Keynes? Or Friedman?  We Now Have an Answer

By Shlomo Maital

         friedman        Keynes

                    Milton Friedman                 J. M. Keynes

   The two leading economists of the 20th C., Milton Friedman and J.M. Keynes, utterly disagreed.   Friedman said that it is money that drives economic demand and prices.  Keynes said, no, it is the aggregate demand driven by government spending that, in bad times, drives the economy.  Recession? Cure it with money, Friedman believed.  Recession? Cure it with fiscal policy (deficit spending), Keynes said.

    Nature has now conspired to resolve the debate.  After the Lehman Bros. bankruptcy on Sept. 17, 2008, the U.S. (and the world) went into a global financial crisis.   Political deadlock in the U.S. Congress has now forced sharp budget cuts, curtailing Keynesian stimulus.  But the Fed, under Bernanke, continues to pump huge amounts of money into the system.  This is a massive natural experiment.  Heavy monetary policy, reverse fiscal policy.  Let’s see what happens.

    If Friedman is right, it will work. If Keynes is right, it won’t work.

    Keynes is right. Here is the evidence, taken from today’s Financial Times:  “According to the Census Bureau, the median household income fell from $51,100 to $51,017 in 2012, and is now 8.3 per cent below its pre-recession peak in 2007. The annual Census Bureau figures demonstrate what has gradually become a lost generation for the American middle class. “Poverty is higher today than it was in 2000 and household incomes are lower,” said Sheldon Danziger, president of the Russell Sage Foundation, which funds social science research.   That is reflected in continued high unemployment, which is currently at 7.3 per cent. Many more people are underemployed or sitting out of the jobs market.  “We just haven’t seen enough job growth,” said Justin King, policy director at the New America Foundation in Washington. “There’s so much unemployment and so much slack that it’s a buyers’ market for labour: people haven’t been able to get wage rises or move to better jobs.”   There’s so much unemployment and so much slack that it’s a buyers’ market for labour: people haven’t been able to get wage rises or move to better jobs

OK, so now we know the truth.  All the heavy money printing, and zero interest rates, have done is enable the fat cats to borrow cheap and invest high.  It hasn’t helped with jobs, or family incomes.  Meanwhile, budget cuts are keeping the economy in stagnation.  

     If you disbelieve me, ask Paul Krugman, Nobel Prize laureate. Or Stan Fisher, until recently Israel’s central banker and formerly deputy MD of the IMF.   Or, better yet, just look at reality. 

    Now that the evidence is clear,   if we are rational thinking human beings, why is the policy not being changed?  Ask the Republicans, locked into their Neanderthal Obamaphobia.  Who pays the price?  The American people, and to some degree, the rest of the world.