The Dangers of Misrepresenting Past Economic Debates

“What’s past is prologue,” says Future, the statue at the National Archives. But in macroeconomic policy—monetary and fiscal—the past is often misrepresented, and that unfortunately leads Future astray.  A common misrepresention these days pertains to past views of economists about monetary and fiscal policy. Consider David Frum’s recent opinion piece for NPR’s Marketplace Radio claiming that “The Great Recession has changed the way many conservatives talk about economic policy.” I don’t see the kind of change Frum and others claim has taken place.

Frum says that in the past “Liberals favored active government measures: government spending to fight recessions, tax increases to curtail inflation. Conservatives by contrast preferred monetary instruments: raise interest rates to stop inflation, loosen money during recessions.” And because many conservatives are now against the monetary activism of the Fed, they have “changed their minds,” says Frum.

But nowhere in his piece does Frum refer to the major distinction between liberals and conservatives in economic policy: liberals prefer active interventionist policy and conservatives prefer predictable rule-like policy. At least since the macroeconomic debates began in Washington in the 1960s, this has been the major difference. Consider two of the most influential policy documents published in the 1960s: The 1962 Economic Report of the President, largely authored by James Tobin, who was recruited by Paul Samuelson to go to Washington, and Capitalism and Freedom authored by Milton Friedman and published that same year. The Report made the case for macroeconomic activism—both monetary and fiscal. Capitalism and Freedom made the case for rules and less discretion—both monetary and fiscal, and argued strongly for less interventionist policies. Earlier Friedrich Hayek was making the same conservative arguments against Keynesian activism when Keynes himself was on the other side.

And this is exactly what conservative are saying now. Stop all the interventions—the short-term discretionary fiscal stimulus packages and the massive quantitative easings and the operation twists of monetary policy. The unpredictability caused by these policies is causing uncertainty and holding the recovery back. Instead put in place more permanent reforms which will create economic recovery and return the economy to the kind of performance we saw in the 1980s and 1990s.

So conservatives have not changed their minds, at least not in the way Frum claims. He may believe, as he says in his piece, that “conservatives have little useful to say.” But when rules-based, less intervnetionist policies were followed we saw good economic preformance as in the 1980s and 1990s.

This entry was posted in Regulatory Policy. Bookmark the permalink.