A HOLLYWOOD film currently nominated for several Oscars poetically sums up in a way the reaction of the academic economic profession and right-wing think tanks to this global economic crisis, especially the fiscal response to it. There has been a river of commentary in a nationwide daily opposed to the Rudd Government’s fiscal stimulus and the similar proposals of other Western governments.

The film, The Curious Case of Benjamin Button, is about a man who ages backwards into childhood. Loosely adapted from a short story by F. Scott Fitzgerald, it’s the tale of an infant who comes into this world as an old man and gets younger as the years pass. The film closes with a young boy suffering from dementia in an old folks’ home. The film, unlike the short story, does not dwell much on the mental progression of Ben as his body progressively gets younger. That’s a pity for if it did the movie might be a useful analogy to describe the conservative nature of the academic economic profession, both here and in America.

Apart from a mostly deafening silence, the profession has given only lukewarm support to the ideas of fiscal stimulus. Some say the fiscal stimulus will not work, while others bemoan the huge increase in government debt that it will entail. Here the argument is that consumers will be so overwhelmed by the huge tax increases well into the future that they will not spend any of the fiscal largesse now. To put it simply, young academic economists are trained to emerge as young fogeys, holding the most doctrinaire conservative views. The nature of graduate training in economics makes it so, with relatively few exposed to economic history or the history of economic thought. Nor, heaven forbid, are they exposed to heterodox economic opinion.

The high priests of the economic profession demand all this if the young wish to become members of the exclusive fraternity. Apart from upholding a faith in government failure and professing a belief in efficient markets there is a terrific emphasis on mastering a Meccano set of techniques and mathematical modelling. The American economist Robert Lucas jnr said nearly 30 years ago: “One cannot find good, under-40 economists who identify themselves or their work as Keynesian … At research seminars, people don’t take Keynesian theorising seriously any more; the audience starts to whisper and giggle to one another.” Consequently most of the economics profession is wary of most of the return of Keynes and the return of governments into economic management.

The young Turks are also disbelieving that the market system can break down or that financial markets can go AWOL. The arch monetarist Milton Friedman pinned the blame for the Great Depression on the failure of the Federal Reserve to inject more liquidity into the financial system. It was in this context that another Ben, namely Ben Bernanke, lauded Friedman a few years before his death with his monetarist explanation of the factors behind the Great Depression. You can pump as much liquidity into the economy as you like, but it will not matter one iota if people have a preference to hold their wealth in cash and not spend.

Some believe the whole subprime problem can be linked to financial institutions being forced via US government policy to lend to those who could not repay their mortgages. Also free-market proponents say that money was kept too cheap for too long. The market, they say, was fooled by the government. If the market was so easily fooled than it cannot be too efficient. Where, too, is the efficient market when we have previously formidable banks collapsing because of shoddy lending practices? Even Alan Greenspan, confessing that the Federal Reserve’s regime of self-regulation had failed because it was built on a “flaw”, did not convince the neo-liberal diehards.

As they reach retirement age, though, university economists begin to mellow and become more open to heterodox approaches. They even begin to dabble in the history of economic thought. The doyen of the American economic profession, Paul Samuelson, now in his 90s, recently said that economists under 60 have forgotten what pulled economies out of the Great Depression. It was not monetary policy that did the trick but an almighty fiscal stimulus. While recapitalising the banks in the US and Britain might improve their balance books they will not be lending unless the government starts it off.

While it’s true that excessive and cheap debt got us in this muddle in the first place and private and public debt levels must fall in the long term, Keynes reminded us that one should not treat the economy as a morality play but a challenge.

Alex Millmow is a senior lecturer in economics at the University of Ballarat.

http://business.theage.com.au/business/fogey-thinking-will-hold-us-in-a-fiscal-yoke-20090212-8653.html