Alan S. Blinder - A Monetary and Fiscal History of the United States, 1961-2021

A MONETARY AND FISCAL HISTORY OF THE UNITED STATES, 19612021

A Monetary and Fiscal History of the United States, 19612021

Alan S. Blinder

PRINCETON UNIVERSITY PRESS

PRINCETON AND OXFORD

Copyright 2022 by Alan S. Blinder

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Those who cannot remember the past are condemned to repeat it.

GEORGE SANTAYANA

These famous words have been repeated so many times since George Santayana wrote them in 1905 that they have become a clich. But remember, clichs often capture important grains of truth. Mark Twain was probably more accurate when he (allegedly) asserted that history doesnt repeat itself, but it often rhymes. Sad to say, many economists and policy makers are not very skilled at picking up rhyming schemes. This book is intended to help.

During fifty-plus years as an academic economist, one thing I have learned is that my fellow economists have a remarkable propensity for forgetting or ignoring the past. Such lapses of memory may not be terribly problematic in the world of pure theory. After all, scientific progress is rarely made by looking backward, the most reliable route to academic success is jumping onto the latest bandwagon, economic theory runs in fads, and many fads dont last long. But forgetfulness in the world of policy can lead to errors, maybe even to grievous errors with serious consequences, which, I suppose, is what Santayana had in mind when he chose the verb condemned.

Policy makers and their economic advisers must resist fads. But they must also avoid getting trapped in the past. Walking that fine line is one of the key ways in which the science of economics merges into the art of economics. Sometimes the merger works well, but often it doesnt. And thats part of the story I tell in these pages.

This book is light on economic theory, and equations are rarer than dodo birds. However, a number of the theoretical and empirical controversies that have surroundedand sometimes envelopedmonetary and fiscal policy find natural homes here. Furthermore, part of the evolution of thought on macroeconomic policy involves or was even spurred by developments in theory. So, several aspects of macroeconomic theory necessarily play roles in the historical narrative.

That said, this book is a work of history, not of theory, so I studiously avoid sojourns into theory for its own sake. Rather, I limit myself to theoretical developments that had serious bearings on policy making. So, for example, you will find much in these pages about monetarism, rational expectations, and even supply-side economics but little about such popular (among academic economists!) topics as Ricardian equivalence, time inconsistency, and the fiscal theory of the price level. As far as I can tell, those (and other) topics had little or no bearing on actual policy making.

The worlds of ideas and policy have always interacted strongly, and the sixty-year period covered in this volume is no exception. Developments in the world of ideas (usually coming from academia) sometimes have major impacts on the world of policy. Developments in the world of events (including policy events) sometimes have major impacts on thinking in the academy. This two-way interaction is a natural and necessary subtheme of this book, and so is its opposite: cases in which policy makers resisted sensible ideas and academics ignored reality.

A second, more important, subtheme is the interaction between policy and politics. In the realm of monetary policy, where the Federal Reserve normally sets short-term interest rates and its other policy instruments independently, politics has mostly been a sidebar issuethough with some notable exceptions (e.g., Richard Nixon and Arthur Burns). Technocrats, mostly economists, make the policy decisions.

But in the realm of fiscal policy, where publicly debated budget issues are at the forefront, politics rules the roost. Fiscal policy decisions are made by elected politicians, though hopefully informed by facts and by sound economic thinking. These politicians are guided by forms of logic that are alien to economistsIve called them political logic to distinguish them from Aristotelian logic (Blinder 2018). Nonetheless, no history of fiscal policy can avoid delving, sometimes deeply, into the politics of the day. Writing a history of fiscal policy in America that ignored the politics would be leaving out of the play not just the Prince of Denmark but also Ophelia, Laertes, and Polonius.

So, you will find substantial political discussion of fiscal policy in these pages, though I emphasize the economics far more than the politics. In that regard, I should level with the reader by stating right up front that I have long been a center-left Democrat. However, in writing this book (unlike in writing my op-ed columns) I have tried hard to relegate my personal political views to second or third fiddle. Where there were controversies in policy making, I dont shy away from the issues. Instead, I try to give the reader a sense of the arguments on both sidesthough without hiding my own views.

The book is designed to serve two audiences. One is my fellow economists or at least those of them who wish to learn some of the lessons of history, lessons that their graduate educations probably did not teach them and that they, in turn, probably dont teach to their students. Such readers may browse selected portions of the book and then place the volume on their bookshelves for future reference.

The other audience is the general reader who is interested in economic policy, or at least in macroeconomic policy. How does the past shape todays attitudes, options, and debates over monetary and fiscal policy? What worked and what didntand why? For those readers especially, the book is arranged chronologically, not thematically, starting in 1961 and continuing to the end of 2021. It is meant to be read as one continuous story, a nonfiction story to be sure.

The title is not accidental but rather an intentional homage to Milton Friedmans and Anna Schwartzs monumental A Monetary History of the United States, 18671960 (Princeton University Press, 1963), from which the doctrine of monetarism and our current view of the Great Depression, among other things, derives. Two changes from their title are obvious. First, I pick up the story exactly where they left offin 1961. Although I am far from a monetarist, I have no desire to engage in debate with the ghosts of Friedman and Schwartz. This work is in no sense a sequel to theirs.