A Monetary and Fiscal History of the United States, 1961-2021 • Princeton University Press • 2022 • 432 pages • $39.95
It’s hard to imagine a better moment for Alan Blinder’s new book, A Monetary and Fiscal History of the United States, 1961-2021, to appear. After all, no issue is more important right now in American politics than inflation, which was over 8 percent for much of this year, while no economic question is more important right now than how the Federal Reserve can get inflation under control without sending the economy into a deep recession. Economists, meanwhile, have spent much of the past year arguing about what role the Biden Administration’s big fiscal stimulus played in fueling rising prices, and whether the benefits of that stimulus—in the form of millions of jobs created and an unemployment rate as low as 3.5 percent—have outweighed the costs. In other words, policymakers are wrestling with the questions at the heart of Blinder’s book.
That book offers pretty much exactly what the title promises, a blow-by-blow chronological history of the evolution of American monetary and fiscal policy over the last 60 years, along with short biographical sketches of key figures in that history, and sharp analytical riffs on the issues policymakers wrestled with during this period. Its clear antecedent, as Blinder writes, is Milton Friedman and Anna Schwartz’s legendary 1963 work A Monetary History of the United States, 1867-1960. But Blinder has pointedly gone beyond the scope of that book by telling the story of monetary and fiscal policy together, “as those two types of stabilization policy struggled—sometimes cooperatively, sometimes combatively—to fight recessions, unemployment, and inflation.”
The decision to incorporate fiscal policy into his narrative may in part reflect Blinder’s ideological assumptions—the longtime Princeton professor, member of Bill Clinton’s Council of Economic Advisers, and former vice chairman of the Fed’s Board of Governors is a quintessential Keynesian economist who believes that fiscal policy is a useful tool to combat recessions, while Friedman, at least, was a conservative who was skeptical that fiscal policy mattered much at all. But the more important reason for including fiscal policy is that telling the history of macroeconomic management over the last 60 years without including fiscal policy would be to leave out a huge chunk of the story.
That’s because, as Blinder argues, it was only beginning in the 1960s that the U.S. government began to systematically use fiscal policy to try to stimulate the economy when it slumped. At the same time, the Federal Reserve was going from seeing its role primarily as being “a bulwark against inflation” to being mandated to maximize employment while also keeping inflation under control. The story Blinder tells, then, is not just the story of what the Fed and presidents and Congress did. It’s also the story of the changing views of what government can and should do to the economy.
That narrative is, on the whole, one of progress, however halting. That’s especially the case when it comes to monetary policy, where over the past 60 years the Federal Reserve has become more professional, better informed, more transparent, and more willing to act aggressively to deal with economic crises. One of the most striking things about Blinder’s book, in fact, is its reminder that the Fed in the 1960s and ‘70s seemed to be very much flying by the seat of its pants. Fed governors obviously had less information (and less up-to-date information) about what was actually happening in the economy, which meant the big challenge of monetary policy—namely that it acts only with a lag—was amplified. But beyond that, the Fed didn’t always seem to have a clear sense of what economic variable (inflation, money growth, unemployment rate) it was targeting, or what the appropriate tool to achieve its goals was.
The Federal Reserve also used to be far more politicized. The exemplar of this, in Blinder’s account, was Arthur Burns, head of the Fed under Nixon, who kept the President (who was his friend) in the loop about interest rate cuts and, Blinder argues, helped engineer a miniboom before the 1972 election in part in order to get Nixon reelected. But it wasn’t just Nixon. For much of the postwar era, presidents routinely weighed in on Fed moves and exerted pressure on Fed chairmen to make policy changes. That changed, really, with Bill Clinton, who despite being angry at Alan Greenspan for raising rates heading into the 1994 midterm election was convinced to hold his tongue (in public, at least). This continued for two decades, until that norm, like so many others, was shattered by Donald Trump (who labeled Fed Chairman Jay Powell “clueless” and threatened to fire him). Liberals sometimes question whether it makes sense for the central bank to be independent. But Blinder’s book makes a convincing case that the “political business cycles” we saw in the 1960s and ‘70s were damaging to the economy as a whole, and that we’re better off without them.
We’re also better off now that the Federal Reserve, which not that long ago didn’t even officially announce when it had raised interest rates, is far more transparent than ever before, communicating its policy goals and targets and the rationale for its decisions far more clearly (and usually in relatively plain English). That’s good from a small-d democratic perspective, but it also allows the Fed to affect markets without necessarily having to act: Sometimes making its intentions clear is enough for markets to move in the right direction, even if that process is always imperfect.
Beyond all this, though, there’s also been something of a substantive change, namely that the Fed has been more patient and less anxious to raise interest rates than it was in the 1980s and early ‘90s. And while we may in part be paying for that now with higher inflation, it’s also the reason unemployment before the pandemic fell to 3.5 percent, lower than it’s been at any point in the last 50 years, and why it returned to that low this year lower than it’s been at any point in the last 50 years. That’s made life materially better for millions of workers who might now be without a job if the Fed had raised interest rates too soon.
If the story Blinder tells of monetary policy is, generally speaking, the story of the Fed becoming more technocratic and systematic in its approach, the story of fiscal policy over the last 60 years is, predictably, much messier. That story begins in optimism, with the Keynesian economists whom John F. Kennedy had brought to Washington convinced that, as the economist James Tobin later put it, “government could and should keep the economy close to a path of steady real growth at a constant target rate of unemployment.” This is an uncontroversial position today (at least among liberals), but it was a relatively radical idea in the early 1960s. FDR had, of course, used government spending to try to counteract the Great Depression. But that was very much a desperate and somewhat scattershot response to a historically unprecedented crisis. Once the U.S. economy returned to normal after World War II, fiscal policy went back up on the shelf—in the 1950s and early ‘60s, there were three different recessions, which the federal government did little to try to mitigate. As Blinder puts it, “countercyclical fiscal policies were considered emergency measures to be reserved [only] for deep recessions” of the kind Roosevelt faced.
That changed with the Kennedy-Johnson tax cut of 1964, which slashed income tax rates across the board in hopes of stimulating an economy that was recovering from a recession. As Blinder puts it, this was “the first deliberate and avowedly Keynesian fiscal policy action ever undertaken by the U.S. government.” (This may be a mild exaggeration, given that FDR did see New Deal spending programs as a way to prime the pump of the economy.) And it seemed to work—in the years immediately following the tax cut, the economy grew faster, unemployment fell, and inflation stayed under control. In the decades that followed, there was considerable pushback from conservative economists and policymakers against the idea that it was desirable, or even possible, to use fiscal policy to mitigate economic downturns. But on the whole, the notion that the government should just sit by and do nothing when recession hits has become a relic of the 1950s.
Even so, it’s hard to draw any other clear through-line from Blinder’s fiscal policy narrative, which goes from LBJ’s insistence on giving people “guns and butter,” Richard Nixon’s strange experiment with wage and price controls, Ronald Reagan’s decision to blow a hole in the federal budget by slashing taxes and raising defense spending at the same time, and Bill Clinton’s successful attempt to bring the budget back into balance, to George W. Bush demolishing all that work with his tax cuts and foreign misadventures, before arriving at Barack Obama’s use of stimulus spending to counteract the Great Recession and his ill-conceived pivot to austerity, and, finally, the government’s massive fiscal response to the COVID-19 pandemic.
If that story is far more tumultuous and jagged than the story of how monetary policy has changed, it’s because changes in fiscal policy are not just responses to what’s happening in the economy. Instead, they reflect different ideas about government’s proper role in the economy, the appropriate level of taxation, and spending priorities. And since the gap between Republicans and Democrats on these issues tends to be wider than the gap between them on monetary policy, shifts in fiscal policy when new presidents are elected have typically been more dramatic than shifts in monetary policy.
To be sure, there is one aspect of fiscal policy on which liberals and conservatives have, as Blinder points out, surprisingly come to agree over the last two decades, namely that deficits and the national debt don’t really matter. When Bill Clinton left office, the federal budget was in surplus, and the national debt was $5.7 trillion. Today, the national debt is $31 trillion, and the budget hasn’t been close to being balanced since George W. Bush took office. Budget deficits, in the Keynesian model, were supposed to be a tool to boost demand when it fell and help jumpstart the economy. But they’ve become a permanent feature of the American economy. Republicans do try to use the budget deficit as a political cudgel during election years whenever Democrats are in office, but when they’ve been in power, they’ve shown little inclination to shrink deficits, in part because they have an insatiable appetite for tax cuts.
That the national debt has increased by so much is not, in and of itself, a problem. After all, the last two decades have featured two major economic crises, to which much higher federal spending was an appropriate response. And for most of that period, interest rates and inflation have stayed low despite the inexorable increase in the national debt. Even so, the reality is that we’ve somehow borrowed $26 trillion since 2001 without doing all that much to increase the economy’s productive capacity (by improving things like transportation infrastructure or the electrical grid), or to deal with our most important challenge, namely climate change. That seems like a failure of fiscal policy.
What Blinder’s book offers, then, is a genuinely comprehensive view of the last 60 years of U.S. economic policy on both the fiscal and monetary sides, and a rigorous analysis of how that policy shaped the course of the U.S. economy. That’s no small accomplishment. At the same time, while the book is already long, it could have benefited from more discussion of how monetary and fiscal policy get made, and of how they should be made, particularly since Blinder can write about these questions from the inside.
As a result, it’s too bad there isn’t more in the book about how the Federal Reserve actually makes decisions, and how that process has changed over time. (One notable exception—and one of the best parts of the book—is Blinder’s discussion of Alan Greenspan’s decision, in the mid-1990s, to not raise interest rates even as unemployment fell toward 4 percent, because he was correctly convinced that a productivity boom was happening that was going to allow employment and wages to grow faster than most people—including Blinder and Janet Yellen, who were both Fed members at the time—believed was possible.) The Fed has access to more data than ever before—how do Fed members decide what data matters most? Similarly, Blinder makes a couple of allusions to behavioral economics, and it would be interesting to know if the rise of behavioral economics has affected (or should affect) the way the Fed models the impact of potential interest rate moves. And even if we accept that the Fed should be independent of overt political influence, is there an argument for diversifying its composition, perhaps by including businessmen and labor representatives, instead of having a committee made up essentially of bankers and academics?
One also wishes Blinder had said more about the dismal growth of American productivity, and real wages, over most of the past 50 years, since that’s had a profound impact on the lives of American workers. Could better fiscal policy have done anything about this? Similarly, the only periods since 1973 when American workers have seen sustained wage growth have been periods when the Fed allowed unemployment to fall below 4 percent without raising interest rates prematurely. Does that suggest that monetary policy over most of this period should have been looser? Or would that just have been a recipe for higher inflation?
Finally, the end of the book, which closes with some anodyne points about central bank independence and the inevitably political nature of fiscal policy, feels like a missed opportunity, given the historical moment we’re in. As the Fed tries to react to inflation without overreacting, it would be interesting to know if there are historical models or analogies Blinder thinks are useful. Do we need a paradigm shift away from the more patient Fed of the past 15 years, or simply a temporary period of higher interest rates? It’s unfair, of course, to expect Blinder to have reworked his final chapter to speculate on these questions. But their absence does make this thoroughly enlightening book feel a bit like a novel that ends just when the plot takes a dramatic, and unexpected, turn.