Sunday, March 22, 2009

Gary Becker Throws Keynes Under the Bus

In a fascinating interview, Nobel Prize economist Gary Becker tells WSJ's Mary Anastasia O'Grady that:

"Keynesianism was out of fashion for so long that we stopped investigating variables the Keynesians would look at such as the multiplier, and there is almost no evidence on what the multiplier would be." He thinks that the paper by Christina Romer, chairman of the Council of Economic Advisors, "saying that the multiplier is about one and a half [is] based on very weak, even nonexistent evidence." His guess? "I think it is a lot less than one. It gets higher in recessions and depressions so it's above zero now but significantly below one. I don't have a number, I haven't estimated it, but I think it would be well below one, let me put it that way."
Of course, the billions upon billions spent as a part of government "stimulus" packages is spent based on the nutty notion that the "multiplier" somehow: A. is greater than 1 and B. what the economy needs in a downturn is spending versus savings. Thank heavens for a little common sense from Becker on this point.

Another common sense gem from Becker:

Becker says that the market-clearing process, so important to recovery, is well underway. "Construction in new residential housing is way down and prices are way down. Maybe 25% down. Lower prices stimulate demand, reduced construction reduces supply."

That's the good news. But he complains about "counterproductive" government policies "designed to lower mortgage rates to stimulate demand." He says he was against the Bush Treasury's idea of capping mortgage rates (which was only floated) and he has "opposed the mortgage plan of President Obama." "It goes against both these adjustments . . . it would hold up prices and increase construction. I think that's a bad idea at this time.
Scarily, he supports the Friedmanite type move by the Fed to boost money reserves, which shows that even if you are a top flight economist like Becker, you can be amazingly blind to the economic distortions and ultimate inflationary consequences of huge money reserve increases, if you don't get the fact that the money supply should be fixed and never, ever changed.

Becker, thus, is correct by throwing Keynes under the bus, but he replaces the Keynesians' nutty proposals with the resurrection of the worst of Milton Friedman's generally solid thinking. Avoid Friedman's thinking on money, and also methodology, and you have a solid economist. It is his aggregative money theories that are dangerous, and Becker is rowing in the same inflationary boat.

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