Janet Yellen, President Obamas selection for chair of the Federal Reserve Bank, will likely sail through the confirmation process. Many Americans expect the high-profile economist to achieve greater financial stability and improve national prosperity.
But the likely outcome is more of the same policies that have made the U.S. a virtually bankrupt nation.
The Treasury Department estimates our current debt at $16 trillion but by Laurence Kotlikoffs intergenerational accounting figures the fiscal gap is somewhere around $222 trillion. That massive debt and all it entails is the result of ideas shared by Yellen, a Keynesian economist.
In The General Theory of Employment, Interest and Money, John Maynard Keynes broke with the mainline tradition of economics that runs from Adam Smith and David Hume to F.A. Hayek and modern political economists such as James Buchanan.
Keynes argued that capitalist economies were not self-regulating and instead were prone to suffer through bouts of economic instability. In his view, policymakers could engage in countermeasures to fix the problem.
Keynesian ideas were particularly attractive during the 1930s as the world economies suffered through the Great Depression. Keynes combined the greatest fear of the advanced capitalist systemmass unemploymentwith the greatest resentmentthe idle richand argued that one followed from the other. His remedy was seductively simple.
Governments should deploy fiscal and monetary policy to manage economic affairs. This launched the cycle of deficit financing, accumulated public debt and the debasement of the currency in an effort to reduce the debt burden.
Adam Smith called this type of policy a juggling trick and generations of graduate students have been trained in it. Janet Yellen is one of them.
Dr. Yellen boasts a distinguished career in academia and public policy, but in many ways she is the quintessential government economist. She wholeheartedly believes that a capitalist economy left alone will not tend to maintain full employment levels of output.
Further, she believes that policymakers can optimally intervene to fix the problems with the capitalist economy.
That runs up against a problem F.A. Hayek noted in his 1974 Nobel Prize lecture. Such macroeconomic demand management and fine-tuning require a level of knowledge beyond the cognitive capacity of even the most sincere and brilliant economic administrators.
Governmental policy in the economy should follow the rule of law so that a stable and predictable framework can be established. Individual economic actors can decide the best strategies for coping with the uncertainty of economic life based on their own knowledge and experiences.
This was not a new position but the one held by classical and neoclassical economists.
In contrast, Yellen is an accomplished representative of the master juggling class of economists. She will use the tools of monetary policy at her disposal in an attempt to paper over the destructive legacy of promissory politics.
So Americans should take seriously Hayeks warning about the pretense of knowledge.
They should imagine Dr. Yellen attempting to juggle sticks of dynamite blindfolded while balancing on a ball floating in a pool.
In such conditions even the most accomplished juggler is likely to fail, with massive consequences for a nation already staggering under massive debt and still in recovery from the Great Recession.
A more prudent course would to stop the juggling altogether. That is what the mainline tradition of economics has taught through the centuries as it spoke truth to power.
Unfortunately, power tends to reject that wisdom. Therefore, we can expect more reckless monetary policy, and likely a surge of inflation, from Janet Yellen.