Big Rate Cuts and Fiscal Stimulus Trump Conservative Ideology

By Mark Weisbrot, AlterNet. Posted January 22, 2008.

It was 1971 when Richard Nixon, a conservative, uttered the famous phrase "We are all Keynesians Now. " But there was a backlash soon to follow, with Ronald Reagan and Margaret Thatcher changing the world as perhaps no two other people did in the 20th century. Ronald Reagan's "supply-side economics" was never taken seriously in the economics profession -- even at the height of his influence there was barely a handful of economists that would lend their names to it. But the economics profession did, in its research at least, throw out many of the insights that had made John Maynard Keynes the most influential economist of the century.

Among these insights was Keynes' explanation that self-regulating markets would not necessarily fix an economy that had fallen into recession, so as to restore growth and full employment. And that government intervention could help do the job that markets could not. This was painfully clear in the middle of the Great Depression, when Keynes put forth the economic theory that became the basis not only of intro economics textbooks (subsequently diluted) but also our modern system of national income accounting. But just as the dogma of the middle ages buried some of what the ancients knew about astronomy, these insights were lost in a right-wing ideological ascendance that infected policy circles and debilitated the social sciences over the last 30 years.

So it is striking to see the most Keynesian response ever to a recession that has not even officially begun (although it may have started - the National Bureau of Economic Research will decide that later). The Fed's three-quarter point cut today was its largest since 1990 and its first move between meetings since 2001 (just following the September 11 attacks). And the markets are anticipating another cut at the Fed's regular policy meeting next week - perhaps as much as half a point. The Fed will most likely be afraid to disappoint.

This is the negative aspect of the Fed's actions, which some economists have rightly criticized: its apparent reaction to the stock market. Most Americans do not have any significant investment in the stock market, even in retirement accounts; and when stocks are overvalued then it is good for them to come down. The stock market is not the economy, and the Fed -- which so foolishly ignored the world's biggest bubble when the stock market was engulfed in a speculative excess in the late 1990s -- should not be using monetary policy to defend current stock prices, no matter how many Republican voters and campaign contributors may see this as the nation's top priority.

But the good news, for the people of the United States and the world, is not only that the Fed now finally recognizes how serious a mess we are in, but that it is willing to ignore what is normally the main enemy of conservative central bankers (pardon the redundancy): the threat of any increase in the rate of inflation. The consumer price index is up 4.1 percent over the last year, far beyond Bernanke's target of two percent; and the drop in the dollar can be expected to add more by increasing import prices. But the Fed is ignoring this in order to focus on the threat of a downturn.

See more stories tagged with: economy, debt, lending crisis, recession, stimulus package, keynesian economics

Mark Weisbrot is Co-Director and co-founder of the Center for Economic and Policy Research. He received his Ph.D. in economics from the University of Michigan. He is co-author, with Dean Baker, of Social Security: The Phony Crisis (University of Chicago Press, 2000), and has written numerous research papers on economic policy. He is also president of Just Foreign Policy.

Liked this story? Get top stories in your inbox each week from AlterNet! Sign up now »