The Economists’ Hour

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Binyamin Appelbaum. The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society. New York: Little, Brown and Company, 2019.

Economic journalist Binyamin Appelbaum reports on the prominent role of free-market economists in shaping national policy during the four decades from 1969 to 2008. The period began with the Nixon administration and ended with the financial crisis in the last year of the George W. Bush administration.

Free-market economists like Milton Friedman were influential voices during those years. They were not alone, however. Appelbaum says, “The economists provided ideas and the corporations provided money: underwriting research, endowing university chairs, and funding think tanks like the National Bureau of Economic Research, the American Enterprise Institute, and the Hoover Institution at Stanford University.” In addition, economic conservatives joined with social conservatives to move the Republican Party to the right. They formed a “coalition of the powerful, defending the status quo against threats real and imagined.” For economic conservatives, the threat might be environmental regulations or high taxes. For social conservatives, it might be gay rights or affirmative action. Republican leaders rallied the support of both groups in order to dominate politics during those years. Mainstream economists and moderate Democrats like Bill Clinton went along with much of the new thinking as well.

Appelbaum acknowledges the many economic benefits that resulted as “economists played a leading role in curbing taxation and public spending, deregulating large sectors of the economy, and clearing the way for globalization.” The runaway inflation of the 1970s was tamed; competition increased in some industries; free trade raised incomes in developing countries and brought inexpensive manufactured goods to American consumers. But he also believes that the “market revolution went too far.” Decade by decade, economic growth slowed down, and the benefits of growth went increasingly to the wealthy. Real wages for low-income workers stagnated or declined. The pursuit of short-term benefits put long-term prosperity at risk, as public policy failed to address environmental problems, deteriorating infrastructure, and human capital needs.

The brief era of “activist economics”

When the Great Depression hit in 1929, few economists had the ear of political leaders. Only in 1946 did Congress create the White House Council of Economic Advisers. Four years into the Depression, the British economist John Maynard Keynes published a letter in the New York Times encouraging the recently elected Franklin Roosevelt to stimulate the economy with massive federal spending. Roosevelt met Keynes the following year, but he was reluctant to create very large deficits. New Deal social programs helped reduce unemployment, but wartime spending after 1941 is usually credited with ending the Depression.

Looking back on that experience, economists and policymakers generally accepted the idea that government could steer the economy on a productive path toward full employment and low inflation. The main Keynesian tool would be fiscal policy, which called for spending in excess of tax revenues to stimulate a lagging economy, but curbing spending to cool down an inflationary economy. The prime example of deliberately Keynesian intervention was the tax cut proposed by President Kennedy and signed by President Johnson in 1964. It seemed to work, as unemployment fell from 5.6% in 1964 to 3.5% in 1968.

Opponents of government activism were already having their say, however. “Milton Friedman…wanted to restore the pre-Keynesian consensus that governments could not stimulate economic growth and should not try.” In Capitalism and Freedom in 1962 and A Monetary History of the United States, 1867-1960 (with Anna Jacobson Schwartz in 1963), he argued that the only useful macroeconomic policy was to insure a slow and steady growth of the money supply. The Federal Reserve Bank’s failure to accomplish this was the main reason for either recession or inflation.

Friedman’s ideas were slow to gain traction. Barry Goldwater endorsed them, and Friedman in turn supported him for President, but he lost to Lyndon Johnson in a landslide in 1964. The following president, Richard Nixon, was ideologically sympathetic, saying in his 1968 inaugural address, “Let each of us ask—not just what government will do for me, but what can I do for myself?” Nixon also signed into law one of Friedman’s proposals, the all-volunteer army, in 1971. But when he faced a troubled economy, Nixon also relied on activist policies like deficit spending to fight unemployment and wage-and-price controls to curb inflation.

The stagflation crisis

What really turned the tide in Friedman’s favor was the combination of persistent inflation and unemployment in the 1970s. The rate of inflation hit 5.8% in 1970, 11.1% in 1974, and 13.5% in 1980. Some of the possible reasons were Vietnam War spending with insufficient taxes to pay for it, shortages of foreign oil, and a slump in productivity growth. Friedman blamed the Federal Reserve for allowing the money supply to expand too rapidly. Meanwhile, the rate of unemployment was over 5% for almost the entire decade, with higher spikes during recessions.

Keynesian economics had no good answer for simultaneously high inflation and unemployment. Inflation was supposed to indicate an overheated economy with high aggregate demand pushing up prices. Unemployment was supposed to indicate a sluggish economy with low aggregate demand discouraging production. Appelbaum describes the resulting loss of confidence in Keynesian solutions:

Nixon and his successors, Gerald Ford and Jimmy Carter, kept trying the interventionist prescriptions of the Keynesians until even some of the Keynesians threw up their hands. Juanita Kreps, an economist who served as Carter’s commerce secretary, told the Washington Post when she stepped down in 1979 that her confidence in Keynesian economics was so badly shaken that she did not plan to return to her position as a tenured professor at Duke University. “I don’t know what I would teach,” she said.

The stage was now set for a massive political and policy shift, one that would embrace the free market unencumbered by much interference from government. As President Ronald Reagan announced in his 1981 inaugural address, “Government is not the solution to our problem; government is the problem.”

Continued

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