Keynes, Hayek Preside at Jobs Debate: Caroline Baum
(Corrects spelling of name in 17th paragraph.)
Maybe it was the concurrence of the two articles, or their disparate views, that got me thinking about how little progress we’ve made.
I’m not referring to the lack of progress in restoring the U.S. economy to health, but to the failure to reach a consensus on what exactly drives growth and fosters economic well-being.
Robert Lucas, a Nobel-winning economist from the University of Chicago, was the subject of the Wall Street Journal’s Sept. 24 weekend interview. Lucas is known for applying rational expectations theory -- the idea that people make economic decisions based on past experience and expectations about the future -- to demonstrate why government intervention doesn’t have the desired effect.
The next day, Christina Romer, professor of economics at the University of California, Berkeley, proffered the Keynesian view in the New York Times’ Sunday Business section. Romer, who stepped down last year as chairman of President Barack Obama’s Council of Economic Advisers, was arguing for an even larger jobs bill than the $447 billion one Obama proposed. She said policy makers need to determine “which measures will be most effective in putting people back to work.”
How exactly do they do that? The determination of effectiveness is a number spit out by an econometric model that is only as good as the assumptions that go into it. Remember Romer’s 3.5 million jobs “created or saved” by 2009’s $830 billion fiscal stimulus? Tell that to today’s 14 million unemployed Americans.
If Lucas is right, the government’s best intentions may be fraught with disappointment. Obama’s jobs plan, with its temporary tax cuts for employees and employers, won’t lead to more spending if workers are afraid of losing their jobs. Nor will it nudge businesses to assume a long-term expense in exchange for a one-time tax credit -- unless they are planning to hire anyway.
Reading Lucas’ and Romer’s ideas back-to-back made me think about the battle that has dominated the dismal science probably since its inception. EconStories.tv used a rap video to pit the ideas of John Maynard Keynes against those of Friedrich von Hayek, the Austrian (by birth and belief system) free-market economist. The refrain of “Fear the Boom and the Bust,” released last year and viewed by 2.7 million people, says it all:
“We’ve been going back and forth for a century.”
(Keynes) “I want to steer markets.”
(Hayek) “I want them set free.”
Authors Daniel Yergin and Joseph Stanislaw chronicled the ebb and flow of the two schools of thought, one interventionist, the other laissez-faire, throughout the 20th century in their 1998 book, “The Commanding Heights: The Battle for the World Economy.” PBS turned the book into a superb six-hour series, the first episode of which is titled, “The Battle for Ideas.”
That battle still rages. In the 21st century, it was evident in the ex-post analysis of the financial crisis, as the blame for the housing bubble, bust and financial fallout was assigned alternatively to capitalism (greedy bankers) or government policy. It smolders today in Washington as the two parties debate measures to revive the U.S. economy.
Why are we still at this juncture? Hasn’t macroeconomics advanced to the point where, before we prescribe medicine for what ails the economy, we can know with a relative degree of certainty whether it helps or hurts?
I talked to many economists about the state of macroeconomics. Their responses, filtered through my own prism, are encapsulated below.
1. Flying Blind
“There’s a lot we don’t know about macroeconomics and particularly about business-cycle theory,” says Harvard’s Greg Mankiw.
That’s why he begins his “Ec 10” class on the principles of economics -- still Harvard’s most popular course -- with microeconomics: “the stuff we do know,” such as supply and demand, the utility function and profit maximization. Basic principles, in other words. Things like, if you tax something more, you get less of it. (You can’t repeat that often enough.)
2. Inexact Science
Economics is considered to be a social science. Unlike the natural sciences, where one can conduct a controlled study, it’s impossible to hold everything else constant in something as complex as an economy. There are too many moving parts to isolate the effect of any single variable, such as infrastructure spending or targeted tax cuts.
Economists have a simple way of dealing with this issue. They publish their findings with the default caveat of “ceteris paribus,” or other things being equal, which they never are.
3. Math as Science
Econometricians have tried to make economics appear scientific by dressing it up with mathematics. Models have replaced logic. Economists tell us with a straight face that a specific dollar amount of government spending will generate 1.9 million jobs.
“Stop using decimal points,” says Russ Roberts, professor of economics at George Mason University and co-creator, with producer John Papola, of EconStories. “Get rid of the grandiose claims. Go back to first principles.” (See No. 1 above.)
4. Good Politics, Bad Policy
It’s no coincidence that conservatives tout Hayek’s government-do-nothing philosophy while liberals advocate Keynesian stimulus, the bigger the better. Sometimes it’s hard to know which is the driver: the policy or the politics.
Often the ideas seem to provide the ammunition for advocating certain policies. You know what they say about guns falling into the wrong hands. By the time the politicians are done with them, the ideas have been subsumed by ideology.
5. Wrong Ballpark
Forget Keynes and Hayek, says Laurence Kotlikoff, professor of economics at Boston University and a Bloomberg View columnist. “The interesting macro that’s relevant isn’t getting any attention,” he tells me. What we’re dealing with is “coordination failure.”
As Kotlikoff explains it, “there is no auctioneer clearing markets,” no place where buyers and sellers can come together.
“Like the agora of ancient Greece?” I ask, hoping to sound smart.
Too literal, he says. There is no forward market for labor, for example. No contingent claims market.
Uh-huh. Now I know I’m out of my depth. Suddenly it’s not so hard to see why macroeconomics doesn’t have all the answers.
(Caroline Baum, author of “Just What I Said,” is a Bloomberg View columnist. The opinions expressed are her own.)
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