluctuations in output, employment and prices by changing taxing and spending policies and the money supply and interest rates? Or are such interventions harmful?
Keynesians, still a majority within the Democratic Party, remain convinced that government should try to manage the business cycle, and that is what the Federal Reserve and Obama administration have been doing.
Keynesians in the Republican Party, and they remain numerous, criticize details of current policies. Martin Feldstein, adviser to Ronald Reagan, just blasted President Barack Obama’s stimulus package for being too small. Greg Mankiw and John Taylor, who both served in the George W. Bush administration, similarly criticize details and say how they would do things differently.
The rational expectationists have taken shots at Obama but have not tried to educate the public about their views the way Friedman and Samuelson did for decades or that Keynesians Mankiw and Paul Krugman still do today.
That leaves the public with the dangerous impression that Republican economists (or anti-Keynesian economists or conservative economists – frame it how you will) really believe the notion that lowering tax rates inevitably increases tax revenues and that a tax cut is the magic elixir to cure all economic ills.
That isn’t true, and the large majority of Republican economists, economists who oppose Keynes, or economists who consider themselves conservatives don’t think it is true. But the fact that an increasing fraction of the electorate thinks it is true poses enormous problems for our country in terms of unrealistic expectations and destructive campaign rhetoric.
Economists who oppose Keynesian ideas, support the historical values of the Republican Party and understand how dangerous many of the economic fantasies propagated by the new crop of Republican presidential candidates can be need to make their voices heard.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.