IBJOpinion

SOWELL: Does Yellen portend a return to Keynes?

Back to TopCommentsE-mailPrintBookmark and Share

Thomas SowellThe nomination of Janet Yellen to become head of the Federal Reserve System has set off a flurry of media stories. The Federal Reserve has become such a major player in the American economy that it needs far more scrutiny and criticism than it has received, regardless of who heads it.

Yellen openly asks, “Will capitalist economies operate at full employment in the absence of routine intervention?” And she answers, “Certainly not.”

The former professor of economics at Berkeley represents the Keynesian economics that once dominated economic theory and policy like a national religion—until it encountered Milton Friedman and the stagflation of the 1970s.

At the height of the Keynesian influence, it was widely believed that government policy-makers could choose a judicious trade-off between the inflation rate and the rate of unemployment. This trade-off was called the Phillips Curve, in honor of an economist at the London School of Economics.

Professor Milton Friedman of the University of Chicago attacked the Phillips Curve, both theoretically and empirically. When Friedman received the Nobel Prize in economics, it seemed as if the idea of a trade-off between the inflation rate and the unemployment rate might be laid to rest.

The ultimate discrediting of this Phillips Curve theory was the rising inflation and unemployment, at the same time in the ’70s, in what came to be called stagflation—a combination of rising inflation and a stagnant economy with high unemployment.

Nevertheless, Yellen’s nomination is the crowning example of a Keynesian comeback.

Yellen asks, “Do policymakers have the knowledge and ability to improve macroeconomic outcomes rather than making matters worse?” And she answers, “Yes.”

She is certainly asking the right questions—and giving the wrong answers.

Her first question, whether free market economies can achieve full employment without government intervention, is a purely factual question that can be answered from history. For the first 150 years of the United States, there was no policy of federal intervention when the economy turned down.

No depression during all that time was as catastrophic as the Great Depression of the 1930s, when both the Fed and presidents Herbert Hoover and Franklin D. Roosevelt intervened in the economy on a massive and unprecedented scale.

Despite the myth that it was the stock market crash of 1929 that caused the double-digit unemployment of the ’30s, unemployment never reached double digits in any of the 12 months that followed the ’29 stock market crash.

Unemployment peaked at 9 percent in December 1929 and was back down to 6.3 percent by June 1930, when the first major federal intervention took place under Herbert Hoover. The unemployment decline then reversed, rising to hit double digits six months later. As Hoover and then FDR continued to intervene, double-digit unemployment persisted.

Conversely, when President Warren G. Harding faced an annual unemployment rate of 11.7 percent in 1921, he did absolutely nothing, except for cutting government spending.

Keynesian economists would say that this was the wrong thing to do. History, however, says that unemployment the following year went down to 6.7 percent—and, in the next, 2.4 percent.

Under Calvin Coolidge, the ultimate in non-interventionist government, the annual unemployment rate got down to 1.8 percent. How does the track record of Keynesian intervention compare to that?•

__________

Sowell is a senior fellow at the Hoover Institution. Send comments on this column to ibjedit@ibj.com.

ADVERTISEMENT

Post a comment to this story

COMMENTS POLICY
We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
 
You are legally responsible for what you post and your anonymity is not guaranteed.
 
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in IBJ editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
 
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
 
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
 

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by
ADVERTISEMENT

facebook - twitter on Facebook & Twitter

Follow on TwitterFollow IBJ on Facebook:
Follow on TwitterFollow IBJ's Tweets on these topics:
 
Subscribe to IBJ
  1. With Pence running the ship good luck with a new government building on the site. He does everything on the cheap except unnecessary roads line a new beltway( like we need that). Things like state of the art office buildings and light rail will never be seen as an asset to these types. They don't get that these are the things that help a city prosper.

  2. Does the $100,000,000,000 include salaries for members of Congress?

  3. "But that doesn't change how the piece plays to most of the people who will see it." If it stands out so little during the day as you seem to suggest maybe most of the people who actually see it will be those present when it is dark enough to experience its full effects.

  4. That's the mentality of most retail marketers. In this case Leo was asked to build the brand. HHG then had a bad sales quarter and rather than stay the course, now want to go back to the schlock that Zimmerman provides (at a considerable cut in price.) And while HHG salesmen are, by far, the pushiest salesmen I have ever experienced, I believe they are NOT paid on commission. But that doesn't mean they aren't trained to be aggressive.

  5. The reason HHG's sales team hits you from the moment you walk through the door is the same reason car salesmen do the same thing: Commission. HHG's folks are paid by commission they and need to hit sales targets or get cut, while BB does not. The sales figures are aggressive, so turnover rate is high. Electronics are the largest commission earners along with non-needed warranties, service plans etc, known in the industry as 'cheese'. The wholesale base price is listed on the cryptic price tag in the string of numbers near the bar code. Know how to decipher it and you get things at cost, with little to no commission to the sales persons. Whether or not this is fair, is more of a moral question than a financial one.

ADVERTISEMENT