Fellows with Friedman
In his blog post, Russ Roberts maintains that while consumption can sometimes create production, it does not represent economic “growth,” except in the very immediate term.
According to Roberts, people are cautious due to past recklessness. The Fed and policy makers are “trying to keep the party going with massive increases in money reserves, cash-for-clunkers, home owner subsidies to people whose mortgages are underwater, and the so-called stimulus package which is stimulating the incomes of some people, financed out of future taxes on the rest of us. But as Hayek would point out, the party needs to stop. We need to clean up the mess. It’s not an easy mess to clean up but to pretend that we can clean it up by pretending it didn’t happen seems to me to be a form of free lunch fantasy.”
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Henderson argues that one result of the 2008 financial crisis and the ensuing global economic slowdown has been a revival of interest in the thinking of John Maynard Keynes. Much of what is being written about Keynes is an attempt to make him relevant to today’s problems and to persuade a modern audience that Keynes was right about deficit spending. Along these lines, economists Roger E. Backhouse and Bradley Bateman have written Capitalist Revolutionary: John Maynard Keynes.
Backhouse and Bateman argue, as the book’s title implies, that although Keynes wanted a substantial amount of government intervention, he did believe in preserving large elements of capitalism. This part of the book is somewhat persuasive, according to Henderson, although their discussion of Keynes’s famous “socialization of investment” advocacy was not completely convincing. But the authors also have another important theme: they argue against the classical liberal view that government should basically keep its hands off the economy. Their attempt fails, says Henderson. They get some basic and important facts wrong, have trouble accounting for the stagflation of the early 1970s that persuaded many economists to abandon the Keynesian model, often misstate the views of Keynes’s critics, and occasionally use subtle shifts in language and even ad hominem attacks to undercut the views of free-market economists, most notably Milton Friedman.
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Allan H. Meltzer
Meltzer reasons that many countries demonstrate the disappointing aggregate outcome of Keynesian policies. For example, Brazil went from a 3% budget surplus in 2011 to a large deficit by 2015. Some of the bad fiscal outcomes reflected weak exports, but some resulted from failed Keynesian policies.
Japan, to take another example, tried Keynesian policies repeatedly with little success. After a recent surge of government spending and monetary stimulus, it entered another recession.
The typical Keynesian answer to sluggish growth is “do more of the same.” Keynes never endorsed or favored most of the policies today that are called Keynesian, says Meltzer. He hardly ever proposed to use government spending to boost consumer spending, as the Keynesians have demanded. He favored recession programs like President Reagan’s successful one to end inflation and increase investment and productivity. That was his standard remedy for recessions: use government policy to increase investment. He would have been appalled and opposed to quantitative easing policies that finance budget deficits by printing money without limit and depreciate the exchange rate.
Keynes strongly favored economic stability. His design for a postwar economic policy called for fixed but adjustable exchange rates and a system that ruled out large or persistent deficits and unrestricted money growth. Unlike the European policy makers, he would have permitted the currencies of Greece and other nations to be devalued. His exchange rates were fixed but adjustable, because he knew that adjusting rates was the less costly alternative to forcing real wages to decline. He also believed that the government actions should generally be limited to solving problems the private sector could not solve by itself. He regarded the persistent failure to reach full employment as the result of uncertainty and overly pessimistic expectations. The problem, he said, was uncertainty and the difficulty of forming correct long-term expectations. That reduced investment and prevented the system from reaching the optimum capital stock required for true full employment. “He may have reached that conclusion because of Britain’s difficulties after the First World War,” writes Melzter. “But he never became a Keynesian.”
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