History is a fickle magistrate. A year ago, when even New Democrats swore by balanced budgets, copies of John Maynard Keynes's General Theory gathered dust in second-hand bookstores. Its ideas advocating government deficit financing had been put out to the curb. We were all anti-Keynesians then.
No, until last fall, the most influential dead economist was Milton Friedman, Keynes's antithesis. When he died at 94 in 2006, Ben Bernanke, chairman of the U.S. Federal Reserve Board, said: "Among economic scholars, Milton Friedman had no peers. The direct and indirect influences of his thinking on contemporary monetary economics would be difficult to overstate."
The inflation-targeting policies adopted during the 1990s by central banks - formally in Canada, less formally in the U.S. - were concrete incarnations of Mr. Friedman's influence. If "inflation is always and everywhere a monetary phenomenon," as the University of Chicago economist insisted, then long-term, stable growth in the money supply is key to keeping the economy on an even keel. Stable is the operative word.
Mr. Friedman's work also provided a blueprint for dealing with deflation, a bigger threat of late, and central bankers have mostly followed it (though it's not certain the double-digit growth in the money supply we've seen recently would get his stamp of approval.) But nobody talks about that. Instead, Mr. Friedman is mostly decried as the prophet of deregulation who put us on the track to doom.
It's Keynes who now gets the credit for saving us. His idea that massive public spending could single-handedly counter negative growth and rising unemployment was at the root of the stimulus packages governments have rushed to implement this year.
Keynes's second coming was officially declared a success this week when Nobel laureate Paul Krugman wrote in The New York Times that "Big Government" saved us from a second Great Depression. And just to twist the knife in Republicans, he added: "And aren't you glad that right now the government is being run by people who don't hate government?"
Notwithstanding Mr. Krugman's assurance, it's impossible to know whether we're headed for a depression, just as we can't know whether one still awaits us. But if we dodged a bullet, it wasn't government stimulus that saved us.
Mr. Krugman notes that so-called automatic stabilizers - such as employment insurance and seniors' pensions - played the biggest role in mitigating the depth of the economic downturn. And those kinds of programs are perhaps the greatest legacy of the Keynesian welfare state, so credit should go where credit is due.
But if the second-biggest factor in saving us from oblivion was the U.S. bailout of the financial sector, as Mr. Krugman concedes, he neglects to mention the heavy lifting was done by the "government haters" in the Bush administration. President Barack Obama's team merely tweaked the program.
Government stimulus is No. 3 on Mr. Krugman's list of things that rescued us from the jaws of a depression. But we all know how slowly Canadian stimulus money has flowed. The U.S. package was passed even later than ours. It's estimated that only 10 per cent of the $800-billion (U.S.) stimulus envelope has gone out government doors.
It's debatable whether it's made a marked difference. (China's stimulus package, on the other hand, has.) A TD Bank report figures that Americans who got one-time stimulus cheques from the government this spring saved the money. "This would seem to indicate that in an age of deleveraging, fiscal stimulus is not the stimulus it used to be."
Could this be evidence of "Ricardian equivalence," as consumers hoard cash in anticipation of the inevitable tax hikes that will hit them when governments confront swollen post-recession debt loads and an inability to borrow? Bank of Canada Governor Mark Carney has raised that prospect, noting that governments need credible "exit strategies" if fiscal stimulus is to avoid going to waste. But who really believes they have them?
Or that central banks know when or how to drain the ocean of liquidity they've pumped into the economy in recent months? Arthur Laffer, who inspired Ronald Reagan's tax policies, warns: "We can expect rapidly rising prices and much, much higher interest rates over the next four or five years, and a concomitant deleterious impact on output and employment not unlike the late 1970s."
If this is the year of Keynes, the next few could well belong to Milton Friedman.
Konrad Yakabuski