NCPA - National Center for Policy Analysis

Candidates Criticize Keynesianism At The Federal Reserve

September 1, 1999

For 50 years, the theories of John Maynard Keynes dominated economic thinking. One of the pillars of Keynesianism is the Phillips Curve, which shows a trade-off between inflation and unemployment. Low unemployment leads to high inflation, and high unemployment reduces inflation.

In the 1970s, Keynesians could neither explain nor prescribe any solution to the problem of simultaneously rising inflation and unemployment. This led to a reassertion of neoclassical economics.

Unfortunately, Keynesian theories are still alive and well at the Federal Reserve and in the bond market. Ever since the unemployment rate broke the 5 percent barrier in May 1997, the neo-Keynesians have been expecting another burst of inflation. The Keynesians in the bond market have now pressured the Federal Open Market Committee to raise interest rates by 50 basis points (one half of a percentage point).

It is appropriate for presidential candidates to spell out their thoughts about monetary policy.

  • Last week, Steve Forbes blasted the Fed's latest tightening move as based on a "flawed and disproven theory that prosperity causes inflation" (i.e., the Phillips Curve). Deflation, he said, "is far more of a danger, as any American farmer can tell you."
  • On Saturday, Dan Quayle criticized Fed Chairman Alan Greenspan for suggesting that if stock prices go too high this could also trigger further Fed tightening.
  • George W. Bush, on the other hand, voiced support for the Fed's latest action and reiterated a desire to reappoint Greenspan to another term as Fed chairman.
  • And Al Gore and Bill Bradley had no comment.

This argument may seem esoteric to the Washington press corps, which is intent on making campaign finance reform and gun control the major issues in the presidential race. But commodity prices rise and fall on Fed actions, and lately prices have been very weak indeed.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, September 1, 1999.


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