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Keynes Is Passe: Both Parties Say Goodbye To His Stimulus Concept

By James C. Miller III President Nixon once said, "We're all Keynesians now, " meaning that politicians had learned a lot from economists, including John Maynard Keynes. Liberal wags announced the intellectual debate over. Keynes had won, they said. Not so fast. Yes, Lord Keynes was a bright fellow who made important public contributions. He tried to salvage the post-World War I European economies, and he helped to orchestrate the post-World War II Bretton Woods agreement, which contributed enormously to the economic expansion of victors and vanquished alike. But it was his musing about a "general theory of employment, interest and money" that made him a household name. Other economists, especially some in the U.S., embraced his theory, using it to justify a large role for government. To the problem of recession or depression, they answered: Prime the pump, increase government spending. Later, pump-priming took the form of tax cuts, as in the initiative launched by President Kennedy (although it has become increasingly evident that he did this more for what are now called supply-side reasons). The domination of Keynesian fiscal policy reached its zenith during President Johnson's administration, with the ascension of Gardner Ackley to the chairmanship of the Council of Economic Advisers. By then, it was presumed by almost every professional economist that the way to ensure full employment was through demand management, and that the way to accomplish this was through fiscal policy. Monetary policy was presumed to be of little use, and was largely ignored. Then, over the next decade or so, there was an interesting and altogether unexpected development. Researchers, led most importantly by the research shop at the Federal Reserve Bank of St. Louis, began testing the relative effectiveness of fiscal policy vs. monetary policy and found the latter quicker and far more predictable in its effects on aggregate demand. In a rough-and-ready way, this was a debate over monetarism vs. Keynesianism, and monetarism won. The supply-side revolution, which emphasizes the need to maintain low tax rates and small government and pursue stable monetary policies to promote economic growth and maintain full employment, has carried the day. Notice that the Bush tax cut is being supported and opposed primarily as a moral matter. "It's not right for the government to keep so much of your money" - and "No one should have to give the government more than one-third of their income" - are mantras of its proponents. Opponents say it would "cost too much" and that it would "buy a Lexus for the millionaire, but just a muffler for the working person." Because of recent adverse economic news - last month Federal Reserve Chairman Alan Greenspan suggested the economy is probably at a standstill - some argue that an immediate tax cut is needed to stimulate the economy. But note, this debate is not really being framed in Keynesian terms. While Treasury Secretary Paul O'Neill has argued for putting "money into the hands of Americans quickly," this should not be considered evidence of a "revival of Keynesianism," as argued by Washington Post columnist Sebastian Mallaby. The real argument for making the tax cut immediate rests on history: The tax cut must avoid what happened with the Reagan tax cuts in the early 1980s, where the delay in their implementation caused people to shift taxable income to the future, making the recession more acute than it would have been otherwise. Cutting taxes immediately to increase confidence in the future, and thereby promote consumption and new investment, is an argument properly characterized as supply-side. Opponents fall back on their "can't afford" rhetoric. According to New York Times economics columnist Paul Krugman, "claims that tax cuts can be accelerated without reducing our soon-to-be-gone budget surplus are disingenuous." This may or may not be true, but it hardly qualifies as a demand-side argument. No longer is the debate over pump-priming. Gone are proposals for countercyclical spending increases and one-shot injections of consumer purchasing power - such as Sen. George McGovern 's offer to give everyone a cash grant, a notion revived under President Carter by Charles Schultze, then CEA chairman. If this intellectual turnaround seems a little breathtaking, keep in mind that it is breathtaking to professional economists as well. Once the staple of any course in macroeconomics, Keynesianism is now all but abandoned. We should not let deficiencies in Keynes ' general theory and what it spawned blind us to his important contributions. But the idea that made him a household name, "fiscal stimulus," is no longer taken seriously by either political party. James C. Miller III is a former director of the Office of Management and Budget. He is now counselor to Citizens for a Sound Economy Foundation, a market-based public policy organization in Washington, D.C.

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Keynes Is Passe: Both Parties Say Goodbye To His Stimulus Concept

By James C. Miller III President Nixon once said, "We're all Keynesians now, " meaning that politicians had learned a lot from economists, including John Maynard Keynes. Liberal wags announced the intellectual debate over. Keynes had won, they said. Not so fast. Yes, Lord Keynes was a bright fellow who made important public contributions. He tried to salvage the post-World War I European economies, and he helped to orchestrate the post-World War II Bretton Woods agreement, which contributed enormously to the economic expansion of victors and vanquished alike. But it was his musing about a "general theory of employment, interest and money" that made him a household name. Other economists, especially some in the U.S., embraced his theory, using it to justify a large role for government. To the problem of recession or depression, they answered: Prime the pump, increase government spending. Later, pump-priming took the form of tax cuts, as in the initiative launched by President Kennedy (although it has become increasingly evident that he did this more for what are now called supply-side reasons). The domination of Keynesian fiscal policy reached its zenith during President Johnson's administration, with the ascension of Gardner Ackley to the chairmanship of the Council of Economic Advisers. By then, it was presumed by almost every professional economist that the way to ensure full employment was through demand management, and that the way to accomplish this was through fiscal policy. Monetary policy was presumed to be of little use, and was largely ignored. Then, over the next decade or so, there was an interesting and altogether unexpected development. Researchers, led most importantly by the research shop at the Federal Reserve Bank of St. Louis, began testing the relative effectiveness of fiscal policy vs. monetary policy and found the latter quicker and far more predictable in its effects on aggregate demand. In a rough-and-ready way, this was a debate over monetarism vs. Keynesianism, and monetarism won. The supply-side revolution, which emphasizes the need to maintain low tax rates and small government and pursue stable monetary policies to promote economic growth and maintain full employment, has carried the day. Notice that the Bush tax cut is being supported and opposed primarily as a moral matter. "It's not right for the government to keep so much of your money" - and "No one should have to give the government more than one-third of their income" - are mantras of its proponents. Opponents say it would "cost too much" and that it would "buy a Lexus for the millionaire, but just a muffler for the working person." Because of recent adverse economic news - last month Federal Reserve Chairman Alan Greenspan suggested the economy is probably at a standstill - some argue that an immediate tax cut is needed to stimulate the economy. But note, this debate is not really being framed in Keynesian terms. While Treasury Secretary Paul O'Neill has argued for putting "money into the hands of Americans quickly," this should not be considered evidence of a "revival of Keynesianism," as argued by Washington Post columnist Sebastian Mallaby. The real argument for making the tax cut immediate rests on history: The tax cut must avoid what happened with the Reagan tax cuts in the early 1980s, where the delay in their implementation caused people to shift taxable income to the future, making the recession more acute than it would have been otherwise. Cutting taxes immediately to increase confidence in the future, and thereby promote consumption and new investment, is an argument properly characterized as supply-side. Opponents fall back on their "can't afford" rhetoric. According to New York Times economics columnist Paul Krugman, "claims that tax cuts can be accelerated without reducing our soon-to-be-gone budget surplus are disingenuous." This may or may not be true, but it hardly qualifies as a demand-side argument. No longer is the debate over pump-priming. Gone are proposals for countercyclical spending increases and one-shot injections of consumer purchasing power - such as Sen. George McGovern 's offer to give everyone a cash grant, a notion revived under President Carter by Charles Schultze, then CEA chairman. If this intellectual turnaround seems a little breathtaking, keep in mind that it is breathtaking to professional economists as well. Once the staple of any course in macroeconomics, Keynesianism is now all but abandoned. We should not let deficiencies in Keynes ' general theory and what it spawned blind us to his important contributions. But the idea that made him a household name, "fiscal stimulus," is no longer taken seriously by either political party. James C. Miller III is a former director of the Office of Management and Budget. He is now counselor to Citizens for a Sound Economy Foundation, a market-based public policy organization in Washington, D.C.

02/22/2001
Who Let the Bears Out?

ORGANIZATION: Citizens for a Sound Economy Foundation - hosts a Policy Watch luncheon, featuring, "Who Let the Bears Out? Perspectives on a New SEC and the Fate of Financial Markets." TIME: 12 noon LOCATION: 2128 Rayburn House Office Building CONTACT: Paul Hilliar, 202-942-7658, or philliar@cse.org PARTICIPANTS: Laura Unger, commissioner, Securities and Exchange Commission (SEC); Matt Andresen, CEO, Island ENC; Jerry Ellig, senior research fellow, CSE; and Gregory Smith, senior analyst, J.P. Morgan H&Q TYPE: Luncheon

http://d7.freedomworks.org.s3.amazonaws.com/styles/thumbnail/s3/te_social_media_share/fw_default_0.jpg?itok=mX_C44GW

Who Let the Bears Out?

ORGANIZATION: Citizens for a Sound Economy Foundation - hosts a Policy Watch luncheon, featuring, "Who Let the Bears Out? Perspectives on a New SEC and the Fate of Financial Markets." TIME: 12 noon LOCATION: 2128 Rayburn House Office Building CONTACT: Paul Hilliar, 202-942-7658, or philliar@cse.org PARTICIPANTS: Laura Unger, commissioner, Securities and Exchange Commission (SEC); Matt Andresen, CEO, Island ENC; Jerry Ellig, senior research fellow, CSE; and Gregory Smith, senior analyst, J.P. Morgan H&Q TYPE: Luncheon

02/21/2001
Luncheon

EVENT: LUNCHEON - CITIZENS FOR A SOUND ECONOMY FOUNDATION TIME: 12:on noon SUBJECT: Citizens for a Sound Economy Foundation hosts a Policy Watch luncheon, featuring, "Who Let the Bears Out? Perspectives on a New SEC and the Fate of Financial Markets." Laura Unger, commissioner, Securities and Exchange Commission (SEC); Matt Andresen, CEO, Island ENC; Jerry Ellig, senior research fellow, CSE; and Gregory Smith, senior analyst, J.P. Morgan H&Q 2128 Rayburn House Office Building -- February 21, 2001

http://d7.freedomworks.org.s3.amazonaws.com/styles/thumbnail/s3/te_social_media_share/fw_default_0.jpg?itok=mX_C44GW

Luncheon

EVENT: LUNCHEON - CITIZENS FOR A SOUND ECONOMY FOUNDATION TIME: 12:on noon SUBJECT: Citizens for a Sound Economy Foundation hosts a Policy Watch luncheon, featuring, "Who Let the Bears Out? Perspectives on a New SEC and the Fate of Financial Markets." Laura Unger, commissioner, Securities and Exchange Commission (SEC); Matt Andresen, CEO, Island ENC; Jerry Ellig, senior research fellow, CSE; and Gregory Smith, senior analyst, J.P. Morgan H&Q 2128 Rayburn House Office Building -- February 21, 2001

02/21/2001
CSE Foundation Panel Explores SEC Agenda and Electronic Communications Networks

Washington, D.C. - Citizens for a Sound Economy Foundation hosted a Policy Watch panel, "Who Let the Bears Out? Persepectives on a New SEC and the Fate of Financial Markets" on February 21, 2001. Expert panelists included Joe Lombard, Senior Counsel to former SEC Chairman Arthur Levitt, Matt Andresen, CEO of Island Electronic Communications Network, Gregory Smith, Financial Analyst with JP Morgan H & Q, and CSE Foundation's Research Fellow, Jerry Ellig. The panel delved into such areas as electronic communications networks and the future agenda of the SEC, and how these two items will affect the stability and prosperity of our financial markets.

http://d7.freedomworks.org.s3.amazonaws.com/styles/thumbnail/s3/te_social_media_share/fw_default_0.jpg?itok=mX_C44GW
Press Release

CSE Foundation Panel Explores SEC Agenda and Electronic Communications Networks

Washington, D.C. - Citizens for a Sound Economy Foundation hosted a Policy Watch panel, "Who Let the Bears Out? Persepectives on a New SEC and the Fate of Financial Markets" on February 21, 2001. Expert panelists included Joe Lombard, Senior Counsel to former SEC Chairman Arthur Levitt, Matt Andresen, CEO of Island Electronic Communications Network, Gregory Smith, Financial Analyst with JP Morgan H & Q, and CSE Foundation's Research Fellow, Jerry Ellig. The panel delved into such areas as electronic communications networks and the future agenda of the SEC, and how these two items will affect the stability and prosperity of our financial markets.

02/21/2001
Who Let the Bears Out?

Citizens for a Sound Economy Foundation Invites you to attend a Policy Watch luncheon Who Let the Bears Out? Perspectives on a New SEC and the Fate of Financial Markets Featuring: Honorable Laura Unger Commissioner Securities and Exchange Commission Matt Andresen CEO Island ECN Dr. Jerry Ellig Senior Research Fellow Citizens for a Sound Economy Foundation Gregory Smith Senior Analyst JP Morgan H & Q

http://d7.freedomworks.org.s3.amazonaws.com/styles/thumbnail/s3/te_social_media_share/fw_default_0.jpg?itok=mX_C44GW
Press Release

Who Let the Bears Out?

Citizens for a Sound Economy Foundation Invites you to attend a Policy Watch luncheon Who Let the Bears Out? Perspectives on a New SEC and the Fate of Financial Markets Featuring: Honorable Laura Unger Commissioner Securities and Exchange Commission Matt Andresen CEO Island ECN Dr. Jerry Ellig Senior Research Fellow Citizens for a Sound Economy Foundation Gregory Smith Senior Analyst JP Morgan H & Q

02/21/2001
The People Speak Again: Washington CSE Conducts Second Annual CSE Day at the Capitol

"Several hundred people, most members of a conservative group called Washington Citizens for a Sound Economy, buttonholed their legislators Monday with a plea for smaller, cheaper, less restrictive state government." - Associated Press

http://d7.freedomworks.org.s3.amazonaws.com/styles/thumbnail/s3/te_social_media_share/fw_default_0.jpg?itok=mX_C44GW
Press Release

The People Speak Again: Washington CSE Conducts Second Annual CSE Day at the Capitol

"Several hundred people, most members of a conservative group called Washington Citizens for a Sound Economy, buttonholed their legislators Monday with a plea for smaller, cheaper, less restrictive state government." - Associated Press

02/21/2001
We Can Afford a Much Bigger Tax Cut

Copley News Service, 02/21/2001 WASHINGTON — Circumstances have changed dramatically since President Bush first proposed his tax cut last year. The economy has slowed down, with recession a distinct possibility. But in the long term, official budget surplus projections have risen from $3 trillion to almost $6 trillion.

http://d7.freedomworks.org.s3.amazonaws.com/styles/thumbnail/s3/te_social_media_share/fw_default_0.jpg?itok=mX_C44GW
Press Release

We Can Afford a Much Bigger Tax Cut

Copley News Service, 02/21/2001 WASHINGTON — Circumstances have changed dramatically since President Bush first proposed his tax cut last year. The economy has slowed down, with recession a distinct possibility. But in the long term, official budget surplus projections have risen from $3 trillion to almost $6 trillion.

02/21/2001
National Manufactured Housing Group Joins Alliance Seeking to End U.S./Canada Softwood Lumber Agreement

The Manufactured Housing Association for Regulatory Reform (MHARR), which represents 40-plus small and medium producers of manufactured homes throughout the United States, has joined the American Consumers for Affordable Homes (ACAH), an ad-hoc alliance of 15 consumer groups, trade organizations and companies that represent more than 95 percent of softwood lumber consumption in the U.S. MHARR focuses on regulatory issues that impact the manufactured housing industry. ACAH supports an end to the U.S.-Canada Softwood Lumber Agreement of 1996 (SLA) when it expires on April 1. The SLA restricts lumber shipments from Canada to the United States. "This misguided agreement has done damage to producers and increased costs to consumers of manufactured housing," said Danny D. Ghorbani, president and CEO, MHARR. "The restrictions the SLA places on softwood lumber coming into the United States is increasing prices of manufactured homes and keeping prospective buyers from purchasing a home," Ghorbani continued. "Many of these families are the young, elderly, and people trying to purchase their first home or one for retirement. While the SLA benefits a few special interests, it clearly is depriving too many people from the American Dream of home ownership." Ghorbani urged the government to allow the SLA to expire without any new agreement. "It has out-lived its usefulness," he charged. "This country thrives on free trade which creates more jobs and allows more people to benefit from a strong economy." Free trade with our neighbors in Canada should be our highest priority; free trade in products such as lumber is important to our economy." Other members of the ACAH include: Abitibi Consolidated Sales Corporation, CHEP USA, Citizens for a Sound Economy, Consumers for World Trade, Free Trade Lumber Council, Home Depot, International Mass Retail Association, Leggett & Platt Inc., Manufactured Housing Institute, National Association of Home Builders, National Black Chamber of Commerce, National Lumber and Building Material Dealers Association, National Retail Federation, and the United States Hispanic Contractors Association.

http://d7.freedomworks.org.s3.amazonaws.com/styles/thumbnail/s3/te_social_media_share/fw_default_0.jpg?itok=mX_C44GW

National Manufactured Housing Group Joins Alliance Seeking to End U.S./Canada Softwood Lumber Agreement

The Manufactured Housing Association for Regulatory Reform (MHARR), which represents 40-plus small and medium producers of manufactured homes throughout the United States, has joined the American Consumers for Affordable Homes (ACAH), an ad-hoc alliance of 15 consumer groups, trade organizations and companies that represent more than 95 percent of softwood lumber consumption in the U.S. MHARR focuses on regulatory issues that impact the manufactured housing industry. ACAH supports an end to the U.S.-Canada Softwood Lumber Agreement of 1996 (SLA) when it expires on April 1. The SLA restricts lumber shipments from Canada to the United States. "This misguided agreement has done damage to producers and increased costs to consumers of manufactured housing," said Danny D. Ghorbani, president and CEO, MHARR. "The restrictions the SLA places on softwood lumber coming into the United States is increasing prices of manufactured homes and keeping prospective buyers from purchasing a home," Ghorbani continued. "Many of these families are the young, elderly, and people trying to purchase their first home or one for retirement. While the SLA benefits a few special interests, it clearly is depriving too many people from the American Dream of home ownership." Ghorbani urged the government to allow the SLA to expire without any new agreement. "It has out-lived its usefulness," he charged. "This country thrives on free trade which creates more jobs and allows more people to benefit from a strong economy." Free trade with our neighbors in Canada should be our highest priority; free trade in products such as lumber is important to our economy." Other members of the ACAH include: Abitibi Consolidated Sales Corporation, CHEP USA, Citizens for a Sound Economy, Consumers for World Trade, Free Trade Lumber Council, Home Depot, International Mass Retail Association, Leggett & Platt Inc., Manufactured Housing Institute, National Association of Home Builders, National Black Chamber of Commerce, National Lumber and Building Material Dealers Association, National Retail Federation, and the United States Hispanic Contractors Association.

02/20/2001
Legislature: Democracy Showcased in Olympia

OLYMPIA -- By the calendar, Monday was Presidents Day. But it was the people 's day, no question. And rarely has democracy flashed its colors so boldly as it did on this sunny, daylong parade of political dissonance. Activists swarmed the Legislature on Monday, delivering the same mixed message issued by Washington voters in recent years: Cut our taxes and red tape but not at the expense of state services or pay.

http://d7.freedomworks.org.s3.amazonaws.com/styles/thumbnail/s3/te_social_media_share/fw_default_0.jpg?itok=mX_C44GW

Legislature: Democracy Showcased in Olympia

BY Howard Buck

OLYMPIA -- By the calendar, Monday was Presidents Day. But it was the people 's day, no question. And rarely has democracy flashed its colors so boldly as it did on this sunny, daylong parade of political dissonance. Activists swarmed the Legislature on Monday, delivering the same mixed message issued by Washington voters in recent years: Cut our taxes and red tape but not at the expense of state services or pay.

02/20/2001
Bush, GOP Launch Coordinated Effort To Promote Tax Cuts

USA Today (2/20, Keen, Weisman) reports, "President Bush, who has admitted he has 'a lot of work to do' to sell his $1.6 trillion, 10-year tax- cut plan, hits the road this week to try to build support." Bush "is counting on help from the Republican National Committee and conservative and business groups. In the works: Tuesday in St. Louis, Bush will introduce 'tax families' who would save money under his plan. He used the same approach during the campaign and in a White House event two weeks ago. On Feb. 27, Bush will promote his proposal in a speech to a joint session of Congress." Vice President Cheney's "schedule includes time for interviews with reporters from local newspapers and TV and radio stations to promote the tax cut. The Republican National Committee is hosting online chats and taping dozens of TV and radio interviews daily with GOP proponents of tax cuts. And Bush aides have asked Republican lawmakers to hold 'tax events' promoting Bush's plan in their districts." USA adds, "Some conservative groups are encouraging their members to side with Bush. Americans for Tax Reform is asking Republican- controlled legislatures in 20 states to pass resolutions endorsing Bush's plan. The Michigan House has already passed one." USA also reports, "Business groups met Friday to form a coalition that will push the Bush plan through lobbying, outreach to their members and possibly an advertising campaign. Participants include the US Chamber of Commerce, the National Association of Manufacturers, the National Association of Wholesaler-Distributors and the National Federation of Independent Business." The AP (2/20) reports, "Amid congressional doubts about his tax-cut plan, President Bush is hitting the road to rally public support for the proposal and the education reforms that are high among his budget priorities." Bush "hopes to curry support among Americans who polls say are in favor of reducing taxes but do not want those reductions to come at the expense of popular government programs such as aid to education and debt reduction." US News and World Report (2/26, Walsh) reports, "This week, the Rove Plan, as it is referred to by staffers, has Bush visiting with families of Oklahoma City bombing victims, and, once again, emphasizing tax cuts and education reform."

http://d7.freedomworks.org.s3.amazonaws.com/styles/thumbnail/s3/te_social_media_share/fw_default_0.jpg?itok=mX_C44GW

Bush, GOP Launch Coordinated Effort To Promote Tax Cuts

USA Today (2/20, Keen, Weisman) reports, "President Bush, who has admitted he has 'a lot of work to do' to sell his $1.6 trillion, 10-year tax- cut plan, hits the road this week to try to build support." Bush "is counting on help from the Republican National Committee and conservative and business groups. In the works: Tuesday in St. Louis, Bush will introduce 'tax families' who would save money under his plan. He used the same approach during the campaign and in a White House event two weeks ago. On Feb. 27, Bush will promote his proposal in a speech to a joint session of Congress." Vice President Cheney's "schedule includes time for interviews with reporters from local newspapers and TV and radio stations to promote the tax cut. The Republican National Committee is hosting online chats and taping dozens of TV and radio interviews daily with GOP proponents of tax cuts. And Bush aides have asked Republican lawmakers to hold 'tax events' promoting Bush's plan in their districts." USA adds, "Some conservative groups are encouraging their members to side with Bush. Americans for Tax Reform is asking Republican- controlled legislatures in 20 states to pass resolutions endorsing Bush's plan. The Michigan House has already passed one." USA also reports, "Business groups met Friday to form a coalition that will push the Bush plan through lobbying, outreach to their members and possibly an advertising campaign. Participants include the US Chamber of Commerce, the National Association of Manufacturers, the National Association of Wholesaler-Distributors and the National Federation of Independent Business." The AP (2/20) reports, "Amid congressional doubts about his tax-cut plan, President Bush is hitting the road to rally public support for the proposal and the education reforms that are high among his budget priorities." Bush "hopes to curry support among Americans who polls say are in favor of reducing taxes but do not want those reductions to come at the expense of popular government programs such as aid to education and debt reduction." US News and World Report (2/26, Walsh) reports, "This week, the Rove Plan, as it is referred to by staffers, has Bush visiting with families of Oklahoma City bombing victims, and, once again, emphasizing tax cuts and education reform."

02/20/2001

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