Keynes v. Smith – in Defense of Nixon
Mark Thoma points out to Thomas Bray that accepting a Keynesian view of macroeconomics does not mean one has to abandon Adam Smith’s view of microeconomics. Mark also points out that Bush’s adherence to fiscal stimulus in 2001 was in someway consistent with the message of the General Theory. I say “someway” because Bush’s ad nausam excuse for long-term fiscal irresponsibility by his appeal to wanting more jobs is sheer abuse of Keynesian logic.
But it is his attack on Nixon’s abandonment of the Bretton Woods system that caught my eye and apparently that of Tim Duy (see the comments section under Mark’s post):
In 1971, seeking to justify the scrapping of the gold standard and flooding the market with dollars, a Republican president, Richard Nixon, declared “we are all Keynesians now.” He was referring to British economist John Maynard Keynes, who in the 1930s called the gold standard a “barbarous relic” that got in the way of the taxing and spending needed to overcome the Great Depression. Alas for Nixon, those policies were no more successful in the 1970s than they had been in combating the long Depression. Indeed, partly because of Nixon’s misguided effort to control inflation through wage and price controls, the U.S. economy fell into a deep funk that lasted more than a decade.
Nixon did a lot of things during his term in office with some of them no doubt pleasing Milton Friedman and some of them no doubt ignoring Dr. Friedman. Perhaps Mr. Bray is not aware that the latter years of Lyndon Johnson’s Administration saw excessive aggregate demand growth (something his Keynesian CEA tried to stop) even under Bretton Woods. Friedman suggested to Nixon that a tight monetary policy should be adopted to lower inflation – and perhaps it started off too tight. While some of us may have endorsed the reversal of this tight monetary policy, I’m sure Friedman can make a compelling case that Nixon took the easy money advice too far.
But leaving Bretton Woods and going to a floating exchange rate regime was more of a Friedman idea than a Keynesian idea. Bray probably does not appreciate the concerns back then about a deterioration in the balance of payments. And he also does not appreciate the fact that U.S. policymakers since Nixon have avoided a return to Bretton Woods – even if certain Asian Central Banks have not.
Tim Duy raises the devaluation of the 1930’s. At the depth of the Great Depression (1933) real exports (in 2000$) were $18.9 billion with real imports being $29.1 billion. By 1940, real exports had risen to $34.8 billion with real imports being $36.2 billion. If we could only have the same level of success in reversing our present current account deficit woes!