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Support High-Quality Commentary For more than 25 years, Project Syndicate has been guided by a simple credo: All people deserve access to a broad range of views by the world's foremost leaders and thinkers on the issues, events, and forces shaping their lives. Show More Contact Us. This is important, because the Fed's interest rate cuts will not have anywhere near the stimulus effect on the economy that they had in pulling us out of the last recession. In that expansion, the cuts contributed to an enormous housing bubble, by lowering mortgage rates.
It was this bubble, with rising home prices that allowed people to collectively borrow trillions of dollars against their homes and spend it, that drove the economic recovery of the last six years. All that is now working in reverse, so lower interest rates won't have the same impact. And all this is assuming that lower short-term interest rates will move long-term rates lower, which is no longer a safe assumption - but that is another story.
The details of the stimulus plan remain to be worked out, and of course it will be better if the stimulus is targeted toward those who need it most and will spend it. Some subsidies for energy conservation and public transportation could also potentially provide some long-term benefits. But it is testimony to the power of a volatile and alienated electorate that our politicians are moving so quickly, and that conservatives have rediscovered the Keynesianism of Nixon.
Of course the White House pushed for some tax breaks for business, but the bulk of the package - including tax cuts for households - will be a Keynesian one. In other words, it will be designed to put money in the hands of those who will spend it, so as to replace the lost spending resulting from the bursting of the housing bubble, not, as previous tax cuts such as capital gains and right-wing ideology prescribes: to give more money to rich people so that they will supposedly invest it and increase productivity in a full-employment economy.
It probably helps that the Republicans are quite scared that the combination of an unpopular war and a serious recession in a presidential election year has the potential to make them into a long-term minority party. Nixon's comment was made to Howard K. Somehow it made its way into The New York Times three days later. The President told Smith that he was, "now a Keynesian in economics. Not only did the President order Treasury Secretary Connally to end US convertibility into gold, effectively defaulting on August 15, , he also that same day issued Executive Order under authority of the Economic Stabilization Act of you can always tell what won't happen by the names of these economic laws that imposed a day freeze on both wages and prices.
Speaking to the American people on television that day, the President only made one true statement in his entire address. He said, "in the past 7 years, there has been an average of one international monetary crisis every year. The quote attributed to Nixon was actually given by Milton Friedman - twice.
The first was in a Time Magazine article from December all about Dr. Friedman was purportedly very upset about his inclusion in the work, judging it to be a case of words taken far out of context. In , he attempted to set the record straight, declaring instead that, "We all use the Keynesian language and apparatus; none of us any longer accepts the initial Keynesian conclusions.
The true legacy of Keynes is not so much his General Theory rather that intervention is not just commonplace but demanded, an almost sacred duty. The market may be assumed efficient, but it was inefficient set against planned "optimal outcomes. Friedman's acceptance of the "language and apparatus" was, he hoped, only to provide a path for free markets to enter the top-down equation; to use central banks as the means for intervention as if that would preserve something great of free market potential.
It can only work, however, if you know what it is you are doing. As Hayek had warned, it is ever so infrequently the case. By , even those on the "left" were entirely disgusted by Keynesianism that the bipartisan spirit of Congress was to be open and declared "supply siders. By early , though, it was all back in that corner yet again. Across the intervening 27 years between the Joint Economic Committee report and Federal Reserve Chairman Ben Bernanke's January appearance before Congress, aggregate demand theory had been turned degrees; shunned in bipartisan fashion by one generation who had seen up close its effects, and then embraced in equally bipartisan fashion by another who believed in some Great "Moderation" but only because they had convinced themselves there never were any asset bubbles as if "global savings glut" was anything more than three words slung together in lieu of admitting global monetary arrangements were far different than the models.
What Chairman Bernanke told Congress at the start of the Great Recession was his endorsement of all kinds of "stimulus", the full language and apparatus of Keynes. Congress and President Bush dutifully obliged, cutting "stimulus" checks almost right away in , culminating eventually in the American Reinvestment and Recovery Act under the next administration again, you can tell what won't happen by the name. On the monetary side, pace Friedman, it has been constant intervention ever since.
The appearance of quantitative easing was all Milton Friedman, as he had written about the general idea as far back as A Monetary Theory in In , he famously admonished the Bank of Japan for what he called the "interest rate fallacy. History recorded the opposite in clear and convincing fashion. Richard Nixon's "shock" of and the rest of the decade did not occur under low interest rates at all, rather they would move only in the other direction.
The Great Depression, by contrast, saw an unending trend of nothing but ultra-low yields and rates. Monetary economists were, by the 's, utterly confused. They still are, apparently. Interest rates in all over the world are also heading in only one direction, and it is not the direction that we need. Yet, it is reported everywhere in the media from the mouths of central bankers that this is "stimulus"; that is, after all, what QE is believed to have been all about.
The goal of the monetary intervention is to buy bonds and lower the interest rate; that there are now much lower interest rates seems to suggest QE's success, or at least that conditions are now even that much more "stimulative. It misses a central observation similar to what afflicted Nixon's thinking that wage and price controls would somehow alter the Great Inflation into general prosperity.
Even assuming that rates are reacting to central bank transactions overall, the very fact that it has to be repeated over and over, pushing rates lower and lower, still suggests a further overarching cause. It still adds up to Friedman's interest rate fallacy. The incidence of low rates as a longer-term phenomenon is exclusively associated with "tight" money periods - in the real economy.
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