Unlike the natural sciences, macroeconomic ideas have implications that can dramatically redistribute wealth. That makes macroeconomics much more political than the natural sciences (with the exception of climate change) and the left–right political spectrum between progressives and conservatives has created divisions in macroeconomic theory. The media loves to present one dimensional yin-yang news stories with a simple two-sided narrative for every issue. That false dilemma narrative misrepresents the true nature of academic debates which often have tremendous consensus and multifaceted dimensions. This is true of macroeconomics which has a tremendous amount of consensus around a Keynesian-monetarist core, but multifaceted disagreements. Simon Wren-Lewis said that, “macroeconomics is often taught as if [political and] ideological influence was non-existent, or at least not important to the development of the discipline. I think doing good social science involves recognising ideological influence, rather than pretending it does not exist.” This article is an attempt to explain some of the surprising political divisions that influence debates over macroeconomics.
Overall economists are overwhelmingly Keynesian. Conservative economist Greg Mankiw’s pointed out in 2009 that 90% of economists agree that Keynesian fiscal policy works. Every poll of economists for decades has also shown tremendous consensus. For example, the University of Chicago polled elite economists in 2014 and found that 98% agreed that Obama’s fiscal stimulus worked to reduce unemployment: All of the introductory textbooks teach Keynesian economics that yields this kind of conclusion. There are a few economists who reject the Keynesian model, but they are either not macroeconomists and never teach macro nor research it (like John Cochrane), or they are Real Business Cycle (RBC) theorists (like Robert Lucas) who do have an active research program at prestigious freshwater schools. Although the RBC theorists have been successful in publishing in top journals, this school is insular and has rarely engaged with policy makers or with the vast majority of economists who reject RBC. RBC theoriests can’t even teach introductory macroeconomics because none of them have figured out how to explain their theories in English without extremely complex mathematical models and dubious assumptions. (Note, I tried to see what the University of Chicago teaches undergraduates, but there are no details on their website so please let me know in comments if you find out what this bastion of RBC teaches. I suspect they teach Keynesian economics to undergraduates like everyone else.)
Conservative Academic Macroeconomics
On the Right, the macroeconomists involved in government policy and business forecasting are almost all Keynesians, but they tend favor tax-cuts over government spending and their spending priorities are different from those of the Left. For example, Conservative Keynesians are a bit more likely to promote military spending as a stimulus, but military Keynesianism is also fairly popular on the Left.
Keynesian School: Conservative Keynesians have dominated economic policy for almost every Republican president and Republican candidate (post primary). They have tended to focus on cutting taxes as an economic stimulus rather than on raising spending. For example, McCain’s chief economic adviser, (Doug Holtz-Eakin) and Romney’s (Glenn Hubbard) were Keynesians as were all of both Bush’s advisors. All the rest of the list of presidential economic advisers going back to at least the Ford administration have been Keynesians too (although I don’t know enough about a couple of them to be completely positive). The American Conservative Magazine wrote that,
An astonishing number of the Republicans’ most cherished economic thinkers can be called Keynesians…. What is a conservative Keynesian? While there may not be a formal definition—mainstream Keynesianism has many nuanced variations—it is fair to say that a conservative Keynesian 1.) looks at the world in terms of macroeconomic aggregates, that is, total output, total employment, and most especially aggregate demand; 2.) sees government fiscal policy as a way to improve those aggregates; and 3.) embraces or at least tolerates deficit spending and inflation in the short run. That much is pretty close to standard Keynesianism. What makes one a Keynesian of the Right is a preference for tax cuts over government spending, although the intention is the same: to put money into the hands of consumers as a way to increase aggregate demand during recessions.
Monetarist School: Monetarism was a short-lived movement that peaked in the 1970s. It was led by Milton Friedman. Many textbooks still present the 1970’s debate between monetarism and Keynesianism as being unresolved, but the academic debate ended in the 1980s and monetarism substantially ceased to exist as a separate school by the 1990s. Friedman’s band of monetarists won the key points of the debate and their ideas were adopted by Keynesians. The main effect of the monetarism has been to emphasize monetary policy over fiscal policy for fighting recessions and especially for reducing inflation. In some ways, the ideological split was never very big. Friedman drew upon some of Keynes’ own monetary ideas that Keynes’ self-proclaimed followers had been ignoring. Some textbooks present monetarism as a free-market alternative to Keynesianism. This is probably because Milton Friedman happened to be a free-market libertarian, and some prominent Keynesians (like Paul Samuelson who informally debated Friedman in Newsweek for decades) happened to be liberals. Part of Friedman’s motivation was to counter liberal Keynesian calls for government spending stimulus by promoting monetary stimulus instead. Some libertarians on the right continue to portray Keynesian economics as ‘central planning’ and call fiscal policy ‘socialism’, but they are a small minority and Friedman never thought of monetary policy as a realm that free markets should control. He recognized that monetarism is a form of central planning in which the government planners at the central bank adjust the quantity of money to control inflation and interest rates (one fundamental prices in the economy, the price of money). Monetarists want to fine-tune interest rates and inflation in order to stabilize the financial sector, unemployment, and economic growth. Monetary policy is just another kind of socialism and that is why the Austrian libertarians reject monetarism and want to return to the gold standard. Under the gold standard, monetary policy is more controlled (but not completely) by the gold market instead of by central bankers. But even on the gold standard, central bankers and financial regulators had ultimate control over monetary policy because of the fractional reserve system that used paper money and bank accounts for most money. Gold was simply a symbolic base. Central banks (and other big institutions in the financial system) still actively manipulated the money supply under the gold standard.
Real Business Cycle (RBC): Also known as the “new classical school”, freshwater economics, liquidationists, etc. RBC scholars tend to be libertarians who believe that recessions are natural and inevitable and that government policy changes can only make them worse. This is the biggest academic challenge to Keynesianism and many top graduate schools like the University of Chicago and academic journals (like the journals the University of Chicago publishes) have completely abandoned study of Keynesian economics in favor of RBC macro. One of the most surprising features of RBC macro is its utter rejection of monetarism. RBC models usually assume that monetary policy has zero effect on the real economy! The University of Chicago was the ground zero of monetarism in the 1970s under the leadership of Milton Friedman. Friedman must be rolling in his grave with the knowledge that his former school has so utterly rejected his macroeconomics. RBC gained ascendance for aesthetic reasons. It seemed to integrate microeconomics and macroeconomics. It was more consistent with the ethos in microeconomics that people are rational actors. It is also appealing for people who like the idea that markets naturally self-correct because it rejects the idea that a recession is a form of market failure. Some RBC models also gave some support to the idea of Ricardian equivalence which is the theory that fiscal policy has no effect on aggregate demand. Ricardian equivalence relies on false assumptions and is overwhelmingly contradicted by empirical research, but somehow it became fashionable in some RBC circles anyhow and once the Great Recession of 2008 happened, many prominent politicians and pundits (and very few economists) twisted it into a rationale for austerity and it morphed into a sort of “Austerian School” that became prominent in the popular press. There is nothing in RBC models to support the idea that austerity can reduce recessions, but Austrian School (Hayek and Schumpeter) had had that idea during the Great Depression, but they lost credibility because of it and Hayek abandoned his work on macroeconomics as a result.
Austerian School: A term of derision for Austrian and RBC economists who think that the government should fight the recession through the opposite of Keynesian (and monetarist) policies. Austerity is reducing deficits and the money supply. Austerians usually employ a traditionally Keynesian argument about confidence to give anti-Keynesian conclusions. Austerians say that recessions happen when people lose confidence due to worries about government inability to pay back government debts and worries about inflation. They think that if governments cut spending and reduce the money supply, people will regain confidence and start buying again (increase aggregate demand). Only a small percentage of economists are Austerians, but this ideology has wide populist appeal outside of the economics profession. And some of the leaders of elite institutions like the European Central Bank, the Bank of International Settlement, and the OECD are Austerians. There is no formal economic model that supports this view. It is not part of mainstream RBC academic theories. It is mainly an ad-hoc view that arose in response to the Great Recession of 2007. A couple of academic papers got a huge amount of attention during the Great Recession for claiming to find empirical support for expansionary austerity, but they were all eventually discredited.
Liberal Academic Macroeconomics
On the left, academic macroeconomics is even more dominated by Keynesians than on the right, but the left has different priorities.
Keynesian School: Liberal Keynesians are more favorably predisposed to government spending than conservative Keynesians who are more likely to favor tax cuts as an economic stimulus. There are a lot of sub-categories of Keynesians on the left, but their policies are all broadly similar:
Neo-Keynesian, Old-Keynesian, or Neoclassical Keynesian: This was mainstream macroeconomics from 1936-1980 based on Hicks’ IS-LM model and the Phillips curve.
New-Keynesian: Use the same mathematical modelling techniques as RBC, but add ‘frictions’ like sticky prices to get very similar results as the old Keynesians. They just use different methods to come to very similar conclusions.
Post-Keynesians: I don’t get why they think they are different, but they tend to be more liberal.
Monetarist Keynesians: Friedman won the intellectual debates over the role of monetary policy and almost all Keynesian economists on the left embrace monetarist solutions as the primary tool for macroeconomic management. Keynes himself supported monetary stimulus, so It seems odd that there was ever an intellectual divide between monetarists and Keynesians back in the 1970s.
Agnostic-Apathetic ‘School’: There are a few economists on the left who simply have little opinion about macroeconomic debates because they did not study recessions in graduate school. They either chosen to ignore macro in favor of micro or they believed that recessions are not important in comparison with studying economic growth, international trade, or finance. I would put Jeffrey Sachs in this camp. He is a brilliant liberal development economist who wrote stupid things about the recession because he clearly did not put much thought into it. His priorities simply lie elsewhere. Unfortunately, Obama has economic advisers who are in this camp. They went along with calls for austerity because they thought it was politically popular and they did not prioritize fighting unemployment. The big ideological divide on the left is between Keynesian-monetarists and the apathetic economists.
Macroeconomics ideology at the PhD level
PhD programs became divided in the 1970s, first between old Keynesians and monetarists and later between Keynesians and RBC. I have never fully understood the old Keynesian-monetarist debate because the two ‘schools’ are so integrated today that I have a hard time imagining why there was ever significant debate between the two. Keynes himself had monetarist ideas and the principle monetarist, Milton Friedman had written, “We are all Keynesians now.” Friedman wrote that in 1965, which was before the word monetarism had even been coined. He recognized the validity of Keynesian thought well before the political debate between the Keynesians (more on the left) and the monetarists (more on the right) peaked in the 1970s.
Then in the 1980s, RBC began to displace Keynesian AND monetarism in PhD programs like the University of Chicago and the University of Wisconsin. These programs have a reputation for being conservative, but many liberals graduated from these programs and followed the RBC research program. Paul Krugman coined the term ‘freshwater economics’ to describe these inland schools where RBC displaced Keynesianism because the coastal schools, including most of the Ivy League, continued to teach Keynesian macro. These so-called saltwater schools were not much more liberal than the freshwater schools. The saltwater schools produced most of the conservative economists who went on to run economic policy for the Republican party (see above). The politicians ignored the freshwater (RBC) economists because they said that government policy is ineffective at best or counterproductive at worst. It was only natural for politicians to ignore the freshwater economists who said that there are no answers to our macroeconomic problems when there were many prestigious saltwater economists who claimed that they did have answers.
Whereas few undergraduate macroeconomics textbooks even try to explain RBC, there are two RBC graduate-school macro texts written by Ljungqvist, & Sargent and by Stokey, Lucas & Prescott. There are also some New Keynesian graduate texts that also teach RBC because RBC is generally just a simplified version of New Keynesian models.
The Austrian Business Cycle theory is “now rarely discussed by mainstream economists, but was more actively debated” in academia before the Great Depression. Even its most revered scholar, Friedrich Hayek, gave up on working on it after his ideas were discredited during the Depression. Austrian theory is still important in popular culture because of libertarian supporters who get a lot of media coverage. One libertarian group spent big bucks producing a pair of rap videos to try to boost its importance in grass-roots culture. At the PhD level, the last university in the world that focused on Austrian theories was Auburn University, but it’s PhD program was disbanded in 1999 and they apparently did not put much stock in Austrian macroeconomics because they never had anyone who taught macroeconomics! The Austrians agree with many of the conclusions of the RBC theorists. Both schools think that recessions are naturally the best of all possible worlds and nothing can or should be done to try to lessen them. But the Austrians reject RBC theory because they dislike the mathematical methods of RBC. Austrians tend to favor the gold standard which is something that the RBC economists reject.
Macroeconomic ideology at the undergraduate level
Almost all of the undergraduate textbooks present the standard Keynesian-monetarist synthesis whether they are written by a conservative Republican like Ben Bernanke or a liberal Democrat like Robert Frank. Oh, wait, those guys co-authored the same textbook. And their textbook presents roughly the same Keynesian-monetarist synthesis as the top-selling text by conservative former adviser to Bush and Romney, Greg Mankiw (who named his dog Keynes) and the text by liberal lightening-rod Paul Krugman. The main opposition to the textbook consensus comes from Real Business Cycle (RBC) theory, but it only appears in very few textbooks that don’t sell very well. As mentioned above, RBC has been very successful among some top economics researchers in PhD programs, but it never made much headway in the undergraduate education because it is too mathematical for undergraduates to ever think they could comprehend it. It takes a PhD to think you understand RBC, but even the PhDs have not really understood how to apply their own models. The math was just so complex that they did not completely understand their own theories and the entire RBC agenda fell apart during the aftermath of the 2008 recession. New Keynesian models are built on the same kind of math as RBC, but they translate into same old Keynesian stories about the economy that always made empirical sense at the undergraduate level, so that is why RBC was never able to displace any Keynesianism in undergraduate education. The RBC models never made enough sense to be translated into English narratives that were convincing to smart people. Their complex math was intrinsically pleasing to the elite academics who could understand the math, but the RBC theorists never figured out how to apply it to the real world. Undergraduate textbooks need to be able to explain empirical applications and so RBC was never able to replace Keynesian ideas in the undergraduate textbooks.
A conservative website I read asked for examples of conservative economics texts, and readers submitted suggestions for about 30 popular books, and two graduate-level RBC texts (mentioned above), but not a single undergraduate macroeconomics textbook. Both conservative and liberal economists mostly teach Keynesian macroeconomics to undergraduates.
Some undergraduate textbooks mention “supply-side economics,” but that isn’t an academic school at all. It is a political movement that gained momentum in the 1970s based on Arthur Laffer idea that cutting taxes would create so much growth in aggregate supply that it would pay for itself and increase revenues. If you search the primary academic journal archive at Jstor, you will not find any references to a “supply-side school” or even “supply-side economists” except in commenting on the popular political movement. The supply-side idea was also once promoted by Keynesians who influenced JFK’s tax cuts in the 1960s (from a top income tax rate of 91% down to 70%) and Keynesians still have a similar theory that a tax cut during a recession can restore economic growth enough to more than pay for itself if the multiplier is big enough. Conservative Keynesians still make this argument and it was the basis for George Bush’s tax rebate checks in 2008. The difference between the Keynesian theory and the supply-side theory is that in the Keynesian theory, tax cuts stimulate aggregate demand by reducing the need for hoarding whereas the supply-siders think tax cuts would cause an increase in aggregate supply (productivity) by making people work a lot more hours. Also Keynesian economists predict that tax cuts would only boost the economy during a recession and supply-side activists always predict that it would be good for the economy, even during an economic boom.
Macroeconomic media bias: “Mediamacro”
Most of the general public develops an understanding of science from the popularizers of science like Steven Hawking and Neil deGrasse Tyson because very few people get a science degree. But at least most people formally study basic science through high school and college graduates get at least a couple classes. Only a tiny minority has ever had even a single macroeconomics course at any level and most people develop their understanding of economics from popularizers in the mass media who are disproportionately hacks.
Whereas interest groups ignore most scientific disciplines with a few exceptions like global warming and medicine, moneyed interests have taken a great interest in economics and injected hacks into popular discussions. Controversial ideas sell more advertisements than consensus, so the media likes to promote provocative macroeconomics rather than the the boring consensus that readers could get in any textbook or even on Wikipedia.
Simon Wren-Lewis calls the mainstream media’s view of macro, “mediamacro.” The media has had particular biases since the 2008 crisis. For example, the media has been much more austerian than either the general public or the economics profession. The media loves to oversimplify and use inappropriate moral analogies like to say that the government needs to be less lazy and borrow less money so that we don’t put a debt burden on our children. The media is heavily biased towards the opinions of powerful businesspeople and Wall-Street finance tycoons who have never studied economics.
The media likes crazy ideas because crazy people are interesting and the media likes debate. If the media cannot find enough debate among PhD economists, they will try to find someone else, even if they have to find a madman. Crazy people certainly say interesting things that can be fun to watch. Anyone can call himself an economist and most of the ‘economists’ on the TV news are not qualified to teach undergraduate economics because they do not have an economics degree. And when the media does interview someone with an actual economics degree, there is a bias towards interviewing economists who work for an interest group rather than academics.
That is how the gold standard gets so much attention in the media despite almost zero support from economists. Probably less than 1% of PhD economists think that the gold standard is better than our current system (and most of them probably went to Auburn University, mentioned above), but the press loves the gold standard because it is interesting and simple. The media loves opposing viewpoints so they can claim “balance” so they present madmen arguing for the gold standard to “balance” against the economics profession that thinks it is a terrible system. Media bias helps explain why 44% of Americans think a return to the gold standard would be a good idea.
The media likes to tell stories about conflict between two sides of any issue. More than two sides gets too complicated for the narratives that they try to create, so they tend to engineer simplistic narratives that are more entertaining than the difficult complexities of reality. In the most simplified (and unrealistic) media narrative, the liberals are Keynesians who support government spending and the conservatives are anti-Keynesians who support business interests by shrinking the deficit. This is a misleading narrative that contains only the tiniest grain of reality. Macroeconomics is political, but the true ideologies of the various factions are complex.
Two main reasons for the political divisions in macroeconomics:
1. Macroeconomic policies divide classes and create winners and losers.
Monetarist policies would raise inflation and lower real interest rates during recessions which hurts savers (richer and older) and benefits borrowers (poorer and younger). Keynesian deficit policies tend to worry the wealthy more than the middle class because the wealthy are hurt less by high unemployment and they pay a disproportionate amount of the taxes that will eventually repay the deficits. Plus, Keynesian expansionary policies require redistributing resources from the class of people who are prone to hoard (richer and older) to people who want to spend (poorer and younger).
2. People have different ideologies about how the world works.
Keynesian-monetarist ideas assume that mass unemployment is due to a massive market failure. A minority of economists dislike the very idea of market failure because it is messy and unaesthetic. A very few people have an almost religious faith in the benevolence of markets. Economic elites also tend to dislike the idea of market failure because if markets can fail, then some of their wealth may be due to market failure. Business elites tend to like the ideology that perfect markets have rewarded them efficiently. It is a justification for their wealth and power over others. Under perfect markets, wealth would be a perfect reward for contributions to society.
Macroeconomic Political Divide Summary
There is no simple way explain the ideological macroeconomic divisions between Republicans and Democrats. The top-level economic advisers in both parties have been almost exclusively Keynesians all the way back to WWII. But politicians just do not listen to their economic advisers when it comes to making economic policy. Austerians have had tremendous anti-Keynesian influence over both parties despite not holding official positions of authority. Ever since 2008 when the economic stimulus package was passed, both parties have been austerian. For example, Obama raised taxes as part of the Affordable Care Act (Obamacare) so it would reduce the deficit and has been trying to raise taxes on the wealthy. That is austerian, not Keynesian. Similarly, the Republicans have been trying to cut social spending, and the Democrats seem to have been happy to let government spending decrease (as a fraction of our total income) since the beginning of 2009.
On the monetary policy side, Obama neglected to appoint Fed board members for months because he has been shockingly apathetic about monetary policy. The Republican leadership has criticized the Fed for trying to help reduce unemployment by expanding the money supply which is a rejection of Milton Friedman’s conservative monetarist ideas. Both parties have displayed relatively austerian monetary policy priorities.
Today there is no significant academic division between monetarists and Keynesians. The big ideological divide in academic macroeconomics is between both of them and the RBC economists who make radically different predictions. The RBC school thinks that the government cannot (or should not) do anything to help recover from recessions. What little monetarist-Keynesian ideological divide still exists is mostly one of priority. Economists who call themselves Keynesians generally put more priority on fiscal stimulus and think that works better than monetary stimulus, particularly when interest rates are near zero. The few economists who still call themselves monetarists put more priority on monetary stimulus and think that quantitative easing works better than fiscal stimulus. But most mainstream Keynesians endorse monetarist ideas and vice versa.
There are a lot of self-taught Austerians who oppose the Keynesian-monetarist synthesis, but they are rarely qualified to teach undergraduate economics classes. In academic macroeconomics, only the ‘freshwater’ RBC school has been a significant challenge to Keynesianism. Although the RBC vision has enchanted many bright academics, they withdrew from policy discussions into their ivory-towers since according to RBC theory, policy either has no effect or certainly doesn’t help. They remained isolated from the challenging ideas of the world outside until the crisis of 2008 finally brought challenges that they could not ignore.
Because Keynesian-monetarist policies are likely to improve the plight of the median American, I support this academic consensus. Monetarist-Keynesian policies should benefit both the needy (unemployed) and the median. Massive unemployment and idle capital is a tragic waste and we should use all feasible tools to reduce the suffering. This should not be controversial. It is the textbook consensus that almost every college student learns in Principles of Macroeconomics. It is amazing to me how the media and both parties have conspired to produce austerianism which is the polar opposite of the macroeconomics taught in the college textbooks.