Although this is a very plain vanilla, powers-that-be representation of where we are and where we're going, what comes through is the fact Blinder really knows this stuff. And he is very facile, which is a bit scary if juxtaposed with a dollop of Voltaire
"Ils ne se servent de la pensée que pour autoriser leurs injustices,
et emploient les paroles que pour déguiser leurs pensées"
—François-Marie Arouet--'Voltaire', Dialogue xiv. Le Chapon et la Poularde (1766).
and employ speech only to conceal their thoughts"
From Neue Zürcher Zeitung's TheMarket.ch, December 20:
«This Is Not Looking Like a Replay of 1982»
Fears of a recession are rising. Alan Blinder, former Vice Chairman of the Federal Reserve, compares the current environment to the big inflation surge in the early Eighties and the economic downturn at the time. He says what’s different today and what’s next for interest rates.
Inflation was the big topic for markets this past year. Looking ahead to 2023, concerns about the economy are increasingly coming into focus. In the United States and Europe, a recession seems all but certain. The question is how bad the downturn will be.
The Market NZZ talked about these developments with Alan Blinder. The Professor of Economics and Public Affairs at Princeton University and former Vice Chair of the Federal Reserve Board has recently published a new book on modern U.S. economic history which tackles the shifting relationship between fiscal and monetary policy from John F. Kennedy to Joe Biden.
«The recession that we are probably going to have looks likely to be mild,» Mr. Blinder says. «This is not looking like a replay of 2008 or anything remotely close, or, going back to Volcker, a replay of 1982».
In this in-depth interview which has which has been lightly edited, Blinder draws parallels, but also cites differences between today’s environment and the early 1980s, when then Fed Chairman Paul Volcker fought inflation relentlessly and pushed the U.S. economy into recession. He explains why the current situation is less difficult for Fed Chair Jerome Powell. And he says what’s next for interest rates and monetary policy.
«Today, I think Keynesian theory is on the rise again, but not so much in the rhetoric but in the actions»: Alan Blinder.Professor Blinder, your new book chronicles the history of fiscal and monetary policy in the U.S. from 1961 to 2021. Why did you choose those sixty years as time frame?
Well, the endpoint was easy because that was as far as I could go. The beginning point was also easy in two senses. First, 1960 was where Friedman and Schwartz’ «Monetary History of the United States» ended. Second, it was also the beginning of Keynesianism in America; not in the intellectual world, but in the policy world with the Kennedy administration coming in in 1961. So it was a natural starting point.
How did this change economic policy?
Essentially, there was nothing that we would call fiscal policy prior to that time. Of course, there was a budget, government spending and taxing, and that goes back to the beginnings of the Republic. But people in Washington were very rarely, if ever, thinking of using those instruments of fiscal policy – taxation or spending – to make the economy either grow slower or faster. That’s what we mean by fiscal policy these days. It’s a common place now. But if you went back to the time before Kennedy, there was hardly any thinking of that nature in the US. A number of European countries were ahead of us. For instance, the Swedes had been doing it since the Thirties, but not the Americans.
And what were the consequences of this?
As I said, Keynesianism came to Washington with JFK, and when he was assassinated, this transformation was really completed by his successor Lyndon B. Johnson. In those days, it was thought that stabilization policy was mostly fiscal policy, and that monetary policy was kind of a passive partner. The term «accommodative monetary policy» comes from that period.So monetary was just playing second fiddle?
If the fiscal authorities wanted to cut taxes, they didn’t want that to push interest rates way up, so the people at the Federal Reserve were supposed to accommodate fiscal policy by stabilizing interest rates. But they were not the active participants. During the research for my book, I even dug up an amazing quote from the 1968 Economic Report of the President stating: «The control of inflation is the responsibility of fiscal policy, not monetary policy.» Just imagine that! Nobody would say something like that today.Already at the time of the World War II, the Federal Reserve was de facto demoted to an extension of the Treasury. In the recent past, however, it has mostly been up to monetary policy to support the economy in periods of weakness. How did this happen?
I’m skipping over a lot of episodes, but after the huge Reagan tax cuts in 1982-84, fiscal stabilization policy basically disappeared for over twenty years. Sure, there was fiscal policy, there were budgets, there were taxes, there was spending. But the people in authority were not looking to fiscal policy to manage the economy. For twenty years, the job of fiscal policy was basically to «get the budget deficit down», so much so that we had a recession in 1991 during the presidency of George H.W. Bush and not a soul advocated for fiscal stimulus to help shorten the recession. Everyone looked at the Fed.In the financial crisis of 2008/09, but especially with the massive stimulus packages following the outbreak of the pandemic, fiscal and monetary policy have again increasingly worked together. Are we currently experiencing some sort of revival of the 1960s?
Absolutely. The belief in Keynesian economics has had peaks and valleys over the past sixty years. Today, I think Keynesian theory is on the rise again – not so much in rhetoric but in actions. If you look at how the world reacted to the crisis in 2008 and 2020, that was Keynesianism big time. No country said «I’m going Keynesian here». But they did go Keynesian again in a big way....
....MUCH MORE
