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Dr. Dudley Salley is a professor of economics at Floyd College in Rome, Georgia, and a former Federal Reserve Bank economist.
All Op-Ed articles are the opinions of the authors and not of NABE.
Mr. Keynes, Mr. Greenspan, and the Bush II Recession
Recessions are bad, especially if you are the president. Like children, recessions get named after you. Kennedy certainly did not cause the "Kennedy" recession of 1960, nor Reagan, the 1980 -1982 record job loss attributed to him. Eisenhower begot two recessions, Ike I and Ike II. Likewise, the present slowdown probably will be called Bush II, since George Bush I presided over 1991's downturn. Recall the unkind slogan, "it's the economy, stupid".
To correct economic downturns, Mr. Keynes, the famous depression-era economist who also authored the postwar Bretton Woods international monetary system, prescribed government deficit spending. President Kennedy proved him right with a textbook policy recovery in the 1960's. Increased spending on NASA and the1964 tax cut led to full employment in 1965.
However, like all good things, fiscal deficits can lead to over indulgence. In the 1970's Chicago's Prof. Milton Friedman claimed the Nobel Prize for spotting deficit induced inflation as the virus responsible for the surprising 1974 -1975 devastation of everyone's net worth. By the 1980's, Reagan launched supply-side policies while standing before an alarming chart of growing federal deficits.
But in times without inflation, Keynes still seems to rule. Other things being equal, government deficits step on the economic gas and government surpluses step on the brakes. Check the record. Surpluses in 1947-48, 1956-57, balance in 1960, and surplus in 1969-all were followed by recessions. Mr. Keynes is batting 1.000.
Next, remember that in the inflationary confusion of 1974-75, Mr. Greenspan headed President Ford's ("whip inflation now") council of economic advisors. Like all good Keynesians at the time, he greeted the anomaly of fiscal deficits and unemployment with great surprise. While corporate executives blamed OPEC oil prices for the strange turn of events, Friedman blamed the Fed. The FOMC under Chairman Burns apparently bought too many Vietnam War bonds, keeping interest rates low and stoking the inflation.
After becoming Fed Chairman himself, an apparently reformed Mr. Greenspan announced annually that there is no longer a Keynesian (Phillips Curve) trade-off between inflation and unemployment. That is to say, the Fed can raise interest rates to reduce inflation without causing a recession. In fact with the indulgence of increased productivity as in the 1990's, the Fed does not even have to raise interest rates to contain inflation.
But last year with "exuberance" lurking on Wall Street, interest
rate increases seemed called for after all. The Fed Chief echoed Mr. Keynes'
admonition about "animal spirits" getting the best of investment
managers.
The great New Year's surprise, though, is not the FOMC's interest rate cuts
in the face of a weakening business cycle, but Mr. Greenspan's plug for a
tax cut-a fiscal policy measure. Suddenly it seems the Fed Chief has been
a closet Keynesian all along! It is not Fed interest rates that cause recession;
it is fiscal policy surpluses. Indeed, the record supports this argument.
The message appears to be "Cut taxes now, because it's the surplus stupid!"
Good advice. We should all learn so well from experience.
Agree? Or disagree? Let NABE know what you think. Suitable replies will be published
...in times without inflation, Keynes still seems to rule...
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