killer buffalo

The old joke goes that if you ask a Keynesian economist how many monetarists it takes to screw in a light bulb, he will tell you that one monetarist can screw anything relatively effectively; if you ask a monetarist, he might tell you that changing the bulb isn’t necessary at all, that is to say, market forces will take care of it.

The truth is, whether or not President Obama and the 111th Congress blame the unregulated free-market for instigating the current recession, they have looked to Treasury Secretary Geithner and Director of the White House Economic Council Lawrence Summers for guidance, and thus far the guidance they have received has been to administer periodic tax breaks and increase federal spending on employment programs.

These Keynesian solutions—those which seek to temper the business cycle through counter-cyclical government policy like stimulus during recession and tax hikes during periods of growth—have come to dominate America’s new economically interventionist political landscape from campaign rhetoric to the G-20 summit, in federal tax rebates and the $1.1 trillion promised to the International Monetary Fund (IMF). While it’s likely that such an approach is the result of a renewed faith in the theory of John Maynard Keynes and the current rethink of nearly three decades of the more laissez-faire government policy led by Milton Friedman, it’s possible that there’s another factor at work.

Milton Friedman and the monetarists that trailed him believed that the business cycle was ultimately inescapable—that lowering federal interest rates wouldn’t affect long term rates because it would cause lenders to fear inflation and that financial stimulus would only lead to a rise in price levels in the same way that distributing printed or borrowed money only makes money worth proportionally less. From Prime Minister Margaret Thatcher to President Reagan and, to a certain extent, President Clinton, Mr Friedman built-up significant political muscle during the latter half of the 20th century. And yet every time the American economy sunk into recession, Mr Keynes’ followers re-emerged.

Politically, the monetarist view—that little or nothing can be done to alter the business cycle and that the use of monetary policy will often have negative long term effects—suffers from its lack of a short term solution to economic depression. Even if Mr Obama and his cabinet believe that stimulus won’t have positive economic outcomes, it does present a tentative political answer to the recession; where monetarist theory stipulates that Americans must wait for the economic downturn to self-correct, Keynesian economics offers self-determined confidence and the appearance that actions are being taken in the White House and the legislature to save American jobs. In other words, monetarism vs. Keynesianism is fate vs. free will, and even when we doubt free will, we want to believe in it.

Looking ahead, the fact that Mr Obama is taking an active role in the economic crisis could inspire the self-confidence needed to shake recession, which means that even though financial stimulus may have no real economic benefit, people believing that it does could, on its own, be beneficial. When the American economy finds its way back to growth—and it will—Mr Obama and his Keynesian policies will probably be credited, and Mr Freidman will turn in his grave.  That’s the first law of economics: for every economist, there exists another equal and opposite.

-David Lamb

Sphere: Related Content

No related posts.