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the one we describe in Econ 101. In particular, empirical studies that do not impose the restrictions of Keynesian theory suggest that you might get more bang for the buck with tax cuts than spending hikes.” 46
    EUGENE FAMA, PROFESSOR OF FINANCE, UNIVERSITY OF CHICAGO BOOTH SCHOOL OF BUSINESS:
    “Unfortunately, bailouts and stimulus plans are not a cure. The problem is simple: bailouts and stimulus plans are funded by issuing more government debt. (The money must come from somewhere!) The added debt absorbs savings that would otherwise go to private investment. In the end, despite the existence of idle resources, bailouts and stimulus plans do not add to current resources in use. They just move resources from one use to another.” 47
    JOHN TAYLOR, PROFESSOR OF ECONOMICS, STANFORD UNIVERSITYV
    “The theory that a short-run government spending stimulus will jump-start the economy is based on old-fashioned, largely static Keynesian theories. These approaches do not adequately account for the complex dynamics of a modern international economy, or for expectations of the future that are now built into decisions in virtually every market.” 48
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    As this book goes to press in April 2009, the nation’s jobless rate continues its upward climb. The economy swallowed the 2009 part of the stimulus package, burped, and went nowhere.
    But the more the economy stagnates despite Obama’s medicine, the more he will sap his own credibility. The more unemployment data pile up and jobless claims grow week by week, the more the president’s ratings will plummet.
    And the more likely it is that we can turn things around in the election of 2010!
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    MISERY INDEX: THE UPWARD, UNRELENTING MARCH OF UNEMPLOYMENT
     
    Month      Jobless Rate
    August 2008   6.1%
    September 2008  6.1%
    October 2008   6.5%
    November 2008  6.7%
    December 2008  7.2%
    January 2009   7.6%
    February 2009   8.1%
    March 2009     8.5%
    April 2009     8.9%
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    FIGHTING THE RECESSION: WHAT OBAMA SHOULD HAVE DONE
    So what should Obama have done?
    The classic conservative answer, revealed as on tablets from Mount Sinai by the economic giant Milton Friedman in the 1980s, held that money supply and monetary policy were the key. Friedman warned against looking to Keynesian economics to stimulate demand; the more government borrows, he reasoned, the less is available to the private sector, which actually has to create the jobs. And any short-term effect of massive deficit spending will be obviated by fears about the inflation it will cause.
    Instead, Friedman said, use monetary policy—interest rates—to increase the supply of money and credit. Work on the supply side, not the demand side, of the economy. Give businesses the low interest rates to borrow the capital they need to expand, and get government out of the way.
    But the problem is that interest rates today, as in Elton John’s song, are already “too low for zero.” Faced with the onset of the recession, the Federal Reserve Board has cut them as close to zero as you can get. Yet the recessionhas only deepened. And the deeper it gets, the more prices drop. After all, when no one wants to buy, prices go down. But with prices dropping by 3 or 4 percent a year, even a 0 percent interest rate is really 3 or 4 percent! (If money is worth 4 percent more each year—because prices have fallen by that much—why borrow money at 0 percent interest? Even at that price, it means you can’t take advantage of the rising value of the currency.)
    Cutting interest rates has done little to solve the recession. Credit has continued to dry up. And with confidence in the economy at historic lows, no one wants to borrow anyway.
    So if Keynesian demand stimulation won’t work and Friedman’s monetary policy was ineffective, what will work? In the years since Keynes, economists have developed what’s known as the Theory of Rational Expectations. Simply priming the pump—and hoping for the