Thurday Musings on Macroeconomic Policy and "The Right"

Over at Equitable Growth I have two things I want to say this morning.

First, Amtrak wifi really is c---, isn't it?

Second, I think that Paul Krugman gets one thing wrong here, in his talk of "the right" and macroeconomic policy... READ MOAR

There has not been one single right on macroeconomic policy since the Great Depression. There have been two. The lunatic right has been opposed to every single possible anti-recession policy except for union-busting, on the grounds that the market must be optimal: the market giveth, The market taketh away, blessed be the name of the market, and impious is he who tries to reverse or soften its judgment. The non-lunatic right holds that market economies are indeed macroeconomically unstable but they can be balanced by minimal interventions in aggregate variables: that is, by assigning the central bank the cost of controlling the money supply in order to make Say's Law true in practice even though it is false in theory.

As the extremely-sharp Paul Romer has been noting recently as he rages around the internet, Chicago's George Stigler's reaction in microeconomics to the idea that markets might significantly fail was to rule such thoughts unscientific, heretical, and damnable. Analyses that appeared to find market failure were either failing to take account of the fact that information was a scarce factor of production, or that the government had somehow blocked some Coasian property-rights bargain. Hence there probably wasn't any significant market failure, or if there was it was due to misdeeds by the government. (We can argue over whether Stigler believed all this, or just thought it was a useful exoteric teaching that it was his role as an apostle of liberty to put forward.)

Chicago in macroeconomics used to be different. Milton Friedman had no tolerance at all for the "business cycles are optimal fluctuations" blessed-be-the-name-of-the market Austrian crowd. It acknowledged that the market could fail massively unless something was done to make Say's Law hold, but then immediately repressed that acknowledgement, saying that a properly neutral monetary policy would automatically make Say's Law hold, thus if Say's Law did not hold that was to a government but a market failure, and a constant nominal money growth rate would be a properly neutral monetary policy.

Now on one level this will simply bonkers. Does anyone think that if the government has a target for freight-car loadings or kilowatt-hours and takes steps to hit that target that it is pursuing a "neutral" and "non-interventionist" policy? No. So why is a government that has a target for the quantity of liquidity services provided pursuing a "neutral" and "non-interventionist" policy? On another level it is very clever indeed, as one should expect because Milton Friedman was very clever. It disarms the lunatic right by saying: "You have your neutral monetary policy, I have mine, mine works, and yours doesn't." It disarms the left by saying: "You claim that the Great Depression was due to market failure, and that where there is one significant market failure there are probably others. But the Great Depression was actually due to a government failure! Ha ha!" Thus, Friedman believed, he could preserve the economists' loathing of the state without committing himself to tolerating big and unnecessary depressions as part of the natural order.

The problem Milton Friedman faced at the end of his life was that the world did not agree with him. Paul Volker actually gave the k%-per-year nominal money growth rule an honest try, and found it completely inadequate. And in spite of ample liquidity Japan fell into its last decades.

In the end, I think, Friedman made the choice for reality over ideology. In the case of Japan's lost decades, Friedman was very clear that if the k%-per-year money growth rate did not balance aggregate demand to potential supply, it needed to be abandoned. The government should instead printing more money, and print enough money until aggregate demand did balance potential supply. Print money. By short-term bonds. If there aren't enough short-term bonds, buy long-term bonds. If there aren't enough long-term bonds, drop the money from helicopters--or buy other things than long-term bonds with the newly-printed money: bridges, biomedical research, human capital for twelve-year olds. And by now we are doing expansionary fiscal policy.

The problem is that Milton Friedman has next to no followers these days--and certainly next to nobody who is listened to by the High Politicians of the right. The fight over whether to have a sensible or insane macroeconomic policy has not always been a left-right matter. But the failure of any sensible macroeconomic right to maintain its theoretical and political influence has made it one. That's when Tony Yates laments that this shouldn't be a left-right issue, he really should look at himself in the mirror and ask what it is that he has failed to do.

Paul Krugman:

Paul Krugman: Conservatives and Keynes: "Tony Yates asks, ‘Why can’t we all get along?’...

declar[ing] that 'it’s disappointing that the debate has become a left-right thing. I don’t see why it should.'

But the debate over business-cycle economics has always been a left-right thing. Specifically, the right has always been deeply hostile to the notion that expansionary fiscal policy can ever be helpful or austerity harmful; most of the time it has been hostile to expansionary monetary policy too (in the long view, Friedman-type monetarism was an aberration; Hayek-type liquidationism is much more the norm).... The politicization of the macro debate... has deep roots. Oh, and some of us have been discussing those roots in articles and blog posts for years now. We’ve noted that after World War II there was a concerted, disgraceful effort by conservatives and business interests to prevent the teaching of Keynesian economics in the universities, an effort that succeeded in killing the first real Keynesian textbook. Samuelson, luckily, managed to get past that barrier--and many were the complaints. William Buckley’s God and Man at Yale was a diatribe against atheism (or the failure to include religious indoctrination, which to him was the same thing) and collectivism--by which he mainly meant teaching Keynesian macroeconomics.

Do note that Buckley was not just opposed to the full toleration rather than stigmatization of atheism and agnosticism, but of Judaism as well. In his eyes, mandatory chapel did not include a synagogue option. And, of course, Islam, Zoroastrianism, Hinduism, Buddhism, and so forth were really beyond the pale. Combine this with Buckley's belief that a Yale that was mandatorily Protestant would be a bigoted place, and one's mind whirls...

What’s it all about, then? The best stories seem to involve ulterior political motives. Keynesian economics, if true, would mean that governments don’t have to be deeply concerned about business confidence, and don’t have to respond to recessions by slashing social programs. Therefore it must not be true, and must be opposed.... If you think I’m being too flip, too conspiracy-minded, or both, OK--but what’s your explanation? For conservative hostility to Keynes is not an intellectual fad of the moment. It has absolutely consistent for generations, and is clearly very deep-seated.

There are surely some ulterior political motives--Obama's policies will lead to a faster recovery and raise the Democrats' chances so we must block them; fiscal expansion would lead to prosperity and we need a sense of crisis and poverty two alarm people enough to get them to cut back the social insurance state. But more of it is not political in this sort of partisan sense: it is, rather, that the prosperity of fiscal expansion is a false prosperity. It wasn't a Republican but Obama's own Secretary of the Treasury Tim Geithner who claimed that the prosperity from fiscal expansion would be a "sugar high". Now Geithner is not a theorist or an analyst: he is a manager, and a manager who believes that wisdom is inherent in the beliefs of the well-paid members of the Establishment, and the better-paid the more wisdom.

And most of it, I think, is ideological--a belief that the world must make sense, and a kind of sense that we can easily grasp with brains that are just barely evolved enough to remember at what waterhole the lioness lurks and to invent beer. There is a very comforting feeling in believing that one understands the world. That leads to a dogmatic belief in dogma. And that means that there is always resistance to the ideas that the world is a surprising place and one always needs to be ready to mark one's beliefs to market.

Indeed, with many people since 2005, I have found that the more clever they are, the better they are at thinking up reasons why they should not mark their beliefs to market. But using your cleverness in this way--as Paul Romer says George Stigler did--is, as Richard Thaler might say, not just dumb, but the limit of an infinite sequence of dumb.