Nicholas Wapshott

It is a cruel irony of fate that 2012, the year that celebrates the centennial of Milton Friedman’s birth, is the year that marks the end of his preeminence as an influence over economic policy. Since the emergence in the early 1970s of stagflation – a corrosive combination of lack of growth matched by inflation in double figures – Friedman’s dictums on the causes and cures of rising prices have been the mood music behind management of many leading economies. Since the Great Recession took hold, however, the priorities of government economists have evolved, and once more growth and employment are emerging as the prime goals of public policy.

In the 33 years since Paul Volcker was made Federal Reserve chairman by President Jimmy Carter in 1979, Friedman’s idea that inflation is the economy’s greatest danger has ruled the roost. So long as inflation is kept at around 2 percent, unemployment has been allowed to find its own level. But times have changed. At the first meeting of the Federal Reserve since Barack Obama’s re-election, Federal Reserve Chairman Ben Bernanke has made the creation of jobs a principal aim alongside keeping inflation in check.

In practice, this means interest rates will not be raised so long as unemployment remains above 6.5 percent and inflation is forecast to remain below 2.5 percent. With this tap on the tiller, Bernanke has quietly dispatched the Age of Friedman, replacing it with a policy that harks back to the Keynesian days when “full employment” was the sole target. (Technical note: In economics, “full employment” does not mean when everyone is employed; to allow for the churn as workers move among employers and other adjustments to the labor force, “full employment” is usually deemed to be when 94 percent to 97 percent of those seeking jobs are employed.)

This significant but surreptitious shift in economic policy did not make headlines in the popular press or on the nightly TV newscasts. Rupert Murdoch’s Wall Street Journal, however, which is fighting a rearguard action on behalf of “classical,” or Hayekian, economics, spotted the importance of the change. “It’s striking to see a central bank in the post-Paul Volcker era say overtly that it wants more inflation,” it wrote, before warning that “sooner or later the bill for open-ended monetary stimulus will arrive.”

Economics in the modern age, since John Maynard Keynes transformed the discipline with his “General Theory of Employment, Interest and Money” in 1936, has been a tussle among those, like Keynes, who believed unemployment to be society’s greatest scourge, and those, like Friedrich Hayek, who saw inflation as a nation’s undoing. The division can be traced to the two men’s personal experiences, with the patrician Keynes indignant that the British should suffer mass unemployment through the 1920s and 1930s and Hayek traumatized by the social decay that overtook his native Austria during the years of rampant inflation after World War One.

We may never come to understand exactly what was on the crazed mind of Adam Lanza, the man identified as the Connecticut gunman who set out from his home with murder in his heart. All we know, based on reports, is that this troubled young man had an issue with his mother, a schoolteacher in Newtown, Connecticut, that so enraged him he drove with a .223-caliber assault rifle and at least two other guns to attack in cold blood  an elementary school where she taught.

By mid-morning break at the Sandy Hook Elementary School, a reported 20 children and six adults were also dead,* pointlessly killed as they went about their peaceful business of teaching and being taught. As a nation, all we are left with are chilling pictures of frightened schoolchildren clutching each other in a crocodile line, weeping in fear and in horror at what they have just witnessed.

We are left wondering, what was Lanza thinking? Why should so many suffer for his agitated state? Why does a possible family quarrel end in a massacre of unrelated innocents? What price must we continue to pay in human lives to protect the Constitution’s apparent guarantee for us to bear arms?

There was so much cacophony at the Republican National Convention in Tampa this summer that some unscripted remarks were not given the prominence they deserved. One of the most prescient, in light of Mitt Romney’s defeat, was this from South Carolina Senator Lindsey Graham: “We’re not generating enough angry white guys to stay in business for the long term.” Graham’s bleak demographic assessment of the conservative future was confirmed by David Bositis, of the Joint Center for Political and Economic Studies, whose harsh verdict was that the “Republican Party base is white, aging and dying off.”

Has the GOP really become a redoubt for “angry white guys”? Will Republicans put themselves out of business by not appealing fast enough to young voters? To put it at its most stark: Are conservatives going extinct? Graham’s view was echoed this past weekend by the Republican sage George Will. Pondering whether the Supreme Court will declare gay marriage legal, he said, “There is something like an emerging consensus. Quite literally, the opposition to gay marriage is dying. It’s old people.”

The problem with many aging Americans is that their reactionary views are out of sync with those of women, people of color, immigrants and gays who make up the Democrats’ election winning “rainbow coalition.” As the 2012 results show, when it comes to social issues ‑ women’s rights, such as equal pay; women’s health, including contraception and abortion; the rights of racial minorities, including basic elements of democracy such as access to the ballot; immigration, both legal and illegal, and equal rights for children of illegals; gay rights and homosexual marriage ‑ the Republicans fiercely defend the status quo. And the older the Republicans, the more reactionary they tend to be.

Then last month the political party he supports and largely owns lost the election. When you have Sarah Palin, Mike Huckabee, Roger Ailes, Karl Rove, John Bolton, Liz Cheney, William Kristol, Dick Morris, Oliver North, Rick Santorum, and Newt Gingrich on the books and have all your media properties conduct a virulent, ad hominem campaign against the president, then watch the Republicans lose so convincingly, it must be hard to know where you went wrong.

Then on Monday Murdoch announced his reluctant splitting of News Corp. in two, dividing the company between News Corp.–containing the mostly hard-copy waning press properties he dabbles in as an expensive hobby–and Fox Group, made up of the money-making media properties, like the Fox movie studio, the Fox TV network, and Fox News, that the company’s non-family and therefore non-voting shareholders prefer. The restructuring was forced upon Murdoch in the wake of the revelation that phone hacking had become quotidian at his British newspapers, a crime of which, despite his addiction to editorial micromanagement, he has always denied all knowledge. Had he not taken the initiative and divided his company, the report by Lord Justice Leveson on corruption in the British press might have demanded a more painful remedy.

To stem the damage being done to his company’s profit centers, and to appease one of his biggest sleeping shareholders, Saudi Prince Alwaleed bin Talal, Murdoch closed the News of the World, the scandal rag he used to intimidate those who did not toe his line, and he lost his chief executive in London, Rebekah Brooks, who awaits trial for interfering with the course of justice, among other charges. Almost all the other 86 arrested so far, except those they are accused of bribing, are former Murdoch employees.

The “fiscal cliff” talks offer a chance to rebalance the American economy so that the long years of living beyond our means — spending too much and raising too little, paid for by borrowing from the Chinese – will be brought to an end in an orderly fashion. As we have seen from the pitched battle between the White House and the Republican House leadership, finding the right balance between tax increases and spending cuts is not easy.

The guiding principle for both sides, however, should be primum nil nocere: First, do no harm. Having survived the worst financial crash in 80 years, the United States should do nothing to put the fragile recovery at risk. Since the turmoil of 2008, economic growth remains positive but feeble, which is more than you can say for comparable economies, such as the eurozone and Britain, that have battened down the hatches and nosedived into slump. The 17 eurozone countries are deep in recession with joblessness at more than 11 per cent; last quarter the U.K. briefly emerged from a double-dip recession of its own making but is expected to enter a triple-dip recession by the end of the year.

If we get the fiscal cliff bargain wrong–too-large tax increases combined with too-deep, too-early cuts in public spending–we risk tipping the economy back into the painful recession we have just escaped. In Washington, the trade-ff between tax and spending is portrayed as a quid pro quo, with Democrats demanding tax cuts for everyone except high earners and Republicans pressing for deep cuts in Medicare but not defense. The politicians have badly framed the argument. Think of tax and spending — if you will excuse the battered simile — as the knobs on an Etch-A-Sketch. To draw a perfect circle entails turning both knobs together at exactly the right rate.

You have got to admire Steven Spielberg. He has taken the well-worn story of Abraham Lincoln’s final days and turned it into a pointed piece of contemporary political commentary. When he first met Doris Kearns Goodwin back in 1999, well before she had completed her masterly account of the Lincoln White House, Team of Rivals, it seems Spielberg decided to film an episode in Lincoln’s life that would ring true at the time of release many years later. He chose to concentrate his “Lincoln” movie on a pivotal time in the presidency: the final five months when Lincoln had just been re-elected, when the Civil War was all-but won, and when the fractious House was undecided about whether to fall in with Lincoln’s stated aim of abolishing slavery.

There is an obvious comparison to today’s politics, with President Barack Obama newly re-elected and facing a similarly hazardous short period to dragoon a recalcitrant and largely hostile House to do his bidding over taxes, entitlements and spending. Where Lincoln was working against the clock to ensure the Civil War would continue long enough to prevent Southern pro-slavers from returning to the Union Congress to wreck his plan to outlaw slavery, so Obama is teetering at the edge of a similarly perilous precipice. And just as Lincoln was surrounded in government by his old rivals, so Obama has as loyal lieutenants his former challengers for the Democratic candidacy, Joe Biden and Hillary Clinton.

As Spielberg’s movie shows, Lincoln rejected his close colleagues’ assessment that the daunting arithmetic of the divided House meant he would fail to force through his emancipation measure. Lincoln’s towering achievement is so well known to make a spoiler alert unnecessary. Through guile, arm-twisting, argument, bribery, and bullying, the president pressed on and, while he kept members of a Southern peace delegation kicking their heels, the requisite votes were found to convert his Emancipation Proclamation of 1863 into law. Whether Obama can pull off a similar coup and save America from a ruinous combination of high taxes and deep public spending cuts remains to be seen.

In the civil war that broke out between Republicans the minute the election was called for President Obama, media conservatives have turned on media conservatives. But none have shown more recklessness than Andrew Sullivan, chief American columnist for Murdoch’s Sunday Times in London, who on “Real Time With Bill Maher” cheerfully chewed off the hand that feeds him. “The Republican Party has to say, ‘We have no part of Fox News,’ ” Sullivan declared.

Attacking Murdoch’s grip on the post-defeat Republican debate through the strict party line dictated by Fox News, the Wall Street Journal and the New York Post, the clearly agitated Sullivan said, “The media-industrial complex on the right is so lucrative they don’t want to lose it. And it is now controlling a political party. That has to be severed. Fox News has to be demonized and cut off.”

Sullivan is no leftie. An avowed Reagan and Thatcher fan who moved to Washington  from Britain and became a U.S. citizen to more closely involve himself in conservative thinking, he is the moderate right’s equivalent to that other naturalized Brit, the late Christopher Hitchens. [r2] Sullivan is smart, eloquent and has championed individual rights and attacked social conservatives, not least because he is openly gay.

If free-market economists were serious about their ideas, they would surely be arguing vociferously right now for the economy to plunge over the fiscal cliff. But where are the laissez-faire economists lining up to urge John Boehner to lead his Tea Party tribe in the House to veto all compromise and put our money where their mouths are? They are strangely silent. Instead, the debate is about how Keynesian we should be.

A reminder for those who haven’t read John Maynard Keynes lately, or who have never read Keynes but oppose him anyway out of principle, he was a British math whiz who transformed economics forever with the publication of his “General Theory” in 1936. It suggested three ways to put wind in the sails of an economy in the doldrums. The problem, Keynes suggested, was that there was not enough demand for goods and services, and that governments should take a lead in stimulating spending to encourage business leaders to invest and create jobs.

Keynes’s first prescription was for central banks to make borrowing as cheap as possible with low interest rates. This deters saving and makes new investment in business activity more attractive. Businesses will employ workers who go out and spend their earnings. After studying the roots of the Great Depression, Milton Friedman and Anna Schwarz blamed the economic slump on money being too tight for too long. Such was the fear of returning to the deflationary devastation of the 1930s that successive Federal Reserve chairmen have taken this lesson to heart. Faced with a recession in 2001, even Alan Greenspan, a lover of the free market who flirted in his youth with the Lioness of Laissez-Faire, Ayn Rand, kept money rock-bottom cheap for the whole of the first decade of this century.

Amid the triumphant acclamation and the reluctant resignation of the two presidential candidates’ early morning speeches was the hint that politics is about to take a strange turn. Mitt Romney’s concession address was suitably gracious and, above dissenting heckles from his disappointed party workers, he included this veiled job application: “Our leaders have to reach across the aisle to do the people’s work, and we citizens also have to rise to the occasion.”

Within half an hour President Barack Obama responded in kind. “I just spoke with Governor Romney and I congratulated him and Paul Ryan on a hard-fought campaign,” he said. “In the weeks ahead, I also look forward to sitting down with Governor Romney to talk about where we can work together to move this country forward.”

What do the two men have in mind? The role of defeated presidential candidate is a hard one to endure. America does not like losers, and those who fail to win the world’s most important office are given short shrift. Often they become bywords for has-beens and no-hopers, tacitly blamed for letting their ambitions run ahead of reality. George McGovern was a courageous man, a bomber pilot in World War Two who knew war from the inside and could not bear to see America’s young men sacrificed in a dubious cause. His reward after losing the 1972 race was ignominy and derision. The same was true of another war hero and failed presidential candidate, Bob Dole, in 1996, who became a spokesman for Viagra.

The 2012 election’s October Surprise arrived when Hurricane Sandy made landfall and brought the campaign to a halt. The real surprise, however, is how the narrative was so radically altered by the tropical storm’s progress through New Jersey and how Governor Chris Christie so quickly changed his mind about the president. Until the heavens opened, no Mitt Romney surrogate was more scathing and personally disrespectful toward the president than Christie, whose down-to-earth appeal to blue collar voters was considered so important by GOP strategists he was awarded the keynote address at the convention that crowned Romney the party’s candidate.

In a withering assault in Tampa, Christie called for clear, decisive leadership. “Leadership delivers. Leadership counts. Leadership matters,” he said. “It’s time to end this era of absentee leadership in the Oval Office and send real leaders to the White House.” Christie was back on the attack in Richmond, Virginia, last week, making fun of Obama’s failure to lead. Addressing the president’s complaint that Washington politics-as-usual had hampered his ability to govern, Christie taunted him, saying, “You’ve been living inside 1600 Pennsylvania Avenue for the last four years. If you don’t think you can change Washington from inside the White House, let’s give you the plane ticket back to Chicago you’ve earned.”

Few other Romney surrogates, and certainly not the mechanical Romney himself, could batter the president with such effect. Christie went on to describe Obama as “like a man wandering around a dark room, hands up against the wall, clutching for the light switch of leadership and he just can’t find it” and “blindly walking around the White House looking for a clue.” Then on Monday came Sandy’s 90 miles-an-hour gusts hosing millions of gallons of salt water on the sentimental Christie’s beloved Jersey Shore, the place where the governor grew up and went to high school.