THE WASHINGTON POST – Two decades before he became chair of the Federal Reserve and the second-most-powerful man in the United States, Alan Greenspan made another mark on history. In 1967, at the height of the Vietnam War, he and Columbia economics professor Martin Anderson wrote a memo for Richard Nixon, then with a law firm in New York, advocating an end to military conscription and its replacement by an all-volunteer military. They drew on an analysis by economist Walter Oi, who argued that ending the draft would be good for the economy because young men could work in their preferred occupations. Nixon, who called the draft “one of the severest and most unfair restraints on the free market,” signed on. Four years later, with Nixon in the White House, the volunteer military became law.
Oi liked to tell a joke about a military parade in which the usual tanks and missiles were followed by a few unimpressive-looking civilians. “Those are the economists,” began the punchline. “You wouldn’t believe the damage they can cause.” Such is the theme of Binyamin Appelbaum’s new book, “The Economists’ Hour.” Some of the figures at the heart of the story are famous, like Greenspan and particularly Milton Friedman, who pops up in almost every chapter; others less so, like Oi and Anderson. Together, between the late 1960s and the 2008 financial crisis, they tore down the model of activist government intervention in the economy and replaced it with the simple idea that markets should be left on their own. In the process, they made economics the dominant explanatory framework of our time, commonly rolled out to account for matters from criminal sentencing to the dating “market.” In the words of a district court judge who attended a two-week course on introductory economics at the University of Miami, “More and more, life is best explained not by religion, not by law, but by economics.”
Appelbaum tells how this story has played out across a number of policy areas. In addition to the draft, the topics cover the heart of the conservative turn in economic policymaking: monetarism and the prioritisation of inflation over unemployment; “supply-side” tax cuts; antitrust, or the lack thereof; deregulation; free international currency and capital markets; and the rise of finance. The book introduces us to the economists whose novel ideas persuaded politicians to see the world differently: Jude Wanniski, for example, whose famous cocktail napkin memorialised Arthur Laffer’s eponymous curve (if tax rates are too high, tax revenue declines), which was adopted by Jack Kemp and motivated Ronald Reagan’s 1981 tax cut; and Jim Tozzi, who in the 1960s pioneered the cost-benefit analysis of regulation, which has since become the corporate sector’s most powerful weapon against government oversight.
Economic reasoning colonised the institutions that determine US economic policy, from the Federal Reserve to the judiciary to regulatory bodies. Where once Congress prevented agencies from even considering the costs of regulation, now the debate is over just how much to value a human life now and in the future.
“The Economists’ Hour” provides a novel perspective on the conservative revolution that dominated the past half-century of American political history. As a history of ideas, however, it places the spotlight on individual intellectuals rather than the interest groups and organisations that underlay (and underwrote) the free-market paradigm. The think tanks that industrialised the Friedmanesque critique of 1960s liberalism receive little attention, along with the funders who bankrolled the whole enterprise. It is rarely the most brilliant ideas that have the most impact but rather those that serve powerful interests with the resources necessary to propagate and weaponise them in the political landscape.
That impact, in this case, was clearly negative; the book’s subtitle is “Free Markets, and the Fracture of Society.” The economists’ hour undoubtedly did some good: Airline travel is far cheaper than before regulation, even if the seats are more cramped, and it’s not clear who thinks we should simply ignore the costs and benefits of regulation. But over the period as a whole, the social safety net disintegrated, inequality skyrocketed, the economy shifted toward low-paying service-sector jobs, and for 99 per cent of Americans income growth was lower than in – shudder – France. In addition, the view that everything is a market frayed the bonds of social solidarity that made people feel responsible for the less fortunate. Our ancestors “constructed a market society, and the defining feature of a market is the freedom to walk away,” Appelbaum writes in closing. “Our problem is too many markets, and too much walking away.”
Which brings us to the question: What now? Appelbaum claims that the economists’ hour ended in 2008 with the financial crisis. If only. Even the 2009 stimulus bill was hampered by the Obama administration’s attachment to fiscal responsibility; inflation targeting remains the rule at a Federal Reserve only slightly more interested in unemployment than before; and, as Appelbaum notes, concerns about economic efficiency have undermined the Justice Department’s willingness to prosecute corporate crime. Federal judges continue to cite cost-benefit analyses in paring back the regulatory state. It is hard to contest that “Trump’s contempt for economics … is without parallel among modern American presidents,” yet his policies – a dramatic tax cut for businesses and an ongoing war on regulation – would have been vigorously applauded by the figures in this book.
It is no surprise that the core principles of low taxes, small government and free markets are dogma among Republicans; there will always be a party favouring business and the rich. Crucially, however, the embrace of economics has been a bipartisan affair. On the Democratic side of the aisle, Bill Clinton and his administration slashed deficits to lower interest rates, doubled down on cost-benefit analysis, ended “welfare as know it” by introducing work incentives and suppressed attempts at financial oversight. Barack Obama’s administration invested more deeply in economic analysis than any before; his top legislative priorities included engineering new health insurance markets, establishing a price for carbon emissions and ratifying a free-trade agreement for the Pacific region. Indeed, faith in markets has been a central pillar of the Democratic Party’s identity since the late 1980s. Tired of being portrayed as softhearted liberals who taxed workers in order to coddle welfare queens, the New Democrats took up the gospel of private-sector growth and small government, of a bigger pie and a rising tide that lifts all boats.
For more than a quarter-century, one party has believed that government should leave markets alone to maximise economic growth that will benefit everyone; the other has believed that government should nurture markets to maximise economic growth that will benefit everyone. And for more than a quarter-century, those markets have produced growth whose rewards have mainly been captured by the one per cent. What we don’t have is a party dedicated to the actual welfare of ordinary families – one that believes that government is a means for a decent society to provide for the security and well-being of all its members. Until we have such a party, the reign of the economists will continue.