Policy Making
8. The mixed advice of economists

Another hurdle on the way to (instrumentally) rational economic policy is that the advice of economists is not always unanimous. No surprise. Economists, even rational choice theorists, disagree about how effective various economic policies are. It is up to the politicians to decide whose advice to take. As the Chicago economist and Nobel Laureate George Stigler argued, it is sometimes a matter of demand determining supply: policy makers demand a certain piece of advice (e.g. cut taxes), and then go out and find some group of economists to supply it. No need to pay the preacher when you've got an ample supply of technocrats ready, willing, and able to dress up a personal prejudice in scientific clothing.

Yet debate is ubiquitous. In many ways policy issues dominate the discussion among economists. Whether the problem is inflation, unemployment, instability at home or abroad, or economic growth, the question is always: What can the government do about it? The answers are, as we have seen, far from open and shut, since they depend on how much faith one has in markets. Here we encounter what are now familiar disagreements between the monetarists, libertarians, and new classicals on one side and Keynesians, Post Keynesians, feminists, Institutionalists, and Marxians on the other.

McCloskey: Yes, we, the monetarists, libertarians, and new classicals, are free-marketeers. Like Milton Friedman and Robert Lucas, I have faith in the invisible hand of free markets and am opposed to active government intervention. My advice to the President and the Fed would generally be: do nothing, keep your hands off the levers of fiscal and monetary policy.

Klamer: As a Keynesian, I wholeheartedly disagree. Fiscal policies can turn the economy around. So can a monetary policy that focuses on interest rates. Institutional policies can be effective: I'm thinking of measures like training programs for the unemployed, educational programs to improve skills and opportunities overall, subsidies for critical industries, support for technological development, and control of exchange rates. I may even go further than many fellow Keynesians in endorsing wage and price controls in case the wage-price spiral gets out of hand.

Ziliak: Free markets are great when they accomplish what we value-which happens about 80 percent of the time in our personal and collective lives. But to left-libertarians like me, who think the best vision of the promised land is described by King's Beloved Community-a world characterized not only by low and stable rates of inflation but also by love, freedom, dignity, ownership, human flourishing, and racial and religious justice and peace-is not possible without some institutional and fiscal policies. Those policies range from sustainable development of wildlife, public parks, and urban environments to first home loan subsidies for minorities and women; negative income taxes; and complementary social welfare programs, such as affirmative action and subsidized health care for the poor. In macro policy I sympathize with Post Keynesians. For example, I believe that the international financial scene is sufficiently volatile to warrant inter-governmental or inter-agency provision of welfare and lending of last resort in cases of national or international financial crisis. A government that allows hedge funds and other speculative instruments to debauch the currency of an entire nation is not doing its job of protecting the nation from alien invasion. It's engaging in box top robberies of the Boris and Natasha type.

Rodney: I like that.

Maria: Professor McCloskey, don't you also believe in having some kind of monetary policy?

McCloskey: In a constitutionally restricted sense, yes. The Federal Reserve should maintain a constant growth of money supply. In that sense I advocate a monetary policy. But it's an entirely passive policy. For all I care, the Fed can fire most of its staff, and its Federal Open Market Committee can cancel its regular meetings. There is no need for an activist monetary policy. It will not do any good and has on occasion (in the 1930s, 1970s, and 1990s, for example) done a lot of damage. But I agree with Steve: financial hackers should be stopped by the government.

Bayla: Professor Klamer, how can you believe that politicians can do the right thing? Politicians only pursue their own interest.

Klamer: Sure, the corruption and narrow-mindedness in politics are problems. Professors and students aren't perfect either. But we don't therefore shut down universities. Governments can do bad. But they have the power to do a great deal of good. I place my bet on the goodness.

McCloskey: That's a bet I want to be on the other side of.

Rodney: While Professor Ziliak splits the odds.

Ziliak: True. Overall my odds ratio is 4:1, in favor of markets. But notice that the government programs I advocate involve relatively little need for bureaucrats and other infrastructure. For example, a negative income tax can accomplish poverty alleviation with the completion of one simple line on a tax form, filed perhaps electronically.

Monetarists, libertarians, and new classical economists say that markets will solve both micro and macroeconomic problems; governments will only make the problems worse.

Keynesian economists and a wide variety of heterodox economists, including left-libertarians say that markets generally work well but are imperfect and that the government can be the solution for both micro and macroeconomic problems.