Beneath the Surface

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Paul Dans and Steven Groves, eds. Mandate for Leadership: The Conservative Promise. Washington: The Heritage Foundation, 2023.

This book is part of “Project 2025,” the 2025 Presidential Transition Project of the Heritage Foundation, a conservative think tank. The idea is to bring together conservative leaders and organizations to prepare for the next Republican administration. The project’s associate director, Spencer Chretien, leaves little doubt that their hope is for a second Trump administration.

In November 2016, American conservatives stood on the verge of greatness. The election of Donald Trump to the presidency was a triumph that offered the best chance to reverse the left’s incessant march of progress for its own sake.

In thirty chapters, the Mandate for Leadership’s many authors formulate policies that they hope the next administration will implement. The book is the first of four “pillars” that support Project 2025. The second is an online personnel database where “rock-solid conservatives” can seek administration jobs. The third is the Presidential Administration Academy, which will offer online training intended to “turn future conservative political appointees into experts in governmental effectiveness.” The fourth pillar is the Playbook, which will turn the ideas in Mandate for Leadership into specific plans for each government agency.

Full disclosure: The book is over 900 pages long, and I have not read all of it. I have focused mainly on Section Four: The Economy, and especially the chapters on the Federal Reserve and the Department of the Treasury.

Curbing the Federal Reserve

The author of the chapter on the Federal Reserve is Paul Winfree, an economist who served as one of President Trump’s key economic advisers. He was one of the principal authors of Trump’s budget proposals.

The chapter envisions a much smaller role for the Federal Reserve than it has today. Since 1977, the Fed has worked under what is known as the “dual mandate,” dedicated both to fighting inflation and maintaining full employment. The central bank is not expected to accomplish either zero inflation or zero unemployment, but to keep the economy reasonably stable so that neither gets out of control. The book recommends eliminating the employment side of the dual mandate and focusing exclusively on price stability.

The book would also scale back the Federal Reserve’s role as a “lender of last resort.” In a financial crisis like the one in 2007, credit dries up because banks are afraid to lend, and the Fed lends more money at low rates to keep the financial system from collapsing. Mainstream economists have largely supported those operations. Conservatives fear that banks will invest more recklessly if they know that the Fed has their back.

Similarly, the book’ proposals would prohibit the Federal Reserve from acquiring financial assets, except for Treasury bonds. It could not do what it did during the financial crisis, buying up mortgage-backed securities to maintain their value and help keep the mortgage market from tanking.

“Free banking”

These proposed curbs on the Federal Reserve are only the minimum reforms called for by the Mandate for Leadership. The book proposes much more fundamental reforms that would be harder to implement but are believed to be more effective in achieving price stability. These are listed in “decreasing order of effectiveness against inflation and boom-and-bust recessionary cycles.”

Supposedly, the most effective of all of these is “free banking”:

In free banking, neither interest rates nor the supply of money is controlled by the government. The Federal Reserve is effectively abolished, and the Department of the Treasury largely limits itself to handling the government’s money. Regions of the U.S. actually had a similar system, known as the “Suffolk System,” from 1824 until the 1850s, and it minimized both inflation and economic disruption while allowing lending to flourish… Economic theory predicts and economic history confirms that free banking is both stable and productive, but it is radically different from the system we have now.

He can say that again, at least the last part! From the perspective of anyone well versed in modern economics, this is rather breathtaking. Winfree is proposing that we manage—to the extent that we manage it at all—a 21^st-century economy with a 19^th-century banking system. Maybe that worked for a country of farmers and small businesses. But after the explosive growth of modern industries and capitalist institutions—and especially after the frequent financial panics and scandals of the Gilded Age—the need for a central bank became widely accepted. The Federal Reserve Act created ours in 1913.

The economic theory Winfree refers to seems to be of the neoclassical sort, where free competition is enough to regulate markets. “Competition keeps banks from overprinting or lending irresponsibly.” The idea that huge investment banks can get away with self-serving behavior that proves detrimental to the financial system is missing from this story.

Commodity-backed money

The second allegedly most effective reform advocated by the Mandate for Leadership is a return to the gold standard. “Treasury could set the price of a dollar at today’s market price of $2,000 per ounce of gold.” Holders of dollars could then redeem them for gold if they wished.

This creates a powerful self-policing mechanism: If the federal government creates dollars too quickly, more people will doubt the peg and turn in their gold to banks, which then will turn in their gold and drain the government’s gold. This forces governments to rein in spending and inflation lest their gold reserves become depleted.

If it were that simple, why did country after country abandon the gold standard and allow currencies to fluctuate with market conditions? One reason is that inflation has other causes besides excessive government spending, such as supply shortages. Then people need more dollars to sustain demand for higher-priced goods, but the number of dollars available is artificially limited by the supply of gold. Here is how a mainstream economist, Ben Bernanke, attributes the Great Depression partly to the rigidities of the gold standard.

The origins of the Great Depression are complex, but the international gold standard, which had been reinstituted following its suspension by most countries during World War I, was a principal cause. The war had been accompanied by substantial inflation, as the government finances of belligerent countries crumbled and shortages of critical commodities multiplied. As countries returned to the gold standard after the war, reestablishing the link between the supply of money and the quantity of available gold, it became evident that there was not enough gold in the world, nor was it distributed evenly enough among countries, to sustain the prices of goods and services at their new, higher levels…. As the global shortage of gold began to reassert itself, money supplies and prices collapsed in the gold-standard countries. The prices of U.S. goods and services, for example, fell by 30 percent from 1931 to 1933. The deflation of the price level in turn bankrupted many debtors—think of farmers trying to pay their mortgages when crop prices were plummeting—which helped bring down the financial system and, with it, the economy. (Bernanke, 21st Century Monetary Policy)

Winfree acknowledges the problem, but dismisses it quickly:

One concern raised against commodity backing is that there is not enough gold in the federal government for all the dollars in existence. This is solved by making sure that the initial peg on gold is correct.

Correct? What does that mean in this context? Before the U.S. went off the gold standard completely in the 1970s, the price of gold was pegged at $35 an ounce; today’s proposal is $2,000 per ounce. That ought to make us skeptical that any particular peg will be “correct” for very long.

Fixed rate of money supply growth

The book’s third allegedly most effective reform is to bring back Milton Friedman’s proposal for growing the money supply at a fixed rate, like 3 percent per year. The Fed would be setting a target for the money supply instead of for the inflation rate, as it does now. This was tried about forty years ago but soon abandoned as unworkable. Most economists have moved on, but apparently not all.

In general, the Mandate for Leadership’s proposals for the Federal Reserve and monetary policy seem too radically conservative to have much hope of adoption.

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I will complete my overview of Alan Blinder’s Monetary and Fiscal History of the United States, 1961-2021, by discussing the three other themes he sees in the story of those years.

Who sits in the first chair, fiscal policy or monetary policy?

This theme is closely related to the changing fortunes of Keynesian theory and policy, since Keynesianism makes heavy use of fiscal policy. Prior to the Keynesian ascendancy in the Kennedy-Johnson years, neither fiscal nor monetary policy preoccupied government leaders. The deliberate manipulation of spending, taxing, or interest-rate levels to stimulate or constrain the economy would mostly come later.

The success of the Kennedy-Johnson tax cuts put fiscal policy in the “first chair,” but only briefly. Richard Nixon relied on both expansionary fiscal policy and loose monetary policy—through his influence on Fed Chair Arthur Burns—to boost the economy prior to his reelection in 1972.

The inflation of the 1970s focused attention on monetary theory and policy. On the one hand, Milton Friedman laid the blame for inflation squarely on the Federal Reserve for expanding the money supply too rapidly. On the other hand, economists began to question the effectiveness of fiscal policy for combating unemployment. The high interest rates imposed by the Federal Reserve under Paul Volcker were the most notable policy of the early 1980s. Fiscal policy remained somewhat expansionary, however, since Ronald Reagan was more successful in cutting taxes than cutting spending.

In the 1990s, fiscal policy was a major focus of the Clinton administration, but the emphasis was on deficit reduction rather than economic stimulus. Blinder believes that Fed Chair Alan Greenspan handled monetary policy very well in this period, with interest rates low enough to avoid recession but high enough to control inflation.

Fiscal policy turned deliberately expansionary after 2000, as Presidents George W. Bush and Donald Trump both cut taxes and increased spending. It became even more expansionary when the Obama and Biden administrations spent even more to combat the severe recessions following the financial crisis of 2007 and the pandemic of 2020. Monetary policy was very active in this period as well, with cuts in interest rates and other measures to keep financial markets liquid.

Which dominated, fiscal policy or monetary policy? Before the 1960s, neither; then briefly, fiscal policy (Kennedy-Johnson); then at times, monetary policy (Volcker). In recent decades, both have played major roles.

The rise of central bank independence

As policymakers came to appreciate the importance of monetary policy for managing the economy, they also came to respect the independence of the Federal Reserve Bank. Government spending and taxing decisions are heavily political, but Blinder agrees with the many economists who argue that central bank decisions can and should be less so. “[F]iscal policy decisions will continue to be made largely on political grounds while monetary policy decisions will continue to turn on technocratic, economic considerations. The twain will not soon meet.”

Blinder says that Richard Nixon’s collaboration with Fed Chair Arthur Burns was probably the low point for central bank independence (CBI). When Paul Volcker took over in 1979, the situation changed. “The virtues of CBI have rarely been questioned since then, at least not in the United States.”

That does not mean that political leaders have always been happy with the Fed’s decisions. Donald Trump complained that interest rates were too low during the Obama administration, and then complained they were too high during his own administration. But the Fed continued to go its own way.

Do budget deficits matter?

Back in the Eisenhower era, deficits were commonly regarded as “fiscally imprudent” and even “morally repugnant.” Deliberately risking a budget deficit to stimulate the economy was a bold move when the Kennedy-Johnson administration first proposed it. Many economists wanted Keynesian policies to be symmetric—calling for deficit increases in bad times but deficit reductions in better times. In practice, tax cuts and spending increases turned out to be easier to initiate than to reverse.

Many leaders tried to maintain their theoretical commitment to balanced budgets even as they ran up deficits. Voters were attracted to Reaganomics, which promised both immediate tax cuts and eventual balanced budgets. When the balanced budgets failed to materialize, it fell primarily to Bill Clinton to eliminate the deficit with a combination of tax increases and spending cuts. Then when the Republicans returned to power, the deficits started growing again.

Since 2000, both major parties have contributed to normalizing large deficits. Republicans have done it mainly by cutting taxes, while Democrats have done it mainly by protecting popular spending programs. Democrats have also provided more of the support for fiscal stimulation to counteract severe recessions, with occasional help from Republicans. Republicans call more loudly for spending cuts, but rarely deliver them when they are in power.

Here I will add some thoughts about the current situation. For the fiscal year just ended, federal outlays were about $6.4 trillion, revenues about $4.8 trillion, leaving a deficit of about $1.6 trillion. Eliminating the deficit without raising revenues would require an across-the-board spending cut of 25%. However, neither party is eager to be accused of weakening the nation’s defenses or cutting popular benefit programs like Social Security, Medicare, unemployment compensation or veterans’ benefits. Such programs, plus interest on the existing debt, constitute 84% of the federal budget! The debate over budget cuts centers on the “nondefense discretionary” spending that remains, which covers everything else the federal government does from medical research to air-traffic controllers, border security, federal law enforcement, food and drug regulation, etc., etc.

Suppose Congress were to cut all nondefense discretionary programs by 30%, as a recent Republican proposal called for. That would save about $300 billion a year, but that would still leave about 80% of the deficit untouched. And because government is a labor-intensive activity, it would cause massive unemployment in the federal workforce and severe disruptions to government services. That’s why no serious proposal for reducing the deficit can overlook the biggest parts of the budget or refuse to consider rolling back some of the Republican tax cuts for corporations and the wealthy.

Serious deficit reduction would require bipartisan support for a combination of spending reductions and revenue increases. That is not a very likely prospect, considering that House Speaker Kevin McCarthy got voted out of office just for allowing a vote on a bipartisan resolution to avoid a government shutdown. The resolution in question was supported by 77% of House members, but it went against the hardliners’ effort to hold the government hostage until it adopted their agenda. Those folks were following Donald Trump’s mandate—“UNLESS YOU GET EVERYTHING, SHUT IT DOWN!” That pretty well summarizes the MAGA philosophy of governing, as well as reveals its contempt for the democratic process.

Getting back to the deficit, Blinder does not mention a new economic theory with Keynesian roots, “Modern Monetary Theory” (MMT), probably because it has yet to achieve much acceptance in mainstream economics. Its proponents argue that a nation with “sovereign monetary authority” can sustain deficits better than a household or other entity that lacks control over its own money supply. A good introduction to it is Stephanie Kelton’s The Deficit Myth.

Do deficits matter? Apparently not as much as they used to, considering how long we have been living with them. There will always be limits, but they are probably not as severe as we once thought.

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Keynesian economics rediscovered

The George W. Bush administration ended with an economic disaster—the financial crisis of 2007 and the worst economic recession since the Great Depression. Two economic bubbles burst, a bubble in housing prices and a bubble in fixed-income investments, especially the derivative investments based on shaky mortgage loans. Blinder does not link these asset bubbles to Republican tax cuts, but other Keynesians suggest a connection. Paul Krugman makes a case in Arguing with Zombies that tax cuts for the wealthy have been a “fizzle” because too much of the money has gone to boost the price of existing assets instead of financing new investment.

As the financial crisis turned into the Great Recession, “policy makers all over the world turned Keynesian very quickly.” In the United States, Keynesian responses began with the Economic Stimulus Act of 2008, which sent $600 checks to individual taxpayers ($1200 to married couples). Economic leaders soon realized that it wouldn’t be enough. Treasury Secretary Henry Paulson and Fed Chair Ben Bernanke then persuaded Congressional leaders of the need for a much more aggressive program. They proposed a $700 billion Troubled Assets Relief Program to buy devalued financial assets. Much of the money was aimed at injecting capital into troubled banks. President Bush relied on Democratic votes to pass these measures, with most Republicans voting no. After President Obama (2009-2016) took over, an additional stimulus bill, the American Reinvestment and Recovery Act (ARRA), passed without a single Republican vote.

Blinder joins many other economists in crediting these measures—plus the bank stress tests, which were more regulatory than stimulative—with turning the corner on the recession. It bottomed out in 2009 and was followed by the longest expansion in U.S. history, lasting until the pandemic of 2020.

Politically, the change of fiscal policy was highly polarizing. While Democrats turned sharply Keynesian, Republicans turned sharply anti-Keynesian. After Obama took office, the Tea Party movement whipped up anti-tax, anti-spend sentiment. Its leaders were especially incensed about Obama’s relatively small program to assist homeowners facing foreclosure, despite the fact that polls found about two-thirds support for it. Republicans started describing ARRA as the “failed stimulus” even before it had time to work. After Democrats lost the House in 2010, economic policy turned contractionary, even though the still recovering economy could have used additional stimulus. After several years of anti-Keynesian rhetoric, “No politician even dared utter the word ‘stimulus’.”

With the election of Donald Trump in 2016, the policy focus turned back to tax-cutting. The administration’s arguments for it were largely divorced from any widely accepted economic theory.

Trump’s supply-side rhetoric far surpassed anything the Bush team ever dared claim. If you took Trump at his word, the tax cuts would propel annual GDP growth into the 5-6 percent range [at least double the recent rate], reduce the budget deficit, and then produce surpluses large enough to pay down the national debt. Of course, no serious economist believed those claims.

In fact, after the tax cut the recovery continued at about the same moderate pace as before, but with even larger budget deficits. Unlike previous tax cuts, these were not even very popular, since they favored corporate shareholders and other wealthy taxpayers over the general public.

The coronavirus pandemic of 2020 caused a short but especially severe recession, as it seriously disrupted economic activity of many kinds. With Trump in office, Congress responded with bipartisan support for the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the largest spending bill in history. The economy bounced back sharply by late in the year. When Joe Biden assumed office in 2021, Republicans turned against any additional spending. Biden’s American Rescue Plan squeaked through Congress with no Republican votes. One of its provisions was a larger and refundable child tax credit, available even to families too poor to pay income taxes. (It would turn out to cut child poverty from 9.7% to 5.2% in one year, but poverty went back up again when Senate Republicans blocked its extension with the help of Joe Manchin.)

Because the economy was already recovering by 2021, economists disagreed over whether Biden’s additional deficit spending made economic sense. When inflation surged in 2022, they debated how much inflation was due to excess demand, as opposed to lingering supply shortages caused by the recession. Republicans blamed the Biden administration alone, and went back to calling for deficit reduction. As usual, they meant only spending cuts, not tax increases.

Keynesian economics and political ideology

The two severe recessions of the twenty-first century—the Great Recession of 2007-2009 and the epidemic of 2020—triggered Keynesian policy responses and fostered a renewed respect for Keynesian theory. The idea that the markets were self-regulating and would quickly stabilize themselves without government intervention became less credible. “The competitors to Keynesian economics all either fell of their own weight (e.g., monetarism) or saw their most useful aspects incorporated into the Keynesian tradition (e.g., rational expectations).”

However, the two major American political parties participated in these developments in very different ways. Democrats have a long tradition of Keynesian thinking. Blinder’s list of “basically Keynesian” presidents includes five Democratic presidents—Kennedy, Johnson, Carter, Obama, and Biden—but only two Republicans—Nixon and Ford, both over forty years ago. Democrats have proved more willing to raise government spending or lower taxes with the explicit aim of increasing aggregate demand. Neither party has used spending cuts or tax increases very often to fight inflation—they have relied more on monetary policy for that—but the most successful deficit reduction program in recent memory was implemented by a Democrat, Bill Clinton, without Republican support.

For the past forty years, Republicans have simply called for less government—less spending and less taxation. That may make sense from an old neoclassical perspective, where the economy works best on its own. But the field of economics has not fully embraced that view since the Gilded Age. As Keynesian economics regains support, Republicans find themselves more and more disconnected from today’s economic thinking. To make matters worse, Republicans often fail to practice the economic theory they do preach. They overlook deficit spending by Republican administrations but deplore it by Democratic ones.

Blinder says that fiscal policy decisions are more political than monetary policy decisions, which can be more narrowly technical. Taxing and spending decisions reflect what kind of society and government Americans want. Different political parties will continue to disagree on such questions, whatever happens in the field of economics. Nevertheless, I believe that the contributions of economics can keep political discussion from degenerating into a clash of ideologies. Economists really do try to figure out how economies work, and they really do learn from experience. For all their false starts and blind alleys, economists have a better understanding of national economies than they did a hundred years ago. Some of the things they have learned lately are that aggregate demand matters after all, and that a thriving capitalist economy requires strong aggregate demand, not just an adequate supply of capital. Policies designed to give capitalists more capital to play with can lead to foolish investments and unsustainable asset bubbles.

In Arguing with Zombies, Paul Krugman used the term “zombies” to refer to “ideas that should have been killed by contrary evidence, but instead keep shambling along, eating people’s brains.” I see the persistence of economic zombies as part of a larger trend—the increasing preference of some political leaders for propaganda over facts and science. MAGA Republicans are the worst offenders, probably because what they want for the country is most difficult to defend on rational grounds. Economic literacy is part of the knowledge base that an informed electorate needs to tell the wise leaders from the charlatans and govern itself responsibly.

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Alan S. Blinder. Monetary and Fiscal History of the United States, 1961-2021. Princeton: Princeton University Press, 2022.

For those of us interested in economic policy, this is a useful history of the past six decades. It provides a handy reference for recalling the economic ideas and policies of particular administrations. Although it is rather technical in spots, such as the chapter on “rational expectations” theory, much of it is accessible to non-economists with an interest in public affairs.

Trying to summarize a book of this kind would be a challenging exercise. Fortunately, Blinder has identified a few general themes that unify the narrative. They are, as he titles them in the sections of his final chapter:

• Who sits in the first chair, fiscal policy or monetary policy?
• The rise and fall and rise and…of Keynesian economics
• Do budget deficits matter?
• The rise (without a fall) of central bank independence

This post will focus on the second theme, the ups and downs of Keynesian economics as an influence on federal government policy.

Keynesian economics in vogue

Blinder does not explain Keynesian economics as one would in a textbook, but jumps right in to discuss how different federal administrations have applied it (or failed to do so). I think he would have done non-economists a favor by providing at least a short overview at the beginning of the book. He does define Keynesian policy briefly as the “belief in using fiscal policy to influence aggregate demand.” The government can set spending and taxing levels not just with the aim of balancing the budget, but with an eye toward raising or lowering the demand for economic goods and services. Theoretically, these variations can stabilize the economy by either stimulating a recessionary economy or curbing an inflationary one. Blinder is a sympathetic observer of such policies, saying that his own “macroeconomic framework is decidedly Keynesian.”

Several decades before the era covered by this book, the Franklin Roosevelt administration revved up the economy with massive spending on the New Deal and World War II. But FDR was more of a pragmatist than a theorist. The economic theories put forth by John Maynard Keynes in the 1930s did not become an explicit basis for economic policy until the Kennedy and Johnson administrations of the 1960s. The previous president, Dwight Eisenhower, had maintained the strong belief in balanced budgets more typical of early twentieth-century Republicans.

The centerpiece of Kennedy-Johnson policy was the tax cut proposed by Kennedy after the 1960-61 recession, but not passed until 1964. Blinder describes it as “the first deliberate and avowedly Keynesian fiscal policy action ever undertaken by the U.S. government.” The tax cut’s apparent success in stimulating economic growth and reducing unemployment helped establish the reputation of Keynesian economists in the 1960s. (My college classes in economics around that time were explicitly Keynesian.)

But there was a cloud on the horizon. Blinder says that “in theory, fiscal policy is symmetric. You raise taxes or cut spending to rein in aggregate demand, just as you cut taxes or boost spending to spur aggregate demand.” Nice theory. But politically, raising taxes or cutting spending can be a tough sell. In practice, Keynesian policy has been asymmetric, more often expansionary than contractionary.

Lyndon Johnson did not want to raise taxes or cut his Great Society social programs in order to pay for the (increasingly unpopular) Vietnam War. Instead, he made the macroeconomic mistake of “piling a mountain of defense spending on top of an economy that was already at…full employment.” That generated inflation. In 1968, Johnson approved a temporary surcharge on income taxes, but it was too little too late. And that was about the last time that a Keynesian fiscal policy would be used to cool down the economy instead of to stimulate it. After that, the task of fighting inflation would fall mainly to the monetary policies of the Federal Reserve.

Keynesian economics under attack

Faced with a mild recession during his first term, President Nixon (1969-1974) coordinated with his Federal Reserve Chair Arthur Burns to provide both fiscal and monetary stimulus. The latter was in the form of low interest rates to encourage borrowing and spending. The growth rate soared again, just in time to help get Nixon reelected in 1972, but he had to resort to wage and price controls to counter the resulting inflation. When those controls were phased out during his abbreviated second term, inflation really took off.

To make matters worse, the oil shortages imposed by OPEC in the 1970s produced price spikes in oil and related products. The economy fell into a period of stagflation, when it suffered from both higher prices and higher unemployment at the same time. Keynesian economists had been accustomed to thinking in terms of an either-or, either a sluggish economy with high unemployment or a booming economy with rising prices. How to deal with unemployment and inflation at the same time was not immediately obvious.

Many economists began to interpret stagflation as a failure of Keynesian theory and practice. That opened the door to non-Keynesian perspectives. Milton Friedman’s monetarism provided a simple alternative. He viewed inflation as a purely monetary phenomenon resulting from the Federal Reserve’s failure to control the money supply, a failure that could occur even in times of high unemployment. The way to avoid inflation—including stagflation—was to allow the money supply to grow only slightly faster than the growth of GDP. Government fiscal policy had little to do with it.

Friedman’s monetarism was part of a general movement in economics back to pre-Keynesian thinking. Neoclassical economists had imagined the economy as a self-stabilizing system requiring little government management. Flexible pricing was the key to rapid stabilization in the face of economic fluctuations. If the supply of labor exceeded the demand, leaving many workers unemployed, the price of labor would fall until more employers found it economical to hire. The economy’s natural tendency was toward full employment, and workers who chose not to work at the prevailing wage were considered out of the labor force instead of unemployed.

Economists like Friedman followed a similar logic, although they saw the economy fluctuating around a “natural rate” of unemployment well above zero. (Some workers were hard to employ even if they wanted to work.) Whatever the natural rate of unemployment really was, the point for policy was that government spending or tax cutting couldn’t really reduce unemployment in the long run. Government could control inflation, but with monetary rather than fiscal policy. That left little for fiscal policy to do.

The economists Blinder calls “new classical” provided additional reasons why Keynesian policies were ineffective, often involving what they called “rational expectations.” A temporary tax cut might not stimulate as much new spending as policymakers intended, since a rational taxpayer might save the money in anticipation of higher taxes to come.

Blinder defends Keynesians against the charge that they had failed either to explain or control inflation. He argues that they soon incorporated supply shocks into their models, which then did a pretty good job of accounting for stagflation. Controlling inflation in the face of those shocks without increasing unemployment would have been hard for any policymaker. What actually happened was that a new Federal Reserve Chair, Paul Volcker, took over in 1979 and drastically raised interest rates. That discouraged borrowing and spending, dramatically cutting inflation, but threw the economy into a deep recession in 1981.

Blinder obviously feels that the critics were too quick to declare the death of Keynesian economics. In their eagerness to bury it, they exaggerated the market’s capacity for self-stabilization, the speed with which prices adjust to changes in supply or demand, and the degree to which people’s expectations confound policymakers’ intentions. As for Friedman’s monetarism, his main recommendation to set targets for the money supply itself—as opposed to just manipulating interest rates—was tried for a few years but soon abandoned as unworkable.

Reaganomics

Blinder sees a number of American presidents as “basically Keynesians”—Kennedy, Johnson, Nixon, Ford, Carter, Obama and Biden. He says that three Republican presidents—Reagan, George W. Bush, and Trump—“shunned the Keynesian label but acted Keynesian in practice” because of their large tax cuts. However, Blinder makes clear that the tax-cutting tradition begun by Ronald Reagan (1981-1988) had a very different economic rationale. I would call it “pseudo-Keynesian” at best.

Reaganomics was never just about stimulating aggregate demand by putting more money in the hands of taxpayers. It was about stimulating the “supply side” by giving people—especially wealthy people—more money to save and invest. In effect, this would give capitalists more capital, so they could grow the economy from the top down. Supply-side economists claimed that the tax cuts would pay for themselves because of the additional tax revenue generated by economic growth, a dubious claim in the eyes of most economists. Reaganomics was not supposed to be about deficit spending. It had the twin goals of reducing taxes and reducing spending, with the aim of moving toward balanced budgets and less government debt.

In most respects, Reaganomics failed to live up to its billing. The Reagan administration did not produce economic growth rates higher than the administrations that preceded or followed it. Nor did it cut spending enough to offset its tax cuts, and so it increased the federal deficit. Ironically, the unwanted deficit provided a Keynesian stimulus after the Fed’s high interest rates threw the economy into recession. The period from 1982 to 1990 was a period of steady, although unspectacular, growth. Keynesianism in practice, maybe, but certainly not in theory.

Republicans interpreted the mixed results as a victory. They began to preach the doctrine of perpetual tax cutting without regard to economic conditions. “[T]he desirability of tax cuts, whether the budget is near balance or showing a big deficit and regardless of whether the economy is soaring or sagging, has become the central tenet of Republican economics.” Republicans also preached the doctrine of balanced budgets, but mostly when the other major party was in office! Little of this made sense from the standpoint of mainstream macroeconomics.

[A] clear political pattern had emerged: Republicans railed against budget deficits when a Democrat was in the White House but accepted them willingly, even eagerly, when a Republican was in the White House, especially if the deficits stemmed from tax cuts for the wealthy. In retrospect, the Reagan episode was not a deviation from the norms of the party that once stood for fiscal discipline. Rather, it marked the start of a new normal, interrupted by Bush I and Clinton.

Why “interrupted by Bush I and Clinton”? Because those presidents were the first to face the pressure to reduce the deficits associated with Reaganomics. In 1990, George H. W. Bush reached a deal with Democrats to combine spending cuts with some tax increases. That got him in trouble politically because it violated his “read my lips, no new taxes” campaign promise. Under Bill Clinton (1993-2000), Congress passed another deficit-reduction package, this time with no Republican support at all. That was because Republicans were now holding out for a plan that included only spending cuts and no tax increases. They continued to do so after they took control of the House in 1995, giving in only after trying unsuccessfully to use government shutdowns to have their way. (Does this sound familiar?)

Other things being equal, deficit reduction would be expected to slow the economy. Instead, the country experienced an economic boom extending throughout the 1990s, with higher tax revenues that helped turn the deficit into a surplus. Blinder attributes this to special circumstances. In the bond market, interest rates remained high because of inflation fears. (Lenders demand higher rates when they fear that inflation will erode their returns.) When the deficit-reduction plan calmed those fears, “interest rates dropped like a stone, which helped jump-start the economy and throw the great American jobs machine into high gear.” Fed Chair Alan Greenspan helped this expansion too, by betting that rising productivity would allow more growth without inflation, so a tighter monetary policy was not called for. (Blinder himself became vice chair of the Fed in 1994, so he knows.) Unfortunately, these developments reinforced the belief that deficit reduction is generally good for the economy, a clearly anti-Keynesian notion.

The Clinton budget surplus did not last for long. It disappeared after a new round of tax cuts by George W. Bush (2000-2008).

George W. Bush’s fiscal policies turned out to be among the most profligate in U.S. history to that point. His precedent of not “paying for” tax cuts in 2001 and 2003 was quickly extended to not paying for the wars in Afghanistan and Iraq and even to his expansion of Medicare to include prescription drugs.

Like the Reagan tax cut, these policies provided a Keynesian stimulus without a theoretical justification, since the economy was too strong to need the stimulus at the time. The decline of Keynesian economics had left at least one political party without a coherent and economically grounded policy. But economics was on the verge of big changes.

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Yesterday I discussed the argument that Donald Trump lacked criminal intent when he tried to overturn the results of the 2020 election because he was acting in “good faith.” Trump’s lawyers have been floating another defense in the media, that he was simply exercising his right of free speech. The latest indictment is constitutionally invalid because it “criminalizes speech.” I find this argument even weaker than the first.

Even citizens with only a casual familiarity with the law should notice that not all forms of speech are constitutionally protected. Among those that are not protected are incitement to riot, defamation, and lying to the FBI. Speech is also illegal if it is a means to perpetrate a fraud. Lying about one’s financial condition is not in itself a crime, but it becomes one if the aim is to evade taxes, obtain a bank loan, or solicit investments or charitable donations under false pretenses. (Donald Trump has had some problems in these areas too, but that’s another story.)

The former president’s indictment for conspiring to overturn the election acknowledges that he had the right to say that he won, as well as to pursue legal means to prove it, such as investigations, recounts and lawsuits. What the indictment charges him with is resorting to fraudulent means when these legal means failed for lack of evidence. Asking the Justice Department to investigate allegations of wrongdoing was legal. Trying to get Justice to send a letter to the states claiming that the department had found voting irregularities it really hadn’t found was not. Asking a state official to conduct a recount was legal. Asking him to find the number of votes Trump needed was not. Having alternative electors standing by in case a recount changed the outcome was legal. Having fake electors file affidavits claiming to be the certified electors was not. Asking Members of Congress to debate the legitimacy of electors was legal. Insisting that the Vice President accept the fake electors instead of the real ones was not. The entire criminal conspiracy was implemented by means of speech!

In the end, our democratic elections are legal proceedings regulated by many laws. All citizens are entitled to their opinions about them. But once all the legal processes have run their course, all candidates and their supporters have to abide by the outcome. That means refraining from using speech to perpetuate unsupported allegations and pressure people to take illegal actions. Only people who want to place themselves above and beyond the law refuse to recognize any boundaries on their speech. The indictment is not criminalizing free speech, but simply enforcing a distinction between legal and illegal speech that is essential to the rule of law in a democratic society.