Brief History of Macroeconomic Thought and Policy

Read this chapter to examine macroeconomic attitudes towards economic policies of the three main schools of economic thought: Classical, Keynesian, and Monetarist. Also, learn about modern day interpretations of the main ideas.

3. Macroeconomics for the 21st Century

A Macroeconomic Consensus?

While there is less consensus on macroeconomic policy issues than on some other economic issues (particularly those in the microeconomic and international areas), surveys of economists generally show that the new Keynesian approach has emerged as the preferred approach to macroeconomic analysis. The finding that about 80% of economists agree that expansionary fiscal measures can deal with recessionary gaps certainly suggests that most economists can be counted in the new Keynesian camp. Neither monetarist nor new classical analysis would support such measures. At the same time, there is considerable discomfort about actually using discretionary fiscal policy, as the same survey shows that about 70% of economists feel that discretionary fiscal policy should be avoided and that the business cycle should be managed by the Fed. Just as the new Keynesian approach appears to have won support among most economists, it has become dominant in terms of macroeconomic policy. In the United States, the Great Recession was fought using traditional monetary and fiscal policies, while other policies were used concurrently to deal with the financial crisis that occurred at the same time.

Did the experience of the 2007–2009 recession affect economists' views concerning macroeconomic policy? One source for gauging possible changes in the opinions of economists is the twice-yearly survey of economic policy among the National Association for Business Economics (NABE). According to the August 2010 survey of 242 members of NABE, almost 60% were supportive of monetary policy at that time, which was expansionary and continued to be so at least through the middle of 2012. Concerning fiscal policy, there was less agreement. Still, according to the survey taken at the time the 2009 fiscal stimulus was being debated, 22% characterized it as "about right," another third found it too restrictive, and only one third found it too stimulative. In the August 2010 survey, 39% thought fiscal policy "about right," 24% found it too restrictive, and 37% found it too stimulative. Also, nearly 75% ranked promotion of economic growth as more important than deficit reduction, roughly two thirds supported the extension of unemployment benefits, and 60% agreed that awarding states with federal assistance funds from the 2009 stimulus package was appropriate. Taken together, the new Keynesian approach still seems to reflect the dominant opinion.