KRUGMAN: REBOOBLICANS IGNORE THEIR ECONOMIC MENTOR.

Milton Friedman. the 1976 Nobel Prize winner in Economics. A survey of economists ranked Friedman as the second most popular economist of the twentieth century after John Maynard Keynes,^[2] and The Economist described him as "the most influential economist of the second half of the 20th century...possibly of all of it."
 [He]  became the main advocate opposing activist Keynesian government policies.^[5] ...During the 1960s he promoted an alternative macroeconomic policy known as "monetarism". He theorized there existed a "natural" rate of unemployment, and argued that governments could increase employment above this rate (e.g., by increasing aggregate demand) only at the risk of causing inflation to accelerate.^[7] He argued that the Phillips curve was not stable and predicted what would come to be known as stagflation.^[8] Though opposed to the existence of the Federal Reserve, Friedman argued that, given that it does exist, a steady, small expansion of the money supply was the only wise policy.
....His political philosophy extolled the virtues of a free market economic system with minimal intervention. He once stated that his role in eliminating U.S. conscription was his proudest accomplishment, and his support for school choice led him to found The Friedman Foundation for Educational Choice. In his 1962 book Capitalism and Freedom, Friedman advocated policies such as a volunteer military, freely floating exchange rates, abolition of medical licenses, a negative income tax, and education vouchers.^[10] His ideas concerning monetary policy, taxation, privatization and deregulation influenced government policies, especially during the 1980s.






 

PAUL KRUGMAN N.Y. TIMES

Recently Senator Rand Paul, potential presidential candidate and self-proclaimed expert on monetary issues, sat down for an interview with Bloomberg Businessweek. It didn’t go too well. For example, Mr. Paul talked about America running “a trillion-dollar deficit every year”; actually, the deficit is projected to be only $642 billion in 2013, and it’s falling fast.
But the most interesting moment may have been when Mr. Paul was asked whom he would choose, ideally, to head the Federal Reserve and he suggested Milton Friedman....

Which suggests an interesting question: What ever happened to Friedman’s role as a free-market icon? The answer to that question says a lot about what has happened to modern conservatism.

Friedman, who used to be the ultimate avatar of conservative economics, has essentially disappeared from right-wing discourse. Oh, he gets name-checked now and then — but only for his political polemics, never for his monetary theories. Instead, Rand Paul turns to the “Austrian” view of thinkers like Friedrich Hayek — a view Friedman once described as an “atrophied and rigid caricature” — while Paul Ryan, the G.O.P.’s de facto intellectual leader, gets his monetary economics from Ayn Rand, or more precisely from fictional characters in “Atlas Shrugged.”

How did that happen? Friedman, it turns out, was too nuanced and realist a figure for the modern right, which doesn’t do nuance and rejects reality, which has a well-known liberal bias.

One way to think about Friedman is that he was the man who tried to save free-market ideology from itself, by offering an answer to the obvious question: “If free markets are so great, how come we have depressions?”

Until he came along, the answer of most conservative economists was basically that depressions served a necessary function and should simply be endured. Hayek, for example, argued that “we may perhaps prevent a crisis by checking expansion in time,” but “we can do nothing to get out of it before its natural end, once it has come.” Such dismal answers drove many economists into the arms of John Maynard Keynes.

Friedman, however, gave a different answer. He was willing to give a little ground, and admit that government action was indeed necessary to prevent depressions. But the required government action, he insisted, was of a very narrow kind: all you needed was an appropriately active Federal Reserve. In particular, he argued that the Fed could have prevented the Great Depression — with no need for new government programs — if only it had acted to save failing banks and pumped enough reserves into the banking system to prevent a sharp decline in the money supply.

This was, as I said, a move toward realism (although it looks wrong in the light of recent experience). But realism has no place in today’s Republican Party: both Mr. Paul and Mr. Ryan have furiously attacked Ben Bernanke for responding to the 2008 financial crisis by doing exactly what Friedman said the Fed should have done in the 1930s — advice he repeated to the Bank of Japan in 2000. “There is nothing more insidious that a country can do to its citizens,” Mr. Ryan lectured Mr. Bernanke, “than debase its currency.”

Oh, and while we’re on the subject of debasing currencies: one of Friedman’s most enduring pieces of straight economic analysis was his 1953 argument in favor of flexible exchange rates, in which he argued that countries finding themselves with excessively high wages and prices relative to their trading partners — like the nations of southern Europe today — would be better served by devaluing their currencies than by enduring years of high unemployment “until the deflation has run its sorry course.” Again, there’s no room for that kind of pragmatism in a party in which many members hanker for a return to the gold standard.

Now, I don’t want to put Friedman on a pedestal. In fact, I’d argue that the experience of the past 15 years, first in Japan and now across the Western world, shows that Keynes was right and Friedman was wrong about the ability of unaided monetary policy to fight depressions. The truth is that we need a more activist government than Friedman was willing to countenance.

The point, however, is that modern conservatism has moved so far to the right that it no longer has room for even small concessions to reality. Friedman tried to save free-market conservatism from itself — but the ideologues who now dominate the G.O.P. are beyond saving.

THE MEANING OF THE SEQUESTER: A LONG TERM DISASTER

Felix Vallotton


NY REVIEW OF BOOKS      Jeff Madrick

The sequester is dangerous, but not for the reasons we think. Contrary to what some alarmists predicted, there is little evidence that the automatic, across-the-board cuts to the US budget that went into effect on Friday are causing cataclysmic harm. The stock market has risen slightly to near record heights, and most economists agree that the $85 billion down payment this year on about $1 trillion in cuts over the next ten will not trip the economy into recession. Recent polls, meanwhile, indicate that a large part of the electorate has no opinion on the sequester, which is still poorly understood—making it perhaps less of a political liability for either party than some anticipated.
But what makes the sequester threatening is not that it will plunder the economy in 2013. Rather, it is that these arbitrary cuts are exactly the opposite of what the economy needs both in the short run, and—if the promised $1 trillion in further cuts over ten years is made—in the long term. In the coming months, it will make it difficult for the president to cut the unemployment rate from current levels around 8 percent, a fact that Republicans must enjoy since it reduces their chances of losing the House in 2014, and raises their chances of winning the presidency in 2016 if they can continue to cut spending.

And the sequester will be painful. Educational and housing subsidies will be cut, as will unemployment insurance and research spending. More than $40 billion will be cut from the defense budget, music to my ears, but not to those who will lose jobs at defense contractors. Above all, claims that economic growth down the road will be spurred by reducing the federal deficit through spending cuts are not credible.
Indeed, the real danger of the sequester lies in the misguided deficit-cutting mania that created it in the first place. Put in place by Congress with the president’s approval and encouragement in 2011, the idea of automatic sequestration came out of the same obsession with austerity measures that has put much of Europe into recession and prevented the US economic recovery from fulfilling its potential. Deficit reduction has wide support in Washington and its most active promoters are financed by some of the nation’s wealthiest citizens, who argue that it is a far better alternative than asking them to contribute more in taxes. We must cut deficits now, even before we have a full economic recovery, the thinking goes, to deal with rapidly rising healthcare costs that will drive up the government’s Medicare and Medicaid expenses beginning twenty-five years from now.

This approach to economic policy has no sound basis in either historical experience or current economic analysis. Washington’s austerity economics—the notion that you can induce economic recovery in a weak economy simply by cutting government expenditures—willfully ignores, denies, or declares nonsense the true lessons of the Great Depression, which demonstrated precisely the opposite. More or less since Adam Smith, economists had argued you must increase savings to increase investment, which in turn drove economic growth and produced rising incomes. One way to do this is to get federal deficits down as a percent of GDP. But in the 1930s, it was clear that government efforts to save money had not prevented the global economy from tumbling into severe depression. To the contrary, they helped create the depression of the early 1930s and then a second major downtown in 1937. This is around the time that John Maynard Keynes had the dramatic insight that it wasn’t savings that led to investment but the other way around: more government spending raises incomes and therefore savings, from which more investment is made.
It is true that Keynesian stimulus was derided by economists beginning in the 1970s. Only monetary stimulus—that is, cutting interest rates—was thought to matter. But now rates have been brought so low that they do far less than hoped. And in truth there has been a growing recognition that monetary policy is not by itself adequate to assure a strong economy. Meantime, a “new” Keynesianism developed among some but by no means all mainstream economists, who support the view that modest government stimulus is sensible. But this general approach is a pallid version of the original and still holds, I think too strongly, that reducing deficits is necessary to assure adequate savings.

We need not go back to the Great Depression to understand the dangers of austerity and deficit mania. In our own time, the abysmal performance of austerity-bound European economies have demonstrated the same problem. Take the case of Britain. After the recent global economic crisis, David Cameron, Britain’s Conservative Prime Minister, and George Osborne, his absurdly overconfident chancellor of the Exchequer, repudiated Keynes’ central insight. Two years ago, with the British economy just coming out of recession, these men raised taxes and cut social spending in order to reduce the British deficit and, they claimed, enable newly confident businesses to use all that savings to invest and re-charge the economy. It was pure anti-Keynesianism. The chancellor promised that the budget deficit would fall nicely as a percent of gross domestic product. Thus, a path would be cleared for more capital investment by otherwise “crowded out” private companies.
None of that has come close to happening. Britain is now probably entering its third recession since 2009. With such slow growth, tax revenue is dismal, and the country’s deficit, excluding interest payments, remains the highest, by percentage of GDP, of any European nation. And what of all that promised investment that was predicted? Not only did a chunk of new savings fail to materialize, capital injections in the economy have been weak...
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These policies are an appalling intellectual failure. Yet our current leaders in Washington seem unable to learn this lesson, even in the face of such stark examples of Britain and other European countries. Though he backed the stimulus in early 2009, Barack Obama had already displayed a sympathy for deficit reduction policies before he took office, and he subsequently appointed the Bowles-Simpson commission to suggest ways to balance the budget as soon as possible. He did not accept their proposals, but the austerity advocates quickly gained the upper hand.
Many may wonder why it is so easy to renounce the remarkable Keynes. In part, it is because he so deeply challenged Smith’s Invisible Hand itself, that almost religiously held principle that markets themselves are self-adjusting as prices change to make demand and supply equal.

We all know that austerity economics rules in Europe, but it also rules in the US where the damage done will be considerable if less obvious. Even policymakers who are sympathetic to Keynesianism for the most part propose only moderate stimulus. As a result of Washington’s refusal to raise taxes to cut deficits, the government will not invest adequately in infrastructure, green technologies, public research, pre-k education, and in many other areas of critical need—all in order to meet spurious deficit cutting goals. It also finds expression in a greater willingness to cut needed programs, mostly for the poor, who will suffer as a result....

The economy would have been significantly stronger already had there been not been $1.5 trillion in earlier budget cuts. And it may yet improve once we digest the latest round of cuts. But let’s not mistakenly attribute future improvement in the economy to austerity policies. It will be in spite of them.