Was John Maynard Keynes right? Was John Kenneth Galbraith? What about Arthur Laffer? Milton Friedman?
All of these men were esteemed (or at least highly regarded) economists in their day. And each professed a different approach to economic travails such as the United States is currently experiencing.
Keynes revolutionized economic thinking in the 1930s by arguing that free markets alone could not be counted on to provide recoveries in times of high unemployment. He believed that at such times, demand needed to be increased, and he urged the kind of government programs that Franklin Roosevelt adopted to curtail the worst effects of the Great Depression.
Galbraith was a Keynesian with a decided iconoclastic bent. He cared far less about technical measurements and much more about what a society needed as the measure of what economic policies should be pursued. He had the ear of John Kennedy and Lyndon Johnson in the 1960s and influenced greatly the concept of a “Great Society” that Johnson promoted during his presidency.
Laffer was the “napkin” author (so-called because he allegedly detailed his theory on a restaurant napkin). That theory was that lowering tax rates would actually raise government revenues, because as entrepreneurs were able to keep more of their profits, they would produce more revenue, thereby increasing actual tax revenues. His theory, referred to as “supply-side economics” was adopted by Ronald Reagan and has been part of the Republican Party’s mantra on taxes ever since.
Friedman was the founder of the Chicago School of Economics. As the leading academic at the University of Chicago he called for a rejection of Keynesian principles in favor of a return to a pure market-driven economy. His views found favor in the Reagan years and were adopted much more aggressively during the administration of George W. Bush.
Or are none of these positions absolutely correct? There are certainly other theories on how economies can best be managed (or not managed) to provide for the greatest wealth and prosperity for the greatest number of citizens. And let’s not forget the over-riding influence of the Federal Reserve and its Board of Governors. They are a force unto themselves, free to act without any oversight of any kind, the closest thing to an oligarchy within a democratic republic history may have ever known.
Stripped of all the political rhetoric, much of which is aimed solely at putting one party in power over the other, the debate (such as it is) today is largely over economic theories. No one denies that the American economy is struggling to recover as another summer winds down.
A growing number of observers are mouthing concerns about a possible, if not likely, double-dip recession, which would potentially make the 9.5 percent unemployment figures the Labor Department repeatedly reports of late seem like good news.
Of course, it isn’t good news, especially since the “real unemployment” (that measure of the actual number of able-bodied Americans who are out of work) is most likely closer to 17 or 18 percent, which means that at least one out of every six eligible workers are spending their time in non-income producing activities.
And those figures absolutely soar when the demographics are focused on minority populations, with upwards of one quarter (or more!) of all African-Americans unemployed. That kind of statistic sounds more like something from a third-world nation than the greatest economic engine the world has ever known.
But the figures don’t lie, nor do the lines at the unemployment offices across the land. People are hurting, businesses are hurting, charities are hurting, local governments are hurting, state governments are hurting, and the elected folks in Washington, DC are squabbling about how to fix it all.
On one side of the debate are those who favor as little government “intrusion” into the system as possible. Their remedy is to lower taxes, reduce government spending, reduce government regulations, and generally allow the markets to straighten themselves out. Advocates of this position have no trouble arguing against an increase in unemployment benefits while they insist that the tax cuts for the wealthiest citizens that were promulgated in 2001 must be maintained (even though they are scheduled by law to expire at the end of this year).
On the other side are those who favor a massive increase in government “initiatives” to increase employment and to put more money in the pockets of the country’s consumers. Advocates of this position have no trouble arguing for even larger deficits (the country is already in the red to the tune of over one trillion dollars a year) and a national debt that might exceed the entire gross national product in a very few years.
Who’s right? Who’s wrong?
If you’re the president of the country, you have to worry about those questions. Moreover, you have to worry about whether the electorate believes you have the answers.
Thus far in his presidency, Barack Obama has been a mix of conflicting economic theories. His two top advisors (Treasury Secretary Tim Geithner and National Economic Council Director Larry Summers) have prior ties to Wall Street and are generally assumed to be most protective of the financial markets.
Others in his inner circle may tilt more clearly to the Keynesian side of the spectrum, but their voices have not been as dominant as those on the right might claim.
The big stimulus package that Obama and his allies in Congress pushed through last year was far less aggressive than many liberal economists wanted. Its price tag of $787 billion was far less than Paul Krugman, recent recipient for Nobel Prize Economics, had lobbied for. He now urges a second stimulus bill to forestall that feared double-dip recession.
He won’t get it, of course, and maybe it would be throwing good money after bad anyway.
Who knows? Everyone has a theory, but no one really knows how to get the economy back on track. It may be, as they teach in college, the most scientific of the humanities, but it is still very much the most inexact of the sciences.
I like to compare economics to weather forecasting. In his book on chaos theory, James Gleick points out that if the entire earth were covered with a grid of sensors at one-foot square intervals extending to the top of the atmosphere, providing perfectly accurate data every minute, it would still be impossible to predict a month ahead of time whether it would be sunny or rainy in Princeton, New Jersey. No wonder our present forecasts are highly speculative after two days and nearly worthless beyond a week. The “butterfly effect” (roughly, the aggregate of random infinitisimal variables) dooms forecasting to imprecision.
Economic forecasting necessarily makes assumptions about human behavior. Even the most prudent assumptions are radically contingent. As Gandalf says in “Lord of the Rings,” even the wise cannot foresee all ends. And economists are not always wise, even if they are incredibly smart. When I find myself arguing over economic theory, the arguments seem as much about psychology as money.
Your comments manifest a benefit of fitting our discourse into the mold of economic theory. The necessary imprecision of economics allows us to aknowledge the good faith of those with whom we disagree, even radically. Galbraith and William Buckley were good friends. President Obama could take a lesson from you, Ed.
I do not perceive the President’s economic theory being mixed–though it is possible. His actions seem to manifest a kind of reductionistic Keynesianism. Even Lord Keynes would not have raised taxes in a recession. Also, while I understand that the blog genre demands some degree of generalization, I think you are way off base by identifying George W. Bush’s administration with the Chicago School. Would that it had been so! As I have said many times, when people refer to Bush’s economic policy, my response is WHAT economic policy? (De-regulation of the mortgage banking industry is a phenomonenon that is as attributible to Clinton as to Bush, and carried its own impetus.)
I want to end on a note of commendation. Your economic numbers are brutally honest, stripped of political spin. This is refreshing in light of the “recovery summer” PR coming from the White House, and the legion of liberal commentators who instinctively–perhaps unconsciously–refrain from facing just how dreadfully many of our people are suffering.
Of course, my proposed remedy is to go in the opposite direction that Obama is taking us. We can agree on disagree on that. And about the Federal Reserve . . . nah, I’ll leave that for another day.
Joel Cornwell
I agree with a lot of Joel Cornwell’s comments above. Economics treats an ecosystem so complex and full of random as well as fundamental forces and agents that it may be impossible ever to forecast accurately.
I do think some of the original post’s generalizations were slightly inaccurate, though, from a strict economic point of view, but I can’t argue with their overall thrust. I don’t know that I’d conflate Friedman’s monetarism with Laffer’s napkin quite so glibly. While it may not be obvious that lowering taxes will necessarily stimulate the economy as Laffer predicted, it ought to be obvious that as the marginal tax rate approaches 100% people will not exert themselves to earn more since they won’t keep the fruits of their labors. The question is, at what point on the scale does that become a problem and is there a point where the marginal rate approaches 0% where people (and firms) will exert themselves far more? It ought to be fairly uncontroversial to posit that the curve exists. The questions are:
1. what is its shape?
2. where are we on it now?
3. since different economic agents have different utility and indifference curves, what’s the weighted average impact of where we are on the curve now on the country as a whole?
One of Keynes’ oft-quoted lines is, “in the long run, we’re all dead,” and this is well worth keeping in mind when discussing economic policy. People tend to speak as if there is one course of action that is correct as if it were not possible to do different things at different times. It is pretty clear that the US deficit and debt are gigantic and getting more problematic every moment. At the same time, it’s clear that tightening the fiscal reins now would be disastrous. My sense (for what little it’s worth) is that somehow we need to find a way to stimulate the economy now while putting in place a credible deficit reduction program for the future. I say credible, because people have to believe the deficit reduction is going to occur to push up demand now.
And this brings in the other aspect of the problem with economic policy, which is that economics is only half the problem – politics is the other half. For one thing, most of our legislators appear never to have taken Econ 101 – what they have to say on the subject exhibits a degree of economic ignorance that is truly breathtaking. Secondly, as politicians they’d rather (or they’re forced to) grandstand around the party line. Republicans, in particular at the moment, feel the need to oppose the ruling party for one thing and not get on the wrong side of the Tea Parties who are eroding their base. Democrats, for their part, appear all too willing to spend in ways that don’t necessarily stimulate the economy and have an even worse record than Republicans on spending restraint, taxation and so forth (without getting into a debate on the Clinton era vs the Bush era or the Bush Jr and Reagan deficits, I think most can agree that Democrats aren’t famous over the decades for spending restraint, albeit my larger point is that few politicians, of any stripe, are).
This means that even if I’m right, and the correct thing to do is stimulus spending now with a simultaneous, credible (and hard to wriggle out of) deficit cutting program for the future, I have little faith that our legislators and President would enact it.
The (economic) future looks grim…