Book Review: "A Monetary and Fiscal History of the United States, 1961-2021"

Alan S. Blinder. A Monetary and Fiscal History of the United States, 1961-2021. Princeton: Princeton University Press, 2022. 440 pp. $24.95 (paperback), ISBN 978-0691238401. Reviewed for EH.Net by Brad DeLong, University of California…

In essence, the overarching takeaway from Alan Blinder’s A Monetary and Fiscal History of the United States, 1961-2021 is that there is no single, definitive lesson to be learned. The narrative lacks a linear progression, and the post-WWII era does not present a clear trajectory of improved economic management for macroeconomic stability. Instead, Blinder portrays the history as

wheels within wheels, spinning endlessly in time and space… [with] certain themes… waxing and waning… monetary versus fiscal… the intellectual realm… the world of practical policy making… the repeated ascendance and descendance of Keynesianism…

Issues arise and are addressed—or not. But each solution or lack thereof sets the stage for new problems. These new challenges leave the economy more susceptible, due to the very actions taken previously. By the narrative’s conclusion, one perceives a cyclic recurrence of similar problems, resembling an eternal game of whack-a-mole. This perspective underscores the complex and often cyclical nature of economic policy challenges, emphasizing that history is more about recurring themes and less about a straightforward path of progress. And even when one does succeed in stabilizing the economy, it is because of guesses from a weak knowledge base: I remember Blinder telling me in the early 1990s that the structure of the macroeconomy changes so fast and business cycles come sufficiently rarely that forward-looking business-cycle analysis is always fundamentally based on a one data-point regression with the sample limited to the business cycle just past.

On the fiscal side, Alan Blinder’s book stands as a worthy successor to Herbert Stein’s 1969 classic The Fiscal Revolution in America: Policy in Pursuit of Reality. While Blinder’s work is broader in scope and more contemporary, it leans more heavily into political and intellectual narratives than Stein’s administrative and technocratically focused analysis. For anyone seeking to understand the historical trajectory of fiscal and monetary policy in the United States, both works are indispensable.

However, when it comes to monetary policy, I hesitate to call Blinder’s book a successor to Milton Friedman and Anna J. Schwartz’s 1963 A Monetary History of the United States, 1867-1960. The framework presented by Friedman and Schwartz, which views macroeconomic outcomes through a rigid framework of mechanical transmission from the M2 money stock to nominal spending, falls short. This perspective assumes independent determinations by central banks, banks, and households regarding high-powered money, the deposit-to-reserve ratio, and the deposit-to-currency ratio, respectively. Such an approach fails to capture the complex, interdependent nature of monetary economics. Consequently, despite the numerous accurate observations and insights in A Monetary History, they do not coalesce into a coherent framework. Blinder does a much better job of not letting a faulty analytical framework—and, over a span of sixty years, all simplistic macroeconomic-model frameworks will be faulty—get in the way of the book.

Blinder’s central thesis, if he has one, is that:

Fiscal 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…

This suggests that macroeconomic stabilization and growth policies will remain a complex mix, tackling current issues while inadvertently creating new problems for the future. This is exacerbated by the disjointed functioning of fiscal and monetary policies and the persistent reliance on outdated models by policymakers. These models often fail to address the current fiscal and monetary environment effectively, as they are rooted in the contexts of past generations rather than present realities. Thus, the policy landscape is destined to be one of ongoing adjustments and recurring challenges, much like a blancmange of evolving issues.

I highly, highly recommend this book.

I see, in addition to that semi-central thesis, three major leitmotifs in Blinder’s book:

(1) The Perils of Politicized Monetary Policy: Blinder illustrates how monetary policymakers can derail economies and permanently damage their reputations when they make decisions based on political considerations. The case of Arthur Burns, whose reputation was marred by his focus on Nixon’s re-election in 1972, serves as a stark example. Alan Greenspan’s legacy, too, is diminished by his apparent support for the Bush tax cuts during the 2001 congressional debate. Blinder notes:

During the congressional debate in 2001, Greenspan tarnished his gold-plated reputation by seeming to endorse the Bush tax cuts. His thinly disguised advocacy not only crossed the line between monetary and fiscal policy but also struck many people as way too political for the Federal Reserve. Democrats were naturally displeased. But Greenspan’s endorsement of the Bush tax cuts probably didn’t hurt his chances for reappointment by Bush in 2004…

(2) The Complexity of Fiscal Policy: Blinder emphasizes that effective demand-management and growth-oriented fiscal policy is extraordinarily intricate. The appropriate guidelines and best practices shift significantly from decade to decade, rendering them nearly incomprehensible to the political system in real-time. This evolving complexity poses a significant challenge.

(3) The Limited Utility of Macroeconomic Theories: Blinder critiques the practical effectiveness of macroeconomic theories, particularly those championed by the elite academic community.

Let me elaborate.

These theories often fail to provide actionable guidance. Policymakers who have relied on elite macroeconomic thought often find themselves out of sync with current economic realities. Instead of guiding policy towards future economic conditions, these theories are typically based on outdated historical analogies and ideological biases. Even at best, such theories are of little use in a dynamically changing economic landscape driven by technological advancements.

In the worst of times, those who attempted to rely on cutting-edge macroeconomic theory found that it told them to take off their skates and exit the rink entirely.

And even in the best of times, policymakers who adhered closely to academic elite macroeconomic theories found themselves reacting to past economic conditions rather than anticipating future developments. These cutting-edge theories were essentially historical analogies from previous generations, influenced by ideologies—ideologies that one would hope were benign like oregano, rather than distortive like peyote. These theories offered little utility in a rapidly changing macroeconomy. Policymakers who paid them much attention found themselves skating not to where the puck was going to be, not even to where the puck was, but to where the puck had been in the past.

I would especially note this:

By about 1972 the strong consensus among macroeconomists was that neither monetary nor conventional forms of fiscal policy had permanent effects on employment or output. There was a short-run… no long-run trade-off…. Expansionary monetary or fiscal policies could put the economy on a short-term “sugar high.” But the sugar would dissolve, leaving inflation somewhat higher in its wake. That quickly became the canonical view in [élite high-status] academia, and it still is…

This proved disastrous for Federal Reserve Chair Ben Bernanke’s and President Barack Obama’s stabilization policymaking in the aftermath of the 2007-2009 financial crisis and Great Recession. Their belief that further stimulative measures to rapidly restore full employment would merely put the economy on a short-term sugar high followed by the creation of a persistent inflation problem doomed the United States to a lost half-decade in the first half of the 2010s. When President Joe Biden and Fed Chair Jerome Powell decided to ignore that conventional wisdom after the Covid plague depression of 2020, their stimulative policies rapidly returned the economy to full employment, and did so without creating any persistent inflation problem requiring a substantial recession to solve.

And Blinder’s scars from the 1970s clearly—and, I think, justifiably, pain him.

Blinder judges that once-fashionable monetarism:

rose to prominence on a combination of some hotly disputed scholarly work, Milton Friedman’s singular brilliance and skill in debate, and perhaps most important the [supply-shock driven] rise of inflation… [in which] Keynesianism was unjustly tagged as inherently ‘inflationary’… registered substantial influence on policy formulation…

And its influence on policy was substantial and malign:

The policy debate was… about whether fiscal policy not accommodated by monetary policy mattered. As it turns out, it did…

But Blinder also pulls no punching in recognizing acts of successful monetary judgment and statesmanship, even by those who I believe waged subterranean bureaucratic war to make sure Blinder’s own career as a monetary policymaker reached a premature end:

Greenspan [in the mid-1990s] saw that inflation was not rising. Why not? He hypothesized that rapid productivity growth from New Economy innovations was pushing potential GDP up faster than people realized. It was a hunch at first, but the data subsequently vindicated his iconoclastic view. Due largely to this ‘great call,’ the Fed let the good times roll into the late 1990s…

In sum, Blinder’s book offers a compelling and insightful journey through the tumultuous landscape of U.S. macroeconomic policy after World War II. It allows readers to sit in the passenger seat as the U.S. government navigates the treacherous terrain of managing the macroeconomy, striving for price stability, full employment, financial robustness, and healthy investment. Each episode in this narrative is vividly and wittily recounted, and I believe Blinder’s portrayal is almost entirely accurate.

Engage with this work, and you will gain the knowledge and perspective necessary to present yourself as a sagacious and respected elder statesperson in the realm of macroeconomic policy. You will be equipped with valuable historical lessons that are essential for understanding and advising on the complexities of economic policy.

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References:

Friedman, Milton, & Anna J. Schwartz. 1963. A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press.
Stein, Herbert. 1969. The Fiscal Revolution in America: Policy in Pursuit of Reality. Chicago: University of Chicago Press.