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If Wall Street was brought down by the Ivy
League’s supposed best and the brightest–with their complete faith in
risk-management models taught in business schools–then who failed to rein them
In many cases, their own classmates.
For the last eight years, the squinty-eyed president of the United States,
George W. Bush (Yale BA, Harvard MBA), acted in a manner that mirrored that of
the risk-lovers of Wall Street. He was the “decider” who put 100 percent faith
in his own judgment, often casting aside prudent hedges that would have been a
respectful nod to his critics for fear of showing weakness.
But there is wisdom in weakness.
This worldwide crisis has few precedents, so history offers little in the way
of guidance. Show me a person who knows for sure what we should do, and I’ll
show you someone who needs medication.
The age of humility and second opinions is coming. The problem is, it’s not
We may have traded a cocky Harvard MBA for a cocky Harvard-trained lawyer,
Barack Obama. It shouldn’t surprise us, even this early in the new
administration, that little appears to have changed.
Take a look at the stimulus package. The economics literature is divided on
the best countercyclical recipe.
Keynes and Lucas
The Keynesian school, which for many years has found its gravitational center
in Cambridge, Massachusetts, is optimistic about the benefits of higher
government spending and temporary tax rebates.
The neoclassical school, which emerged from the Nobel Prize-winning work of
Robert Lucas of the University of Chicago, believes that Keynesian stimulus is
ineffective and marginal tax rate reductions work better.
We are currently experiencing the worst economy of our lifetimes. Given the
stakes, wouldn’t it be prudent to pass a stimulus bill that tries a little bit
of each type of medicine? That way, the risk of economic catastrophe would be
significantly reduced if either school of thought is correct.
Instead, we get a measure that is entirely Keynesian. The $787 billion
stimulus package that Obama signed on Feb. 17 contains roughly $288 billion in
tax measures, and those intended to be stimulative are 100 percent Keynesian.
The biggest measure is the “making work pay” credit, a payroll tax cut worth
as much as $400 for singles and $800 for married couples.
Billions to Spend
The remainder of the stimulus package is allocated among various Keynesian
spending measures, including $144 billion for local and state governments, $111
billion for infrastructure spending and roughly $81 billion in additional
funding to protect the vulnerable. The remaining spending is directed toward
various health-care, energy and education measures.
There isn’t a single neoclassical-style reduction of marginal tax rates in
the law. Anyone who watched Wall Street implode because people put too much
faith in a single view of how the world works should be nervous.
Which brings about the question: How can it be that the U.S. government has
bet its future 100 percent on Keynes?
The answer is that the economic decision makers in the Obama administration
are highly homogenous. One might even argue that the Obama administration is one
of the least diverse in modern times.
Harvard lawyer Obama handed the keys of the economic team to former Harvard
President Larry Summers. Summers is, without doubt, on the short list of the
greatest economists I have ever met. Before he entered public life, his work was
Drank the Water
But collectively, the team that he assembled is long on people who are
predisposed to agree with him and short on those who steered clear of the
Keynesian water of Cambridge.
The list of Cambridge insiders includes the chairwoman of Obama’s Council of
Economic Advisers, Christina Romer (MIT); council members Cecilia Rouse
(Harvard) and Austan Goolsbee (MIT); and even senior adviser Paul Volcker
(Harvard). All told, of the 27 top advisers on the White House economic team or
its Economic Recovery Advisory Board, 14 went to Harvard or MIT and 20 are Ivy
Leaguers. As an individual, each of these team members is worthy of bipartisan
praise. As a group, there is a disappointing lack of diversity.
Is it any wonder, then, that we would see a stimulus package that puts so
much faith in Keynesianism? It would be like inviting only American League fans
to a debate about the designated hitter.
The fear is that the same kind of hubris that brought down Wall Street will
now do the same for everything else. The Keynesian school better be right. If
not, we are all in for a long and terrible ride.
Kevin A. Hassett is a senior fellow and the director of economic policy
studies at AEI.
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