Keynesians Spin in Circles on Inflation

Letter to WSJ.

These economists assume Congress and the Fed can time its interventions properly. What if they can’t?

"William Galston’s “How Will Inflation End?” (Politics & Ideas, April 6) discusses the debate among Keynesian economists about the recent mistiming of fiscal and monetary policy. Keynesians believe that generalists in Congress can time fiscal policy and bureaucrats at the Federal Reserve can time price controls in credit markets, both to dampen the business cycle.

Ever tried to time a future wedding on a rainless day? No, because it is too difficult to forecast the weather. The same is true for timing government interventions into the economy. But Keynesians keep trusting the timing of officials with poor incentives to forecast the economy correctly, even though the private sector—with the right incentives—is terrible at it.

On the one hand, many Keynesians argue their policies work because officials can usefully time them. On the other, they often disagree with the officials’ policy timing. For example, Larry Summers argues Washington’s timing is off, thereby negating the value of his Keynesian policy view, which is based on officials’ great timing. Which is it? Likewise, Keynesians generally oppose price controls for the obvious reasons but applaud the Fed’s price controls and its timing in credit markets.

Keynesian economists also believe government is needed to correct excess volatility not only in business cycles, but also in asset markets. Never mind that much of market volatility is caused by governments, and the news cycle obsessed with them.

Asset-market volatility is often induced by governments through Keynesians business-cycle policies. Markets obsess and fluctuate over the timing of the Fed’s price and quantity controls. Perversely, markets often go up on bad news or down on good news because expectations of offsetting Fed actions. Be thankful for private innovation such as interest-rate swaps, currency futures, and Treasury inflation-protected securities that correct for these government failures.

Contrary to Keynesian religion, the government has repeatedly shown that it is incapable of timing the business cycle, but in trying to do so, causes excess volatility in financial markets.

Prof. Tomas Philipson

University of Chicago

Mr. Philipson was a member of the president’s Council of Economic Advisers (2017-20) and its acting chairman (2019-20)."