As newspaper headlines report every morning, the U.S. economy today suffers from the most severe inflation seen in at least two generations. Not coincidentally, the US public debt is also at an all-time high. This partisan and ideological misses the main point.
Some economists are well aware that the current crisis should not be seen as a political problem that suddenly erupted with the presidential election about two years ago. Alan Blinder of Princeton University, for example, has argued for years that engaging in politics simply blocks the way to smart ideas. The “streetlight problem” he articulates holds that the United States would not have reached its present state had it not been for the policy ideas of the past that fell victim to the politicization of an ideal economy.
And as for the present, mainstream economists join the blinder in calling for sterilization of politics from economic decisions, for freeing the ideas of the intellectual elite and finally – hallelujah! – Conduct smart policies. Some of those economists admit that they were actually wrong in the past.
But let’s be honest. Even lecturers in the most prestigious institutions find it difficult not to chuckle while recommending that we must completely exclude politics from the economic equation. After all, this is America – an example and role model of political tolerance for the whole world. And yet and to the point of confusion, there are still many thinkers and scholars who believe that we should replace politics with elitist judgment. In terms of modern monetary and fiscal policy, this claim goes back in time at least to the days of John Maynard Keynes.
In the late 1970s, when inflation showed early signs of a significant rise, economists James Buchanan and Richard Wagner drew attention to the climbing debt and inflationary dangers of the period. Their 1977 book was entitled ‘Democracy in Deficit: The Political Legacy of Lord Keynes’. Wagner and Buchanan did not say a word when describing Keynesian influence as to blame for “persistent and swelling deficits, a rapidly growing public sector, high unemployment rates, constant rising inflation, and a disillusionment with the illusion of American socio-political order.”
Wagner and Buchanan argued that the post-Keynesian era was characterized by “early Harvey Road premises” – the Cambridge campus where the Keynes family lived. One of Keynes ‘biographers, Roy Haroud, coined the phrase “presuppositions,” and Buchanan and Wagner used it to explain how Keynes’ economic theory operates within a political vacuum in which monetary and fiscal decisions are to be made by wise and authoritative people – an intellectual aristocracy that intellectual The conditions for prosperity, freedom and even peace. In 2011, after President Obama introduced his “incentive packages,” many noted that “Keynes is back.” But in practice, Keynesian influence has never left, and macroeconomists and policymakers still suffer from the same preconceived notions of Harvey Road today.
Following Haroud’s description, macroeconomists, politicians and central bank officials today still see themselves as smart and enlightened, ones whose expertise allows them to analyze the situation and determine the best course of action. Those elites consider themselves kind-hearted and generous, so we must trust them to choose the best course of action for society as a whole. Finally, they are also portrayed as sensible people, and will therefore strive to convince each other and the entire public that the path chosen is the best. The above description, 45 years old, seems most appropriate even in 2022.
While familiar streetlights may shine brighter on Pennsylvania Avenue than on Harvey Road, we should not be tempted to place most of the blame solely on politicians. Those who have fueled the current fire of the economic crisis are the wrong and misleading American elites. The conclusion that we should replace the “intellectual aristocracy” with democracy may also be very tempting. Again, this is America. But a closer look at the history behind these problems, as we did in our study, reveals that a democracy free from shackles was part of the problem, and periods of crisis certainly justified the treatment of government as a budgetary source for the whole.
Perhaps the central point in today’s inflation problem is that we cannot completely remove the political dimension from it, but we can more successfully isolate our fiscal and monetary house from the rotten sides of politics. Part of the forward route should be in replacement Trust In politics and elites with recognition of its limitations, and beyond Restraint. This requires an understanding that politicians and members of the ruling elites are neither angels nor magicians, and that demands for more and more gifts also deserve moral judgment.
From the perspective of a healthy economy, large businesses will achieve by trying to raise corporate capital through government programs. For households, it would be a mistake to demand more money to inflate the housing price bubble and pension plans. For politicians, it would be a mistake to take credit for wasteful budgets and economic successes, while shifting the blame for failures toward others. And for central bank executives, it would be a mistake to invent new control mechanisms that would make their work similar to central planners from days gone by.
Removing politics from the equation means adopting subjective rules that will retrain us all to stop and see the government as an inexhaustible budgetary source. Instead of replacing the elites of wisdom with a cable-free democracy, we must turn to constitutional restraint and Republican-style governance. An entire generation of inflated budgets and cash distribution on the part of both parties has created a significant negative surfing effect, leaving us with a severe inflation problem.
If we do take seriously the position of Wagner and Buchanan from ‘Deficit Democracy’, it means focusing on political morality and institutional rules. These rules will restrain and restrain monetary policy, and will limit both the scope and the scale of fiscal policy. Economists like Alex Slater and others are right that we need Milton Friedman today more than ever. But even more than that, we need positions like those of Wagner and Buchanan at the forefront of political and economic debate.
Prof. Peter Calcagnano is a lecturer in economics at Charleston College. Prof. Edward Lopez is a Lecturer in Economics at the University of West Carolina. A full version of the article was first published on the American Institute for Economic Research website – AIER.