Opinion

The Great Debate

from Anatole Kaletsky:

Time to stop following defunct economic policies

Can economists contribute anything useful to our understanding of politics, business and finance in the real world?

I raise this question having spent last weekend in Toronto at the annual conference of the Institute for New Economic Thinking, a foundation created in 2009 in response to the failure of modern economics in the global financial crisis (whose board I currently chair). Unfortunately, the question raised above is as troubling today as it was in November 2008, when Britain’s Queen Elizabeth famously stunned the head of the London School of Economics by asking faux naively, “But why did nobody foresee this [economic collapse]?”

As John Maynard Keynes observed in 1936, when he challenged the economic orthodoxies that were aggravating the Great Depression: “The ideas of economists, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”

This remark is as relevant today as in 1936. Joseph E. Stiglitz, the Nobel laureate, asked rhetorically in Toronto: “Why are central banks and governments still trying to predict the effects of their policies with an economic model that is manifestly absurd?”

His answer was that the economic models studied in universities and published in leading academic journals are still largely based on a simplifying concept, known as the Representative Agent, which effectively assumes that “everyone in the economy is the same.”  So these models have nothing to say about lending or borrowing, ignore the existence of banks and treat bankruptcies as unimportant because “when the borrower does not repay, he only defaults on himself.”

The Keynes-Hayek showdown

By Nicholas Wapshott
The views expressed are his own.

Eighty years ago an anguished debate between two economists began in Britain — and came to shape the politics of the world after World War Two. The differences between John Maynard Keynes and his nemesis Friedrich Hayek sharply described alternative approaches to addressing the ebb and flow of the business cycle, with Keynes arguing that to put the jobless back to work governments could and should intervene in the market and Hayek insisting that such actions were based on an inadequate understanding of how economics really worked and would only delay the day of reckoning.

That snarky disagreement was so vicious and ill-mannered that one old-school economics professor described it as “the method of the duello” being “conducted in the manner of Kilkenny cats.” On Tuesday, in the Asia Society on Park Avenue, New York, two teams of economists, one representing Keynes, the other Hayek, will slug it out before an audience of 250 and bring the debate to America. Seventy years ago, Keynes’s ideas were eagerly embraced by young American economists who began implementing the Cambridge economist’s ideas first in Franklin Roosevelt’s administration, then in every government until Jimmy Carter, when Hayek’s disciple Milton Friedman introduced monetarism as a guiding principle.

The Keynes-Hayek debate has never been so topical. Today the fault line between right and left can be defined as the difference between those, like President Obama, who believe that the broken economy can be fixed by the government providing a giant fiscal stimulus, and those, like all the Republican presidential contenders, who believe government in America is too big and should be dismantled to make way for the operation of the free market. While Obama pushes his Jobs Bill, which would inject about half a trillion dollars into the economy, the GOP in the House is preventing any such manipulation of the economy from taking place.

What happens after Obama’s jobs bill dies?

By Nicholas Wapshott
The opinions expressed are his own.

You can add to the list of hollow cries from history–such as “Ban the Bomb!” and “Bring the Troops Home!”–the president’s favorite refrain, “Pass the Jobs Bill Now!” Like the rest, Obama’s oft repeated demand is a sham, a mere slogan. Neither he nor his party, and certainly no Republican, believes Congress is going to pass even a small part of the bill, for it combines two elements his opponents detest the most: public works and higher taxes on the rich.

While the GOP squabbles over which of a barely electable field to pick as its candidate, Obama has already begun his reelection campaign in earnest. The simple message he is taking on the road is that Congress should “pass the jobs bill now!” That’s a plea he knows is sure to be ignored, leaving him in a position, he believes, to blame persistent joblessness on the Republican obstructionists. He is onto something. As Jimmy Carter found out, Americans hold their presidents to account when the economy is tanking; they expect them to improve the economy and are prepared to fire them when they don’t. It is a lesson for conservatives who believe that governments can’t and shouldn’t attempt to change the economic weather. Voters blame the government anyway, whether they intervene or not.

Obama, like Franklin Roosevelt, believes in trying to fix the symptoms of a broken economy, while his GOP opponent, whoever it turns out to be, must hold to the Hayekian orthodoxy insisted upon by the Tea Party and the Republicans’ fiscally conservative wing that there is nothing much governments can or should do to improve the economy and that stimulus spending either does not work at all or will only make the smallest of differences in the short term. As Obama gleefully knows, a rival promising austerity, the long haul, a far worse economy before it gets better, and a dim light at the end of a long, long tunnel will be running against the spirit of optimism that Americans feel and like to hear from their leaders.

Tea Party has morphed culture wars into economic combat

By Nicholas Wapshott
The opinions expressed are his own.

As Margot Channing put it in All About Eve, “Fasten your seat belts. It’s going to be a bumpy night.” The battle over Obama’s jobs bill marks the opening of the Keynes Hayek election, which, if the poisonous duel between the two giants of economics is anything to go by, will be a down and dirty clash of opposites. Obama will champion intervening in the economy to get Americans back to work, while his rival will demand a shrunken government and the speedy repayment of the national debt.

The first shots in this snarky contest have already been fired. Take Obama’s dismissal, in his speech to both houses of Congress, of the Hayekian notion that government is too costly and largely unnecessary: “This larger notion – that the only thing we can do to restore prosperity is just dismantle government, refund everybody’s money, and let everyone write their own rules, and tell everyone they’re on their own — that’s not who we are. That’s not the story of America.” Obama finds himself defending the whole of the Democrats’ progressive record, from Roosevelt’s New Deal to Johnson’s Big Society.

Most aggressive in his assault upon Keynesianism is Rick Perry, who declared in the Reagan Library last week that Obama “has proven for once and for all that government spending will not create one job. Keynesian policy and Keynesian theory is now done. We’ll never have to have that experiment on America again.” Gingrich, too, thinks “the American people create jobs, not government.” Most Hayekian is Ron Paul, who said his first act in the White House would be to “bring a course in Austrian economics to teach the people the business cycle and why the Fed creates inflation and depressions and all our unemployment problems.”

The fight of the century: behind the scenes

Keynes and Hayek are back. As rappers. For those who don’t know about these two economists, or can’t keep their philosophies straight, there’s a great rap video just out that clearly explains the warring ideologies of those two men, titled “Fight of the Century: Keynes vs Hayek Round Two.” And it is the fight of the century, or at least, right now. If Hamlet were giving a soliloquy about the economy, it would start, “to spend or not to spend. That is the question.” For John Maynard Keynes, the answer is to spend. For Friedrich August Hayek, the answer is to not.

What is interesting, and less known, about this economic rap video is that the idea for it didn’t come from an economist. Or anyone remotely close to being one. Instead, it came from a video producer named John Papola, who went to Penn State for film. And despite having worked at MTV after graduating from college, it’s also his first dive into rapping.

Papola become interested in economics partly because of the Ron Paul campaign in 2007. He was struck by what Paul was saying and how the economy played out in 2008. “Nobody else was saying what [Ron Paul] was saying,” Papola says.

Anti-Keynesians and falling commodity prices

Policymakers’ new enthusiasm for cutting budget deficits will slow growth across the advanced industrial economies, cutting the outlook for commodity consumption and prices over the next 2-3 years.

For the past year, investors and commentators have been trying to guess how quickly extraordinary stimulus provided during the 2008-2009 crisis would be withdrawn.

Most attention focused on the timing of interest rate increases and measures to mop up excess liquidity provided by central banks. Instead tightening is set to commence from the fiscal side.

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