Will Keynes Return by Popular Demand?

Article excerpt

IS a "Keynes boomlet" ahead?

Robert Kuttner, co-editor of The American Prospect, a left-of-center quarterly magazine, argues in his latest issue that persistent high unemployment in most industrial nations and a second volume of Robert Skidelsky's biography of John Maynard Keynes will revive interest in the famed British economist.

Will Hutton, economics editor at the Guardian, a British newspaper, takes a crack at the same topic in an article titled, "Back by Popular Demand." He writes: "The recent experiment in free market economics whose falsities Keynes exposed has not proved notably successful. As our economies have become more marketized, growth has slowed and unemployment has risen."

Mr. Hutton's article freshens memories of the economic debates in the 1950s, 1960s, and early 1970s, when "neo-Keynesians" and "neoclassicists" - two schools of economists - hotly debated government's role in managing the economy. Milton Friedman, then at the University of Chicago, led the neoclassicists. Paul Samuelson, a Massachusetts Institute of Technology professor, led the neo-Keynesians.

Simplifying complex theories, the neo-Keynesians urged governments to use federal tax and spending policies to manage the business cycle. When United States' manpower and machinery were underutilized, Washington should use fiscal policy to lift the economy out of its slump, they said. The problem was that politicians enjoyed passing tax cuts and extra outlays in a recession, but were reluctant to boost taxes and restrain spending in an inflationary boom.

(There was an echo of this controversy last year when the Clinton administration proposed $30 billion of economic stimulation. Congress didn't pass the measure.)

In the area of monetary policy, neo-Keynesians gave prime attention to interest-rate trends.

Dr. Friedman held that typically both fiscal and monetary policy have been pro-cyclical rather than anti-cyclical. Because it takes so long for Congress to act, legislative measures usually worsened recessions and heightened booms. The Federal Reserve, not knowing accurately the status of the business cycle when it shifted policy, did the same. …