in the existing philosophy, economic philosophy was based on theories of john maynard keynes which had been developed in the 1930's. and those policies presuppose the deflationary situation. so when you use them in an inflationary system, all they did was make inflation worse and the inflation eventually made the unemployment worse. so the supply-siders looked around for a different way and their philosophy was to tighten the money supply severely to reduce inflation. and at the same time, cut tax rates in order to increase the incentive to work save and invest. in almost all conventional economists of the time, certainly on the keynes thought this was insane that it was like putting your foot on the brake and the gas pedal at the same time. but we thought it would work in a dead work because ronald reagan and paul volcker implemented it in by the middle of the 1980's, inflation was down very substantially in growth had been restored and this was viewed as a success for the supply-side model. post goes a former proponent of reaganomics, how difficult was it for you to read about its fa

the phrase them have come up with, the idea itself is actually quite an old one and goes back to keynes as i say, who compared a lot of investing and activities in the financial markets to a beauty contest. this is a bit of a sexist analogy but england in the 1930's was sexist. in those days they used to have newspapers anisse to print pages full of photographs of pretty girls and as a contest to rodin and felt he was the prettiest and if your choice was the most popular you won a prize. so how do you play that game? if you are a near classical economists what you would do is look at the women and decide on the basis of how the book, who is the prettiest but actually that is not going to win the prize. what you have to think is which woman is the average opinion going to think of the producer you were thinking about how other people are going to play the game and then if you are really smart you think i'm not going to think about how average opinion, who is the pretty is. you have to think about what average opinion thinks average opinion is going to be the prettiest and then you can ha

for example, in "hoodwinked" you talk about the long-standing debate between keynes and friedman and other disciples have continued this debate and that friedman essentially one through ronald reagan, but also surprise me, it's a good thing you reminded us, through bill clinton. and that really george bush called himself a compassionate conservative and sometimes that label could apply to bill clinton. in fact, you criticize clinton, during his presidency, his africa overtures, his economic overtures. and i wonder if you could just talk about that a little bit? >> you know, clinton had what he called the african renaissance, which was a support of one approved dictator after another, as long as they did favors to big american corporations. and i think we've seen this over and over in our system. this embracing of friedman economics. you know, i was brought up in keynesian, even nixon, nixon said we're all keynesians, but that change very quickly. and under keynes, the belief was that corporations were there not just to make profit, but two good things. and to serve the people. and th

clear to me that the economic conditions we were viewing were almost identical to the once that the keyns analyzed. so it was a useful exercise for me to have the background just as this happened. but i had to kind of short circuit my thoughts about what was coming next because i was overwhelmed by the economic crisis. host: and when folks say keysneian economics, they're talking about more government stimulus, stimulus spending to get the economy going, correct? guest: yeah. to me, the essential point -- you have to understand that what runs the macro economic is essentially federal reserve policy, monetary policy. but there are times when fed policy is impotent, when it can't do anything, economists say it's pushing on industry string. and these conditions come about when you have very, very low interest rates, as we have right now, and economists call this liquidity trap. and when you have that situation, the fed is unable by itself to stimulate the economy. host: so keeping rates real low doesn't do it, as low as they are now, just not going to stimulate the economy? guest: no, it doe

swedes were doing a lot of this stuff as well and i think it's irresponsible to make it seem like keynes was a nazi because some other country implemented some of his policies. out as far as china is concerned the real problem there has nothing to do with taxes and everything to do with the exchange rate that they simply refuse to allow their currencies to rise which gives them a competitive advantage that makes it cheaper for us to buy goods from them than to produce them are souse but nevertheless the u.s. is still the largest manufacturing country in the world and the largest exporter and i think sometimes we forgetn when actually we're still in pretty good shape. >> host: there is a story this morning about china pledging more aid to african nations after a conference this weekend. what are the challenges of a country like china going into places like africa were the u.s. is already but china becomes competitor as a developer in a developing nation in these countries? >> guest: i think basically in everybody's interest certainly to see africa am become more developed and i think the

siller and ackeroff have written a new book about animal smirts, the words of england's john maynard keynes which wlove using our pieces for the visuals. to the economists, animal spirits are the key to both the crash and our failure to anticipa it. they're the emotionshat actually animate an econy like trust and confince. >> dn, please. >> reporte and they tend to ebb and flow r better and worse. >>he basic problem, i would say, is that wbecame overconfident and then we scovered that it was built on fauy premises and now our confidence is craing. >> i think the major thi was that peoplare simply too trting. they trusted that they cod buy mogages and things like that, wch simply were not ing to pay off. and they shoulhave been much more carefu . >>ut of course this is easier said thanone when riding a wave of prosperity. in fact, the act of mang money can induce aactual physal high says economist andrew low. >> it turns out that scientts have shown that financial gain triers the exacsame reward circuitry in the brain tt cocaine does. so when aryou making money, are yoactually engaged in a k

the point is that john-- is being john keynes, his theorys from the 1930s are being exhumed. about what we need to do when there are no other real sources of demand in the system. consumers have pulled back. investors have pulled back. exports cannot be relied on. the only remaining buyer of last resort is the government. >> woodruff: gentlemen, we thank bout, martin feldstein, robert reich. >> thanks, judy. >> thanks. >> ifill: now, the other news of the day, here's hari sreenivasan in our newsroom. >> sreenivasan: an ethiopian airlines plane crashed early this morning just off beirut, lebanon. 90 people were on board, but there was no sign of survivors. the boeing 737 caught fire and plunged into the mediterranean sea minutes after taking off. plane debris washed up on shore, and search and rescue crews recovered at least 21 bodies. investigators said stormy weather could have been a factor in the crash. lebanese president michel suleiman said there was no sign that terrorism was involved. in iraq, baghdad was hit by a series of bombings on the same day that a notorious hen

the choice is looking im ♪ i wonder what john ynard keynes would say ♪ if we asked himnflation or deflation be zimbabwe, or will w be japan? >> repter: the answer the fed is betting on: neither. >> teenaged rl was rescued alive in port-au-pnce today 15 days after the ethquake. she was trapped in t rubble of a house. u.n. officials estimate up to. meanwhile,.s. and french troops worked to re-open t port-aprince seaport. at would relieve the overloa at the clogged aport. ray suar is in haiti where hundreds othousands are still strugglingo simply exist. margaret warner spoke with h earlier toy. hi, ray,t's good to see you. we're two eks into this crise. where do things stand fo ornary haitians when it comes to the basics of life, l's say food, for example. >> suare there is food. there'a lot of aid flowing in, but a lot of people are ving short rations. it's not like peop are going days withoutating. but e food that might normally feed a fily of six is ibstead feeding 12 or 14 people. you meet a lot of people whore hungry. they'll comeight up to you on the street and tell thatou. sohile theres

now we have resurrected keynes and we are starting to apply some of those formulas. so what i am asking you in terms of resolving this and creating more jobs, and doing more things, is that a way out? >> okay, yeah. we have gone through cycle in which markets reign supreme and markets always get it right to. so, the pendulum has swung now in the other direction. we need if not more regulation we need to better regulation or at least we need to enforce the regulation we have so they are not just curiosities on paper. in terms of creating jobs, i mentioned earlier my concerns about a gradualist approach toward dealing with the banking sector problem, and i reiterate that. does not an abstract thought. help me out on this. you have a bank that, if you have bad debts, the it is like, if you are an individual and you have bad debts that you haven't written down, you haven't taken a hit, you have not taken a loss yet, any new borrow blaine, any new lending is going to be curtailed because you have that overhang. you are carrying that albatross. we are still carrying that a

keynes said do not predictor if you do, do it frequently. congress will not allow that. however you are wise enough to rick -- recognize the spot replace you and put in your language or uncertainty. without regard to have a place on my bookshelf for the cbo report 2001 the first that included a rather stunning summary figure of the uncertainty of the projections it shows a possible budget outcomes later outer areas being less likely even the worst scenario the faintly shaded the budget was still projected to be a rough balance. despite what the current policies or at that time it was the last budget outlook prepared by cbo before congress enacted what would be a stunning set of policies that led to the biggest fiscal turnaround in history. less than three years after that report congress inactive to massive tax cuts and authorized to wars and a massive of entitlement program under medicare and none of those measures were paid for. each and every was added to the bill believe our children and grandchildren and said the each one remains with us today. as i read the report

john maynard keynes referred to as -- this as casino-like. want to throw the baby out with the bath water. it is useful for the economy. we have a lot of companies that cannot get money from the banks but the markets. my pension money goes to the bonds issued by the countries. imagine my savings to the companies needed. it does serve a useful purpose. but the utility, or the social good performed by that has receded in importance and a lot of these banks now make more of their money not just by the fees and underwriting the securities but trading them back and forth on their own books and in some senses they are starting to look like gigantic hedge funds. i think in the future you will see a lot less, both because it is a lot more expensive and also governments are trying to discourage it. host: tying it back to this headline, it says that the idea of the proposed tax is a product of six months of policy deliberations by the treasury secretary geithner and his team, which evaluated four competing options. these were, a financial transaction t

last part and always left out when they talk about the economic stimulus package, the last part of keynes ' theory and there would be a growing economy and use those revenues to pay back the money they borrowed to get the process going. and every time there is one of these so-called economic stimulus programs do they pay the money back at the end? no it's very clear there is no such intention here when you have $800 million-plus deficits to say nothing about the unfunded liabilities that is far, far greater than what we are seeing here on this chart. so that is what really puts the lie to the idea that this stimulus is going to have any long-term good effect but the first concern i have is that at some point in time that the amount of money we borrowed when the economy starts to grow not only in this country but elsewhere in the world and some economies are growing at a healthy pace like in countries like china and brazil, they will have increased demand to borrow money and our government will, too, and that means at some., that at some point because people are saving money and interest r