In thrall to a long-dead experiment

By Patrick McIlheran

Milwaukee Journal Sentinel

We are all Keynesians now, Richard Nixon is said to have said. Too true, says Hunter Lewis, who's got a new book on how the famous British economist is still messing with your life.

And he is. We are all followers of John Maynard Keynes in the sense that lab rats, learning a maze by electric shocks, are disciples of some psychologist's theory. We no more benefit from this than do the rats.

Keynes, who died in 1946, is fashionable again. Politicians pray for his blessing on their stimulus plans, since Keynes preached that the way out of a slump was for government to spend lots of money. It should borrow vastly, said Keynes, and spend it on anything. He's the guy who first suggested paying some to dig ditches and others to refill them.

Nor just in slumps, said Keynes: Governments should print money, loads of it, to drive interest rates toward zero. This would cause a permanent boom, if only we also tax away money hoarded uselessly by rich people.

Sound familiar? Of course, says Lewis, who explains the doctrine precisely in "Where Keynes Went Wrong." Washington's embrace of Keynes went uninterrupted through Clinton to Bush to Obama. Fannie Mae's loose loans, the Fed's giveaway rates, bailouts, the porkulus: all Keynes, no matter the party.

How has that worked? "There's just no evidence" that this ever cured a recession, Lewis told me. Keynes "wasn't particular interested in evidence."

History suggests he should have been. Keynes was embraced by Franklin Roosevelt in the Depression; this stalled the mid-1930s recovery. Keynes' ideas in the 1970s led to stagflation. Japan stimulated crazily in the 1990s, giving itself the Lost Decades. The cure for the 2001 slump set up the 2008 crash.

Whereas recessions without stimulus - America in 1921, Southeast Asia in the 1990s - were sharp but swiftly over.

When governments pump stimulating rivers of money, they manipulate prices, the economy's gauges. By juking interest rates, the price of money, you're messing with the most critical gauge. The ensuing unreality leads to inflation, dot-com bubbles or foreclosed subdivisions. Stimulus is like curing a hangover with Thunderbird.

Lewis feels Keynesianism, an intellectual bubble, is nearing a pop, if only because Washington is running out of willing lenders. About time, he says. It has punished thrift and encouraged profligacy. It has led government to turn swaths of the economy into federal protectorates. "That's the single thing that worries me most," he said, the way bonds between government and business make the two indistinguishable. It sickens democracy.

Keynes wasn't a clear writer, says Lewis. He was self-contradictory: The solution to bad debt is more debt, for instance. The more you spend, the more you have. Deficits are a kind of savings. Lewis becomes grimly hilarious when he compiles the Keynesian paradoxes now being spouted. You realize our leaders aren't making sense.

Keynesians argue that it does make sense, only you rabble aren't equipped to comprehend. Keynes believed the economy couldn't be left up to rabble, who were ruled by "animal spirits." It had to be run by the wise - by people like him.

"He said, 'If things go too far in the wrong direction, I'll just step in and fix it,' " said Lewis. "Then he died."

We since have learned that governments are ruled by spirits as animal as anyone's, only with bigger paws. No one is so short-term as politicians, thinking of re-election and seduced by an urge to be in charge. This is why Keynesianism has triumphed among them, said Lewis: "It's a rationalization for policies that they'd like to pursue anyway."

So we all live in a $24 trillion experiment in whether, this time, stimulus will work. Two questions from one of the rats:

First, if the government rigs reality by messing with the value of money, how can we expect any other part of the economy to not be distorted and dishonest?

Second, if we abandon simple, comprehensible rules and rely on constant tinkering by wise leaders, what happens when we instead get leaders who, having done no work but rabble-rousing among Chicago's poor, have not the least clue about running an economy?

Revered, Keynes has no answer.

Patrick McIlheran is a Journal Sentinel editorial columnist. E-mail pmcilheran@journalsentinel.com

Bush can't be Keynesian supply-sider

The following appeared in the Sept. 23, 2007 issue of the St. Paul Pioneer Press and was written by Ed Lotterman. A link to the story may be found here.

It is too bad the Old Testament prophet Elijah never passed through Washington, D.C. His challenge to the Israelites in 1 Kings 18, "Choose ye this day whom ye will serve," is a powerful argument against holding two diametrically opposed positions at the same time. Unfortunately, that is a common occurrence in our nation's capital.

Confusion is evident in the White House response to Alan Greenspan's criticism of administration fiscal policies. Defending President Bush, Press Secretary Dana Perino said, "in late 2000, we were headed into a recession, and tax cuts were the prescribed remedy."

Perino is correct. Tax cuts are a prescribed remedy for a recession - if you are a Keynesian. But George W. Bush did not run for office as a Keynesian. He ran as a supply-sider. Supply-side economists are the most diametrically opposed to Keynes of any school of economic thought. The very name "supply-side" is a rejection of the demand-side jockeying John Maynard Keynes advocated.

Supply-side economists argued that trying to micro-manage an economy by manipulating consumer spending was short-sighted and counterproductive. Keynesian tromping of economic gas and brake pedals to regulate demand harms rather than hurts, they said.

Focus instead on the supply side of the economy, they argued. Reduce regulation of economic activity. Increase incentives for saving and investment. That means lowering high marginal income tax rates and taxes on investment earnings from interest, dividends and capital gains. The object is to increase investment. That requires more savings and, thus, less current consumption.

That was the platform on which George W. Bush ran for office in 2000 and was his rationale for tax cuts in 2001. But by the 2004 election, his arguments had changed. Cutting taxes was needed to spur household consumption. That is back to pure Keynesianism.

The problem is that if you cut taxes to spur demand because the economy faces recession, you have to raise them to curtail demand when it really gets rolling. That should have happened two years ago, but the administration showed no willingness to implement the other half of Keynes' prescription.

Just as ancient Israelites could follow Yahweh or Baal, you can be a Keynesian or a supply-sider. But you cannot be both.

Confused economic policy is not original to the Bush administration.

Jimmy Carter's economic advisers were dyed-in-the-wool Keynesians.

But the Carter White house never could decide if it needed to spur the economy to lower unemployment or retard it to cut inflation.

We ended up with the worst combination of both inflation and unemployment in decades.