All hail Keynes. That’s the message in President Barack Obama’s decision to nominate Janet Yellen, Peter Diamond, and Sarah Bloom Raskin to fill vacancies at the Federal Reserve. This trio makes sense only if you believe the philosophy of the most influential economist of the modern era, John Maynard Keynes.
What makes them odd choices is that the events of the past five years don’t make Keynes look good. Other schools of economic thought come to mind instead. One is the public choice school, which holds that Keynesianism uses crises as pretext to enlarge governments.
Recent history also validates Austrian economics. This camp asserts that government involvement in markets is inherently dangerous. Austrians were among the first to warn that the hybrid status of government sponsored enterprises like Fannie Mae and Freddie Mac could lead to disaster.
The Austrian school says that government doesn’t have to be the only creator of currency, an idea that seems at least plausible in the era of PayPal. These economists assert that monetary authorities often push interest rates too low, causing distortions that lead to violent economic crashes.
How did we get here? In the 1930s Keynes introduced the idea that a government’s relationship to a nation’s economy should be like that of a mechanic working on a car. The mechanic is performing constant tune-ups on the engine, always weighing trade-offs. When parts break down, the decision is whether to tinker or replace them. Too much oil, and the car fails; too little, and the engine freezes. Master Mechanics . . .
Today the Fed is deeply divided between those who would feed the economic engine a large amount of Keynesian oil and those who would use slightly less. Among those who have favored restraint is Richard Fisher, president of the Dallas Fed, who warned a few years ago that loose money can cause inflation. It’s “like kudzu, requiring near toxic doses of counter measures to overcome,” he said.
Keynes pushed his ideas to challenge the orthodoxy of classical economics. Now Keynesian orthodoxy is the rule throughout Washington. It even dominates our universities, leaving non-Keynesians with only a few redoubts such as the University of Chicago and George Mason University. Yet our society prides itself on its intellectual diversity.
Asking Democrats to give up Keynesianism is like getting suburbanites to stop driving SUVs. But Republicans aren’t much better. Most of them have been steeped in these ideas and don’t seem interested in fresh thinking.