Friday, 27 February 2009

So long, Milton Friedman. Hello, James Tobin.

Feb. 27 (Bloomberg) -- After a three-decade run, the free-market philosophies of Friedman that shaped U.S. policy are being eclipsed by the pro- government ideas of Tobin, the late Yale economist and Nobel laureate who brought John Maynard Keynes into the modern era.

Tobin’s stamp is on the $787 billion stimulus signed by President Barack Obama, former students and colleagues say. His philosophies are influencing Austan Goolsbee, a former Tobin student advising Obama, and Ben S. Bernanke, head of the Federal Reserve. Unlike Friedman, Tobin provides guidance for today’s problems, said Paul Krugman, a Princeton University economist.

“Hard-line doctrines don’t seem very appropriate at this troubled moment,” said Krugman, a New York Times columnist who also worked with Tobin at Yale from 1977 to 1979. “Tobin was never a guru in the way Milton Friedman was; he never had legions of Samurai ready to spring to the defense of his theories, but that’s part of why he is so relevant right now.”

The decision by Bernanke last September to invoke the Fed’s emergency powers and put mortgages and other assets on the central bank’s balance sheet “is pure Tobin,” Krugman said. Bernanke cited Tobin’s 1969 essay on monetary theory in a 2004 paper discussing options available to the Federal Reserve for stimulating the economy when interest rates approach zero.

Tobin’s experience of the depression as a teenager in the 1930s gave him a lifelong loathing of unemployment.

‘Livid’ Response

“As a young professor I did a paper where I analyzed the optimal unemployment rate,” said Joseph Stiglitz, a professor at Columbia University in New York, who knew Tobin at Yale. “Tobin went livid over the idea. To him the optimal unemployment rate was zero.”

Like Keynes, Tobin was an advocate for the role of government in maintaining full employment, said James Galbraith, an economist at the University of Texas in Austin. The current economic and financial crisis has validated that philosophy, said Galbraith, a former Tobin student and the son of the late John Kenneth Galbraith, who was a friend of Tobin.

“It’s clear that the position that the federal government has a responsibility for the level of employment, for the economy, has prevailed,” Galbraith said. “The position that the Fed can walk away from the level of employment has completely collapsed. That was the absolutely dominant position coming out of the University of Chicago.”

In contrast to the Friedman-influenced proponents of tax cuts, deregulation and tight control of the money supply, followers of Tobin are more receptive to government intervention in the economy, including stimulus spending.


After Harvard, where he studied under the late Joseph Schumpeter, he spent four years in the U.S. Navy, serving on a destroyer that supported the invasion of North Africa.

Wouk Character

While training to be an officer, he served with Herman Wouk, who later wrote “The Caine Mutiny.” Tobin was Wouk’s model for a character called Tobit, a “mandarin-like midshipman” who had “a domed forehead, measured quiet speech and a mind like a sponge.”

Tobin began teaching at Yale, in New Haven, Connecticut, in 1950, leaving in 1961 and 1962 to serve on the U.S. Council of Economic Advisors under President John F. Kennedy.

At Yale, he put his stamp on generations of economists who studied or taught there. Those include Goolsbee, Krugman, Stiglitz, and Galbraith. Others influenced by Tobin at Yale include Robert Shiller, a Yale economist and creator of the Case/Shiller home price index; Nouriel Roubini, the New York University economist who predicted the financial collapse; Janet Yellen, president of the Federal Reserve Bank of San Francisco; and David Swensen, Yale’s investment manager.

Levin’s Wish

Tobin’s influence on today’s policy makers is still not as powerful as former students would like to see. Richard Levin, the president of Yale, said Tobin would have wanted the stimulus package to create more jobs and contain fewer tax cuts.

“Tobin’s insights are what’s needed right now,” Levin said. “I wish policy makers would listen more carefully to Tobin.”

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