Another Shocking; M. Skousen

Economics on Trial Another Shocking Reversal in Macroeconomics "The potency of fiscal policy-both good and bad-has been demonstrated time and again in the past couple of decades. " -Walter Heller, 19681 W ho wrote this? "Fiscal policy is no . longer a major tool of stabilization policy in the United States. Over the fore seeable future, stabilization policy will be performed by Federal Reserve monetary policy." Milton Friedman? No, it was not a mon etarist. I recently met with Milton Friedman in his home in San Francisco, and asked him who he thought wrote the above statement. "Alan Greenspan?" he queried. No, it wasn't a Federal Reserve official. The author is none other than Paul Sam uelson! In his latest (15th) edition of Eco nomics, co-authored by William D. Nord haus, the premier Keynesian economist admits defeat for fiscal policy as an effective countercyclical tool.2 This is truly an amaz ing confession, a shocking reversal of his longstanding bias of yesteryear.

It was Samuelson who wrote in his first edition (1948)of his famous textbook, "To day few economists regard Federal Reserve monetary policy as a panacea for controlling Dr. Skousen is an economist at Rollins College, Winter Park, Florida 32789, and editor of Fore casts & Strategies, one ofthe largest investment newsletters in the country. For more information about his newsletter and books, contact Phillips Publishing Inc. at (800) 777-5005. by Mark Skousen the business cycle." (1st ed., p. 353) Only fiscal policy mattered. His pivotal chapter, "Fiscal Policy and Full Employment With out Inflation," totally ignored the role of money in the economy. By the ninth edition (1973),his views had shifted to a middle ground. After labeling monetarism "an extreme view," he de clared, "both fiscal and monetary policies matter much." (9th ed., p. 329) However, Samuelson stood squarely in the fiscal camp. The title of his chapter, "Fiscal Policy and Full Employment Without Infla tion, " remained the same from the first edition until the eleventh edition (1980),the last written solely by Samuelson.

Finally, in the latest edition (1995), Sam uelson has thrown in the towel, as if to admit, "We are all monetarists now." Ac cording to the MIT professor, running a federal deficit to jump start the economy "has lost much of its attractiveness to pol icymakers and macroeconomists." (15th ed., p. 644) His concluding chapter on government economic policy is now enti tled, "Policies for Growth and Stability." Why Fiscal Policy Has Become Impotent In the late 1960s,economists debated the merits of fiscal policy (spending and tax changes) vs.· monetary policy (the money supply and interest rates). The Keynesians argued that fiscal policy was the most pow116 erful tool, the monetarists defended mone tary policy as the most influential. Now the debate is over: the monetarists have won. Under the influence of new theories in economics (especially public choice and rational expectations), Samuelson offers several reasons for an impotent fiscal policy today: increasing delays (a year or more) between changes in the economy and Con gressional action on the budget; ineffective ness of deficits or tax cuts to stimulate consumer spending; and the enormity of the national debt, which severely limits the ability of lawmakers to run higher deficits to fight recession. In sum, declares Samuel son, fiscal policy has become "useless."

(15th ed., p. 644) Artificial Stimulants Don't Work Samuelson's amazing change of heart reflects a growing realism in the economics profession. It never did make sense to artificially stimulate the economy through makework projects, war production, and other spendthrift programs, as Keynes sug gested. But running a deliberate deficitis not only "useless," it is harmful to the econ omy. It discourages private saving and forces lawmakers to raise taxes in the fu ture. Indeed, that has been the trend: higher deficits and higher taxes. The lesson is clear: government needs to move in the opposite direction if it truly wants to stabilize the economy and perma nently increase economic growth. By cut ting out wasteful spending, it can turn the deficit into a surplus, and reduce taxes sharply. Monetary Policy Is Useless, Too Paul Samuelson needs to learn another lesson: Efforts to stimulate the economy through "easy money" Federal Reserve 117 monetary policy are useless, too. If the Fed artificiallylowers interest rates and expands the money supply, it can only cause an unsustainable boom-bust cycle. History has demonstrated this "Austrian" insight time and time again. Easy credit may pro vide temporary recovery, but the long-term effects are serious-more unemployment and recession in the future. In short, there is no free lunch. Active government interven tion in the macroeconomy, whether in the form of deficit spending or easy money, is harmful to long-term growth.

Returning to the Classical Model The best policy is noninterventionism. Taxes should stay low. Government bud gets should be limited to essential services, and regularly balanced. The money supply should be stable and non-inflationary. Inter est rates should not be manipulated. There is nothing new about this non interventionist approach. It represents the old classical school of Adam Smith (bal anced budgets, low taxes, sound money, laissez faire). What is noteworthy is the economics profession's gradual shift away from Keynesian economics toward the classical position. An examination of Samuelson's 15 editions of Economics reveals that he has slowly but surely abandoned the tenets of Keynesianism. In the past, he favored deficit spending; now he's opposed to it. He denigrated savings; now he promotes it. He condoned central planning; now he supports market reforms. Might we see a total conversion to laissez faire by the next edition, due to be released on the 50th anniversary of his first edition? We can only hope. [] 1. Walter W. Heller, "Is Monetary Policy Being Over sold?" in Monetary Policy vs. Fiscal Policy, by Milton Fried man and Walter W. Heller (New York: Norton, 1969), p. 31.

2. Paul A. Samuelson and William D. Nordhaus, Econom ics, 15th ed. (New York: McGraw-Hill, 1995), p. 644-45.

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