Macroeconomics and Political Ideology

The left -- right (progressive -- conservative) political spectrum still shows some divisions among  macroeconomic theorists. 

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:
Keynesian: 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, both McCain's chief economic adviser, (Doug Holtz-Eakin) and Romney's (Glenn Hubbard) are Keynesians.  Everyone I recognize on the list of past presidential economic advisors are Keynesians too going back to at least the Ford administration.  Conservative Keynesians tend to favor government spending for different priorities than progressives.  For example, they are a bit more likely to promote military spending as a stimulus, but military Keynesianism is also fairly popular on the Left.  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.

Monetarism:  This school was based on Milton Friedman's ideas in the 1970s.  It substantially ceased to exist as a separate school by the 1990s because Friedman won and his ideas merged with Keynesianism.  The main effect has been to put greater priority upon monetary policy than fiscal policy both for fighting recessions and especially for reducing inflation.  Ironically, Friedman drew upon some of Keynes' monetary ideas that Keynes' intellectual followers had been ignoring.  Some libertarians on the right like to portray Keynesian economics as 'central planning' in which fiscal policy is 'socialism'.  They see monetarism as a free-market alternative.  Milton Friedman had this leaning although I don't think he ever said it so bluntly.  But monetarism is also a form of central planning in which the government planners at the central bank adjust the most fundamental price in the economy, the price of money, to fine tune the economy.  They fine-tune interest rates and inflation in order to stabilize unemployment and economic growth.  Fiscal policy seems to be more politically contentious, but monetary policy is also a kind of central planning. 
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. 
Austrian Business Cycle:  This theory is "now rarely discussed by mainstream economists, but was more actively debated" before the end of the Great Depression.  Even Hayek gave up on working on it by the end of the Depression.  At the PhD level, the last university in the world that still focused on the Austrian theories was Auburn University, but it was disbanded in 1999 and they never had anyone who taught macroeconomics! The Austrians rejected the RBC mathematical methods, but they agreed with the conclusions of the RBC theorists.  They think that recessions are naturally the best of all possible worlds and nothing can or should be done to try to lessen them. 
Austerians: 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 think that the recession is being prolonged because people have lost confidence in the government (worries about government inability to pay back debt) and in our money (worries about inflation). Only a small percentage of economists are Austerians, but this ideology has wide populist appeal outside of the economics profession.  Some of the leaders of elite institutions like the European Central Bank, the Bank of International Settlement, and the OECD are Austerians. 

Left:
Keynesian:   The main schools are the new-Keynsians and the old-Keynesians (or neoclassical Keynesians), but both 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.  It is 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: They claim to be very close to the Keynes' original ideas which they say were warped by the neoclassical Keynesians.  
Monetarist:  Friedman won the intellectual debates over the role of monetary policy and almost all economists on the left embrace monetarist solutions as the primary tool for macroeconomic management and they also support fiscal (Keynesian) measures as well.  In Keynes himself supported monetary stimulus.

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 focused on  microeconomics 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 development economist who keeps saying stupid things about the recession because he clearly has 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 divide on the left is between Keynesian-monetarist economists and the apathetic economists. 

Today the three main macroeconomic schools of thought to know are:

1. Keyensians
2. Monetarists
3. Real Business Cycle (New Classical)

The monetarists and Keynesians have very similar ideas and make similar predictions about the world.  The big ideological divide in macroeconomics is between them and the RBC economists who make radically different predictions and think that the government cannot do anything to reduce recessions.  The monetarist-Keynesian ideological divide is mostly one of priority.  Economists who call themselves Keynesians put more priority on fiscal stimulus and think that works better.  Economists who call themselves monetarists put more priority on monetary stimulus and think that works better.  A few Keynesians think that monetary policy does not work at all in some situations and a few Monetarists think that fiscal policy does not work at all in some situations but most mainstream Keynesians endorse monetarism and vice versa.

Although RBC is important in some prominent graduate schools, almost all the undergraduate Macro textbooks ignore it in favor of the Keynesian-monetarist synthesis.  Personally, I am both a monetarist and Keynesian.  I think they are two great tastes that go great together.  Massive unemployment and idle capital is a waste and a tragedy and we should use all available tools to reduce the tragic waste of unemployed labor and capital.

NGDP

Real Time Economics:

This helps explain why nominal gross domestic product — that is, total GDP without inflation stripped out – has wound up at the center of a debate over how, and whether, the Federal Reserve can do more to stimulate the U.S. economy and lower the nation’s current 9.1% unemployment rate.
The problem boils down to the Fed’s current dual – or in fact, triple – mandate from Congress. Here is the entire wording of the Fed’s mandate, which falls under Section 2A of the Federal Reserve Act.

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

It is this last part which is at the heart of today’s policy debate. In theory, and in the long run, it should be consistent for the Fed to conduct monetary policy in a way that promotes a healthy economy marked by maximum employment, stable prices, and moderate long-term interest rates. But that is little help at a time like now, when the Fed is roughly meeting the latter two objectives but falling well short on the first; that is, on reaching anything close to “maximum” or full employment, typically defined as something like an unemployment rate of 5% (though many think today, for various reasons including demographic ones, this rate is now closer to 7%). ...
The beauty of the NGDP target, as proponents see it, is that it doesn’t differentiate between inflation and real GDP. So it doesn’t matter whether the gap is closed by three parts inflation and one part real GDP or one part inflation and three parts real GDP. The point is that the gap gets closed, because the Fed is able to be as aggressive as it needs to be, and the economy avoids a prolonged slump and chronically high unemployment a la the Great Depression. And by targeting NGDP, or a stated goal for the total size of the economy, instead of a 3% or 5% inflation rate, the Fed is better able to avoid the backlash that might otherwise undermine its ability to achieve said objective.
But would this really work? Now that NGDP is getting serious attention, this question becomes all the more important. Below, a (very abbreviated) round-up of the debate. Best to get up to speed as much as possible now, as it is only likely to gain momentum from here.
Further reading on NGDP targeting:
–Scott Sumner’s work.
–The Goldman note.
–Karl Smith, “NGDP Targeting in Real Life”
–Interfluidity: “The Moral Case for NGDP Targeting” (with links to many others, including Paul Krugman and Brad DeLong, on this issue)
–Bill Woolsey, emphasizing the monetarist position that underlies an NGDP target.
–Heard on the Street: Inflated Expectations for Economic Fix (and Sumner’s response here.)
–Free Exchange: Understanding NGDP Targeting

The moral case for NGDP targeting

The last few weeks have seen high-profile endorsements of having the Federal Reserve target a nominal GDP path. (See Paul Krugman, Brad DeLong, Jan Hatzius and colleagues at Goldman Sachs.) This is a huge victory for the “market monetarists”, a group that includes Scott Sumner, Nick Rowe, David Beckworth, Josh Hendrickson, Bill Woolsey, Marcus Nunes, Niklas Blanchard, David Glasner, Kantoos, and Lars Christensen....
Here I want to join the market monetarists’ happy dance, and point out several moral benefits of NGDP targeting.

• The most plain moral benefit of NGDP targeting is that it is activist. Relative to the status quo, it demands a serious effort to combat the miseries of depression. This is a big improvement over our current strategy, which is to shrug off and rationalize mass deprivation and idleness.
• A second moral benefit is that under (successful) NGDP targeting, any depressions that occur will be inflationary depressions. Ideally, we’ll find that once we stabilize the path of NGDP, the business cycle is conquered and there will be no more depressions ever again. But that probably won’t happen. If depressions occur even while the NGDP path is stabilized, then they will reflect some failure of supply or technology. Our aggregate investment choices will have proved misguided, or we will have encountered insuperable obstacles to carrying wealth forward in time. It is creditors, not debtors, whom we must hold accountable for patterns of aggregate investment. There always have been and always will be foolish or predatory borrowers willing to accept loans that they will not repay. We rely upon discriminating creditors to ensure that funds and resources will be placed in hands that will use them well. Creditors allocate capital by selecting the worthy from innumerable unworthy petitioners. An economic downturn reflects a failure of selection by creditors as a group. It is essential, if we want the high-quality real investment in good times, that creditors bear losses when they allocate funds poorly. When creditors in aggregate have misjudged, we must have some means of imposing losses without the logistical hell of endless bankruptcies. Our least disruptive means of doing so is via inflation....
  In fact, NGDP targeting, despite the stench of sugar-high money games that Austrians perceive in it, might actually increase our ability to impose losses on foolish creditors via default and bankruptcy. This would pay a huge moral dividend, in terms of our ability to avoid the unfairness of arbitrary bail-outs. Both Nick Rowe and Scott Sumner have suggested to me that if we had sufficiently aggressive monetary stabilization, we could avoid acquiescing to “emergency” rescues that flamboyantly reward bad actors, because allowing bad actors to collapse would no longer threaten the rest of us. Rajiv Sethi has made a similar point:
  

  The main justification for these extraordinary measures in support of the financial sector was that perfectly solvent firms in the non-financial sector would have been crippled by the freezing of the commercial paper market. But as Dean Baker has consistently argued, had the Fed’s intervention in the commercial paper market been more timely and vigorous, it might been unnecessary to provide unconditional transfers to insolvent financial intermediaries....

   In constrast to an inflation-targeting central bank, an NGDP-targeting central bank need not distort the division of income between capital and labor. Under current practice, the Fed tends to encourage asset price inflation but worries frenetically over any growth in unit labor costs, or, equivalently, labor’s share of income. Labor share of income has been collapsing since about 1970.