Book Reviews

It’s the Economists, Stupid

How an obsession with markets has produced rising inequality and undermined democracy.

By Isabel Sawhill

Tagged economypolitics

The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society By Binyamin Appelbaum • Little, Brown and Company • 2019 • 336 pages • $30

Most people have heard of John Maynard Keynes and Milton Friedman. After all, both were enormously famous men in their day who were on the cover of Time. What is less well understood is how much influence other economists, and the field itself, have had on public policy in recent decades—for good or for ill. As Keynes himself famously put it, “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”

The influence of economists, especially those in recent decades who have advocated most strongly for the efficiency of markets, is a central theme of Binyamin Appelbaum’s new book, The Economists’ Hour. He shows, in particular, how economists’ belief in free markets has infiltrated the highest levels of government, leading to everything from the supply-side revolution justifying multiple tax cuts, to the failure to regulate subprime lending in the period leading up to the 2008 financial crisis. This markets-know-best and governments-make-matters-worse view of the world is now threatening democracy itself, by leaving too many people and communities behind, and in doing so has given rise to an overdose of Trumpian-style populism. As Appelbaum writes, “The rise of inequality has happened in large measure because policy makers have decided not to stop it.” To be sure, markets are still the best-known device for organizing an economy, but they are a poor means of organizing a society. They are a good way to value an apple, but not such a good way to value a human life or a pollution-free environment.

Markets and the economists who promote them have not always held this kind of sway. Up until the 1970s, economists were far less influential. Longtime mid-century Federal Reserve Chair William McChesney Martin, a stockbroker rather than an economist by background, kept the practitioners of the dismal science in the basement of the Fed, in part because as he put it, “They don’t know their limitations, and have a far greater sense of confidence in their analyses than I have found to be warranted.” But for the four decades from 1969 to 2008, a period Appelbaum calls the “Economists’ Hour,” they grew in influence, presiding over such key institutions as the Fed and the Treasury, and persuading successive presidents from Kennedy to Trump to adopt a number of policies from ending the draft to cutting taxes, deregulating the economy, freeing exchange rates from their tie to gold, and revamping antitrust laws. Their influence may have once helped to stabilize the economy, rationalize regulatory oversight, strengthen safety nets, underscore the importance of public investment, broaden the tax base, and create market mechanisms for controlling environmental costs. But in more recent decades, economists have too often supported policies that have given undue weight to the power of markets and too little to creating a good society.

Though the United States was a central player in this saga, the influence of market ideology also spread to other countries, from the UK to Chile and even China. That influence may now be waning in the aftermath of the financial crisis, along with the failure of supply-side economics to deliver on its promises, and rising concerns about inequality. It is notable that the 2017 tax law enacted under Trump, unlike the tax cuts enacted during the Reagan and George W. Bush administrations, is not popular with the American public while demands to regulate guns and address climate change are growing.

We are, in short, at a tipping point. Are we going to continue to ignore the human costs of too much reliance on markets, or are we going to pivot to a new understanding—one that combines the efficiency of markets with guardrails that protect and promote human flourishing?

Binyamin Appelbaum is the lead writer on business and economics for the editorial board of The New York Times. He has won several awards for his earlier reporting for the Times. Some of my economist colleagues think he is overly critical of our profession. I think that’s a misreading of his views. He is, in fact, not unaware of the benefits of markets. The spread of markets has reduced global poverty, improved health, and expanded consumer choice. But he argues that faith in markets has now gone too far. It has focused too much attention on efficiency and growth and not enough on distribution. Economists have persuaded too many people that redistribution is inconsistent with growth and that slower growth will be bad for rich and poor alike. Whatever the trade-off between the two at some earlier stage of development, we now seem to have reached the point where one has to wonder whether ever-growing inequality is compatible with either strong growth or the survival of democracy.

The book begins by reviewing Milton Friedman’s enormous influence: how he and his disciples convinced President Nixon to do away with the draft in 1971, a move Friedman supported because conscription represented, as he put it in one essay, the “whip of compulsion.” It produced major consequences in terms of who now serves (mostly the less advantaged and minorities) and the willingness of the public to go to war (it’s much easier when it’s someone else’s son or daughter whose life is on the line).

Another early chapter goes back to the heyday of Keynesianism during the 1960s, when people like Walter Heller and James Tobin, both members of President Kennedy’s Council of Economic Advisers, gained the President’s trust. Appelbaum shows how that era ended after President Johnson, embroiled in the Vietnam War, tried to have guns and butter at the same time. Johnson had announced a War on Poverty and other Great Society initiatives, but was also determined to devote whatever resources were needed to support the war effort. Trying to do both threatened inflation and curbed spending on social programs.

But it wasn’t just the war that undermined Keynesian economics—it was also an intellectual attack on the idea that an interventionist fiscal or monetary policy could control the economy. The country may not have won the Vietnam War, but Friedman, according to Appelbaum, won the intellectual war against an activist policy. Friedman and other market-oriented economists argued for a stable, noninterventionist monetary policy on the grounds that economic actors can’t be fooled into changing their behavior by adding or subtracting stimulus in the short run. This view came to be called “rational expectations,” and its logic was impeccable given its assumptions—that deficit spending by the government, for example, would be offset by more savings by households as they prepared to deal with the “inevitable” tax increases needed to pay down the debt. But it ignored the fact that human beings are neither well-informed nor entirely rational or far-seeing.

The chapter on the supply-side revolution leading up to the Reagan tax cuts is the key to understanding how supply-side economics went from being a joke to becoming the reigning ideology for decades up to the present time. First, there’s Jude Wanniski becoming the apostle of supply-side economics from his influential perch on the editorial board of The Wall Street Journal. There’s the well-known origination of the Laffer curve showing how tax cuts can increase revenues after Arthur Laffer drew it on a cocktail napkin at a restaurant across the street from the Treasury Department, and the less well-known story of Laffer’s wife later saying she liked to take long runs because “it’s the only way I can stay married to a lunatic.” There is Alice Rivlin, the director of the Congressional Budget Office, describing supply-siders as “an extreme right-wing claque who should not be given an audience” and later feeling as if she needed to say publicly “we are intensely interested in the supply side.” There’s John Kenneth Galbraith telling Newsweek that small governments might be okay but only if everyone could call up Milton Friedman when the fire department failed to take their calls. There’s Bob Dole’s often-repeated 1981 joke: “Good news is, a bus full of supply-siders went over a cliff last night. Bad news is, there were three empty seats.” And then there was President George H.W. Bush’s famous labeling of supply side-ism as “voodoo economics.”

Markets are a poor way of organizing a society. They are a good way to value an apple, but not a good way to value a human life or the environment.

But as Appelbaum makes clear, voodoo economics, with help from the business community and social conservatives, was to become the dominant paradigm for decades to come. It conveniently enabled conservatives to cut taxes and shrink government with the intellectual blessing of at least a few academic scribblers who called themselves economists. None of the academic economists believed that tax cuts would literally pay for themselves; but some, such as the late Martin Feldstein at Harvard or Edward Prescott at the Minneapolis Federal Reserve Bank, remained very optimistic about the cuts’ effects on growth and the extra revenue that would produce. In short, by the time the first Bush’s son became President, supply-side thinking was no longer voodoo but accepted doctrine—despite the fact that the Laffer curve became, well, laughable. Tax cuts never paid for themselves, but they did put downward pressure on spending and forced Democrats to shrink from any talk of raising more revenue for fear of being accused of stifling job creation or simply of being outbid in the competition for votes.

George H. W. Bush, running to succeed Reagan, forgot about voodoo economics and told a roaring crowd at the 1988 Republican convention, “Read my lips: No. New. Taxes.” However, out of the lime light, he was an old-fashioned, fiscally conservative Republican and so, in 1990, he forged a budget deal with Democrats that did include new taxes. He then mustered enough support in Congress to get the package enacted. As Appelbaum notes, “[I]t was the last time for more than a quarter century that any congressional Republican voted to raise income taxes.” From Friedman’s mind all the way to Republicans’ hearts, the revolution was complete.

Of course, not everyone bought into market fundamentalism. For example, the attack on an activist policy didn’t prevent Federal Reserve Board Chairman Paul Volcker from stepping hard on the monetary brakes in 1979 to control double-digit inflation. And it didn’t prevent President Clinton from believing that a middle-class tax cut was needed in 1993—at least until his advisers convinced him that it was more important to reduce the deficit. In fact, by the end of his term in office, the federal budget was in surplus. As someone who served in Clinton’s Office of Management and Budget, I can attest to the many public investments that didn’t get made because of fiscal concerns and the budget caps associated with them.

Clinton’s fiscal good deeds didn’t go unpunished. After his election in 2000, George W. Bush immediately enacted another big tax cut that made a mockery of Clinton’s budgetary discipline and demonstrated to Democrats that Republican calls for fiscal responsibility were a charade. In a campaign debate in early 2000, Bush made sure to distinguish himself from his father by saying “this is not only ‘No new taxes,’ this is, ‘Tax cuts, so help me God.’” Keeping government small and returning money to taxpayers had become a religion dressed up in economic clothes. In Appelbaum’s words, “Tax cuts were like logs that could be thrown onto the fire at any time.”

During the Obama Administration, Keynesian thinking was resurrected at least temporarily, as the economy teetered on the brink of depression. A $787 billion stimulus package was enacted. Ben Bernanke, chairman of the Federal Reserve, helped to save the economy from disaster, and he and his successor, Janet Yellen, gave greater attention to fighting unemployment while calling for regulation to deal with financial instability. At the same time, little was done to hold bankers accountable for the crisis in 2008. In Appelbaum’s view “economic considerations trumped old-fashioned ideas about justice.”

To be clear, the book is not strictly structured as an historical chronology, and other chapters delve into exchange rates, antitrust, regulation, and the export of market principles to less developed countries. I also want to emphasize that not all economists belong to the Chicago School or believe fervently in the power of markets to improve human welfare. The book may leave an overly negative impression of their role. I can think of many examples where that role has been positive. While efforts to deregulate the economy may sometimes go too far, Appelbaum argues very persuasively in his chapter on the financial crisis that economists, by insisting on more analysis of the benefits and costs of various policies, have also improved government decision-making in the process.

Yes, it’s hard to put a value on human life, but that value is not infinite. At the same time, I very much agree with Appelbaum’s argument, throughout the book, that a market ideology has seeped into the political groundwater. We haven’t sufficiently recognized its influence. It wasn’t just Ronald Reagan but also Bill Clinton who said that “the era of big government is over.” The embrace of an antitrust philosophy that makes consumer welfare and not economic power the center of concern has been bipartisan. So has leaving credit derivatives unregulated. As Appelbaum puts it, “Capitalism became a self-satisfied monopolist in the marketplace of ideas.”

In addition, I sometimes wished the book had been less discursive and more tightly tied to the major theme of the success and failures of market fundamentalism. I felt occasionally that I was reading a series of essays cobbled together under the same umbrella, but one that allowed lots of extraneous rain to leak through the fabric. The chapter on the financial crisis, for example, lopes from a discussion of the earlier deregulation of interest rates that produced the savings and loan crisis to a section on the regulation of fishing rights in Iceland. But in the end, I also saw the value of adding characters, historical events, and concrete examples of why markets are, at one and the same time, very efficient and totally amoral.

Where we go from here remains unclear. The marketplace of ideas is in flux. As is so often the case, events shape as well as flow from ideas, and my guess is that events will shape ideas once again. Keynesian economics died in part because of academic complaints, but also because the Vietnam War, two oil shocks, raging inflation, and declining productivity growth led to double-digit inflation and undermined Keynesianism’s legitimacy. And trust-the-market economics gets a boost when the economy and the stock market grow strongly right after a tax cut, since the public rarely understands the distinction between a sugar high and a more sustainable boost to long-term growth. Economic illiteracy is as much a problem as economic imperialism.

The questioning of market fundamentalism is now giving rise to populism on the left and the right. Both Donald Trump and Bernie Sanders are challenging the status quo. Appelbaum believes “the very survival of liberal democracy is now being tested by nationalist demagogues, as it was in the 1930s,” but he provides no answers to what comes next, because no one can, and perhaps because as a journalist, he doesn’t want to be too prescriptive. My view is that we will muddle through, but we may need a domestic Marshall Plan to repair the damage. The real question is whether our Constitution and political institutions are capable of anything that bold. It’s a lot easier to cut taxes under the banner of supply-side ideology than it is to raise them in an effort to make robust public investments and bring back inclusive growth.

Quite apart from his contribution to identifying the role of economists in guiding policy decisions, Appelbaum does a remarkable job of capturing the issues and personalities that dominated the past 70 years of economic policymaking. As someone who lived through this period, I found old friends (in both senses) and familiar debates on almost every page. Some younger readers may find reading the biographies of economist after economist a bit tiring. But the anecdotes, the sense that one is in the room when important stuff happened, and quotes from many of the most notable players enliven the book.

The book is not only replete with good stories but also with analogies that aptly describe normally abstract economic concepts. For example, Appelbaum’s description of Friedman’s view of a nonactivist monetary policy was that it was like “a dad holding a kid by the hand. The money supply followed like a dog on a leash, free to wander from side to side.” Or his description of the double-digit inflation of the late 1970s as discovering that if you add wood to a fire, it will burn more brightly but if you add too much, it will burn out of control.

Appelbaum has written not just an engaging but an important book. If you want to better understand our current malaise, the election of Donald Trump, the stakes for 2020, and the future of the country, this book will give you both useful perspective and an enjoyable ride along the way. Most of all, it will clarify the fact that we are all victims of reigning ideologies—despite often barely understanding their roots or their influence on how we perceive a messy reality. Add what I have called supply-side (donor-based) politics to supply-side economics, mix well, and the resulting batter could still poison us all.

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Isabel Sawhill is a Senior Fellow at the Brookings Institution and author of The Forgotten Americans: An Economic Agenda for a Divided Nation.

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