SYNOPSIS: The era of vulgar Keynesians isn't quite over yet, thank you Mr. Bush.
If Milton Friedman weren't still alive, he'd be spinning in his grave. His legacy has been betrayed — not by big-government liberals, but by the conservatives about to take power.
Nowadays Mr. Friedman is mainly famous as an apostle of free markets. But through much of his career he was best known as the champion of the conservative doctrine known as monetarism. Basically, monetarists wanted to get the government out of the business of short-term economic management. First and foremost this meant rejecting the use of fiscal policy — discretionary tax cuts or spending increases — to fight recessions.
By and large this was an argument that the monetarists won on the evidence. Few economists now accept Mr. Friedman's further view that even monetary policy should be placed on cruise control. Alas, it turns out that a stable money supply is no guarantee of a stable economy. But almost all economists now agree with the position that monetary policy, not fiscal policy, is the tool of choice for fighting recessions.
Almost all economists, that is, except those who have been or hope to be tapped for jobs in the new administration. Indeed, it's remarkable how thoroughly George W. Bush's people seem to have been converted to a crude Keynesian view of economic policy — a view that, it just so happens, offers them another justification for a tax cut that even moderate Republicans think is excessive.
The latest exposition of that view came from Mr. Bush's choice as chief economic adviser, Lawrence Lindsey, who last weekend stood Milton Friedman on his head, declaring that monetary policy is ineffective and fiscal policy reigns supreme. Here's what he said: "Let's contrast the typical credit card borrower on monetary policy versus fiscal policy. The interest rate cut of last week helps the typical credit card borrower about two bucks a month, two dollars a month, whereas Mr. Bush's tax cut for a family making $40,000, gets a $1,600-a-year tax cut, 32 bucks a week. That's a much bigger heft."
You have to admire Mr. Lindsey. It's not often that an economist manages a triple play. But he did it: his statement was specious on three distinct levels.
First, he exaggerated the impact of Mr. Bush's proposed tax cut on ordinary families. Most families would get far less than he suggested; independent estimates indicate that on average even families with an income of $50,000 would get only half as much tax relief.
Second, he loaded the comparison by comparing the full impact of tax cuts with only one minor effect of interest rate reductions. Won't lower rates (which can, incidentally, be reduced much further) also reduce mortgage payments — not to mention the burden of debt on corporations?
Finally, and most important, he misrepresented the way interest rate cuts work. Their main effect on demand isn't via a reduction in the payments people make on the debt they already have; lower interest rates work by stimulating investment, that is, by inducing businesses and individuals to borrow more, or to put their money into real assets instead of parking it in bonds. That's how rate cuts led to recovery from the last recession even while Bill Clinton was raising taxes.
It was a remarkable display of bogus economic analysis. It would be alarming if the new chief economist believed any of the things he said. But we needn't worry; this was merely a cynical attempt by someone who knows better to build support for that tax cut. After all, Mr. Lindsey would have defended that cut even if the economy were still booming.
Still, Mr. Lindsey's remarks were not a good omen.
One little-noticed but important virtue of the Clinton administration was its honesty in economic analysis and reporting. In general — and in contrast to some of their predecessors — Mr. Clinton's economists avoided misrepresenting the facts, using convenient but specious arguments, or employing scare tactics to sell their policy ideas.
But it's already clear that henceforth things will be different. It seems that the incoming administration regards it as perfectly acceptable to say things that are demonstrably untrue, and even to abandon conservative economic principles, if by so doing it can sell its preferred policy.
Originally published in The New York Times, 1.10.01