Let’s talk about helicopter money. The idea here is that the Federal Reserve could print bank notes (let’s just call it money for clarity’s sake) and drop it out of helicopters where people could pick it up and spend it, thus stimulating the economy. It sounds like a crazy idea. But in our current economic environment, it would not lead to inflation. It would simply put unused workers and resources into service. On the other hand, if the economy were already working at full capacity, throwing money out of helicopters would create inflation.
I don’t pretend to understand money. I think it is a deeply mysterious thing. Economists would generally agree with that. It does have a large psychological component to it where money is worth what we all delude ourselves into thinking it means. The only thing that really ties it down is that we can pay our taxes with it. And that is a big deal. But it still leaves the value of money in a largely mythical land of shared delusion.
The reason I’ve brought this up is because over the weekend, Simon Wren-Lewis wrote, Fighting the Last War. The title is a reference to the old adage that generals are always fighting the last war. His point is not a new one. The truth is that much of the economics profession has never gotten over the success of explaining stagflation. This led to people jettisoning Keynesian theory as though it didn’t even have relevance to situations like the Great Depression, which it was mostly a reaction to.
What’s interesting about this is that it shows that economics really isn’t a science. In physics, both relativity theory and quantum mechanics reduce to Newtonian mechanics for normal (slow, macro-scale) motion. The embrace of Friedman and company and the rejection of Keynes just shows that economics acts more like ideology than science. How is it that rational expectations models don’t reduce to Keynesian models when applied to depressed economies? If I were an economist, I’d be ashamed.
But the practical question is how can economists and policy makers continue to hold onto their doctrines that worked for stagflation but not for depressions (or “secular stagnation” if you prefer). And I think the answer is now as always that it is all about ideology. In general, economists don’t like the government. Even pretty liberal people like Paul Krugman believe in a fairly limited role of government in the economy. So you end up with a situation where the most liberal economists are for fiscal stimulus, the moderates believe in monetary stimulus, and the conservatives think that even monetary policy is dangerous.
Note how skewed that is. The liberal economists are where the general public is. So we end up with a government where only monetary policy is acceptable — and even it not very much. Wren-Lewis suggests that the reason that we are stuck with this way of thinking is that we have the narrative of stagflation all wrong. It didn’t come from government profligacy but rather economic shocks. But I would counter that and say that it is looking for a rational explanation for irrational behavior.
Remember that Greg Mankiw was for government stimulus under Bush the Younger. Then, when Obama proposed it, he was against it. And then, after he became a consultant for Romney and it looked like Romney might be the next president, Mankiw again changed and was much more open to stimulus. There is no doubt that Mankiw is a brilliant economist. But he isn’t just looking at the facts. In fact, I would say he is never looking at the fact and moving forward. He makes a decision and works the facts backward.
Milton Friedman didn’t really revolutionize economic thinking. He was just an especially talented propagandist for a libertarian world view. That’s what he added to economics: a binding conclusion on economic thinking. But that makes Friedman like Roland Barthes and economics like postmodern analysis. And that’s fine! I think Barthes was brilliant. But no one ever made government policy based upon his analysis of soap detergent advertisements.
