Introduction
In the decades following World War II, a group of economists emerged from the shadows of academia and rose to unprecedented levels of influence in shaping American policy and society. "The Economists' Hour" by Binyamin Appelbaum chronicles this remarkable ascent and its far-reaching consequences on our everyday lives. This book provides a critical account of how the ideas of economists like Milton Friedman, Arthur Laffer, and Walter Oi became the dominant ideology for political figures in the United States and around the world.
Appelbaum's work explores how this cultural shift led to a significant rebalancing of power between governments and corporations. As we delve into the key ideas presented in this book, we'll uncover the story of how these economists' market-centric theories transformed various aspects of American life, from military conscription to financial regulations.
The Rise of Free-Market Economics
Ending the Draft: An Unlikely Alliance
One of the first major victories for free-market economists came in an unexpected arena: military conscription. In the 1960s and 1970s, as protests against the Vietnam War raged across college campuses, a group of right-wing economists was quietly working behind the scenes to end the draft.
Economists like Milton Friedman, Martin Anderson, and Walter Oi argued that mandatory military service was not only an unethical infringement on individual rights but also economically inefficient. They proposed that the military should operate like any other job market, offering fair wages to attract voluntary recruits. This approach, they claimed, would result in a more motivated and cost-effective fighting force.
Their ideas gained traction, particularly after Martin Anderson personally delivered a memo outlining this plan to presidential candidate Richard Nixon. After his election in 1968, Nixon campaigned on ending the draft and successfully abolished it in 1973. This policy shift marked a significant triumph for free-market economists and set the stage for their growing influence in the years to come.
The Decline of Keynesian Economics
As the 1960s progressed, a fierce debate was brewing within the American government between two schools of economic thought. On one side were the Keynesians, followers of British economist John Maynard Keynes, who advocated for active government management of the economy. On the other side was the Chicago School, led by Milton Friedman, which favored a hands-off approach to economic policy.
Keynesian economics had dominated American policy since the Great Depression of the 1930s. This approach, which called for massive public spending programs to stimulate the economy during downturns, had been used to great effect by President Franklin Roosevelt and subsequent administrations. By the late 1960s, President Johnson had implemented large social programs like Medicare and Medicaid based on Keynesian principles.
However, the Keynesian approach had a significant drawback: inflation. While pure Keynesianism called for high taxes to curb this problem, such a policy was politically unpopular. This dilemma opened the door for alternative economic theories.
In December 1967, Milton Friedman delivered a pivotal address to the American Economic Association, arguing that the government should largely step back from managing the economy. He proposed that the Federal Reserve should focus solely on controlling inflation by manipulating the money supply, a strategy known as monetarism. This radical departure from Keynesian thinking would gain increasing popularity over the next decade.
The Reagan Era: Supply-Side Economics and Tax Cuts
The late 1970s saw the American economy grappling with a phenomenon known as stagflation – a combination of stagnant job growth and high inflation. In an attempt to address this issue, President Carter appointed Paul Volcker as the head of the Federal Reserve. Volcker, influenced by Friedman's monetarist views, implemented policies to restrict the money supply. While this approach aimed to slow inflation, it resulted in high interest rates, factory closures, and increased unemployment.
When Ronald Reagan entered the White House in 1980, more than eight million Americans were out of work. This economic turmoil set the stage for a new economic theory to gain dominance: supply-side economics.
Economists like Robert Mundell and Arthur Laffer had been advocating for tax cuts as a solution to both inflation and unemployment since the 1960s and 1970s. Their supply-side theory proposed that cutting taxes on incomes, corporations, and investments would stimulate business growth and increase the supply of goods and services in the economy. They argued that the resulting economic boom would enrich the wealthy, and this wealth would then "trickle down" to workers in the form of higher wages.
Reagan embraced this idea wholeheartedly, implementing a series of massive tax cuts across the board. In 1981, he lowered the top income tax rate to 50 percent, and a few years later, cut it even further to 33 percent. However, the results were less impressive than expected. While there was a modest increase in economic activity, the average American did not see a significant boost in wages or savings. In fact, income inequality rose faster than at any time since World War II.
The government's budget also suffered as a result of these policies. With lower tax revenues, there was less funding available for infrastructure, social programs, and other essential services. To make up for this shortfall, the Reagan administration resorted to cutting services and engaging in massive deficit spending.
Despite its flaws, this approach to economic management, dubbed "Reaganomics," remains popular with many lawmakers today. The legacy of supply-side economics and its focus on tax cuts continues to shape economic policy debates in the United States and beyond.
The Pursuit of Economic Efficiency and the Rise of Monopolies
As new economic theories gained popularity, the government's role as a market regulator began to wane. This shift allowed for the consolidation of corporate power and the rise of monopolies in various industries.
Historically, the U.S. government had played an active role in regulating markets and limiting corporate power. The Sherman Antitrust Act of 1890 had given the government the authority to break up big businesses, prevent massive mergers, and enforce labor laws. The goal was to maintain fair competition and prevent monopolies from dominating the market.
However, economists like George Stigler began to challenge this approach in the 1970s. They argued that governments should prioritize economic efficiency over fairness. According to this view, firms should be free to operate as they saw fit, as long as they delivered low prices to consumers. This perspective gained traction as companies like Exxon, General Electric, and IBM financed influential institutes to educate lawmakers on this way of thinking.
As a result, the government began to take a more hands-off approach to business regulation. Corporate mergers accelerated throughout the 1970s and 1980s, leading to increased market concentration in various industries. For instance, by 1992, the five largest meatpacking companies had increased their market share from 25 percent to over 70 percent.
One of the most significant examples of this deregulatory trend was in the airline industry. Since 1938, the government had tightly regulated airlines to ensure high standards of operation. While this kept ticket prices high, it also maintained a certain level of service quality. In the late 1970s, the U.S. ceased enforcing these controls, leading to a period of aggressive competition among airlines. Initially, this made flying more affordable as companies slashed prices and packed planes. However, over time, monopolies began to form. By the 2010s, just four companies carried 80 percent of U.S. passengers and charged higher prices than their more regulated European counterparts.
This shift towards prioritizing economic efficiency over market fairness had far-reaching consequences. While it led to some short-term benefits for consumers in the form of lower prices, it also resulted in the concentration of corporate power and reduced competition in many industries.
The Rise of Cost-Benefit Analysis in Government Regulation
Another significant change brought about by the increasing influence of economists was the widespread adoption of cost-benefit analysis in government decision-making. This approach, which attempts to quantify the potential upsides and downsides of any activity in monetary terms, began to replace moral reasoning in many areas of policy-making.
Cost-benefit analysis was first formulated by economist Charles Hitch at the dawn of the Cold War. He applied this systematic thinking to help the Department of Defense decide which weapons were the most cost-effective investments for the American military. However, this type of reasoning was slow to catch on in other areas of government.
Throughout the late 1960s and early 1970s, new agencies like the Environmental Protection Agency and the Occupational Safety and Health Administration were created to enforce worker and environmental regulations. These laws required measures such as air filters in factories and limits on pollution, with the goal of protecting people regardless of the cost.
However, thinkers like Howard Gates and Jim Tozzi began pushing the idea that any regulation should be subject to cost-benefit analysis. This approach required calculating the monetary value of a human life – a controversial and ethically questionable practice. In 1972, Gates used a series of obscure metrics to estimate that one life was worth about $200,000. Armed with this figure, free-market economists could argue against new regulations by claiming they cost more than they would save in terms of human lives.
The Reagan administration fully embraced this idea. In February 1981, they issued an executive order requiring all regulatory agencies to abide by cost-benefit analysis. As a result, in the following years, many regulations were cast aside on economic grounds, even if they would have saved lives. Subsequent administrations have done little to change this approach, and today, the monetary value assigned to a human life is still used to determine whether a law is "worth it" from an economic perspective.
This shift towards cost-benefit analysis in government decision-making represents a fundamental change in how society approaches issues of public safety and welfare. By reducing complex moral and ethical considerations to simple financial calculations, this approach has profoundly impacted the development and implementation of regulations across various sectors of society.
The End of Fixed Exchange Rates and the New Global Financial System
The Bretton Woods Agreement, established in 1944, had created a system of fixed exchange rates between currencies, with the U.S. dollar as the standard. This arrangement aimed to make international trade more predictable by stabilizing currency values. However, in August 1971, President Nixon, advised by economist George Shultz, decided to withdraw from the Bretton Woods system.
The Bretton Woods system had initially seemed beneficial for all involved parties. It prevented countries from devaluing their currencies to make exports cheaper, which could lead to instability and hamper international trade. However, over time, issues began to emerge. Economies like Germany and Japan rebounded quickly by selling goods into the flourishing U.S. market, resulting in foreign businesses and banks amassing a huge amount of dollars. This posed a problem because, under Bretton Woods, the U.S. was obligated to back each dollar with gold – a promise that became increasingly difficult to keep as the number of dollars in circulation grew.
Shultz, influenced by Milton Friedman, suggested that the United States should stop fixing the value of the dollar and instead let the market determine its worth compared to other currencies. Nixon implemented this advice, leading to significant changes in the global financial system.
In the years that followed, the value of all currencies began to fluctuate as investors started betting in newly created international money markets. The U.S. dollar, being relatively stable, became extremely valuable and strong. While this benefited consumers who could now buy more international goods, it had a detrimental effect on U.S. manufacturers, who struggled to compete against cheaper international imports. By the mid-1980s, millions of factory workers were left unemployed as a result of these changes.
The end of the Bretton Woods system marked a significant shift in the global financial landscape. It created a more volatile and unpredictable environment for international trade and currency exchange, with far-reaching consequences for national economies and workers around the world.
Chile: A Laboratory for Free-Market Economics
The influence of economists like Milton Friedman extended beyond the borders of the United States. In 1973, General Augusto Pinochet seized power in Chile through a violent coup, overthrowing the democratically elected president Salvador Allende. Friedman saw this as an opportunity to put his economic ideas into practice and flew to Chile in 1975 to personally meet with and advise the dictator.
In the following decades, Pinochet and his economic advisor, Sergio de Castro, implemented many of Friedman's economic ideas, creating an economic system that had profound effects on the Chilean people.
Prior to Pinochet's coup, Chile had been making steady economic progress. By 1973, the country's per-capita income was 12 percent higher than the average for Latin America. However, Pinochet's regime took a radically different approach to economic management.
After seizing power, Pinochet handed control of the country's economy to a group known as "Los Chicago Boys" – right-wing, free-market economists educated at the University of Chicago. They implemented Friedman's favorite policies: slashing government programs, tightening the money supply, and privatizing industries. The immediate result was economic turmoil, with large portions of the working class losing their jobs while a small number of Pinochet's supporters became extremely wealthy.
Furthermore, Pinochet eliminated the country's capital controls and financial regulations. This allowed foreign investors to buy up many of Chile's natural resources and forced Chilean businesses to borrow massive amounts of foreign currency. By the early 1980s, Chile was more indebted than any other country in the region. By the end of the decade, the country was less prosperous than Cuba.
Pinochet was finally ousted in 1990, but the legacy of his free-market experiment remains. The country now faces the challenge of rectifying decades of inequality and political repression. However, there are signs of progress. In 2016, 10 percent of the population protested for higher pensions, and a growing student movement shows promise for creating real political change.
The Chilean experiment serves as a cautionary tale about the potential consequences of implementing free-market economic policies without regard for social equity or democratic processes. It highlights the importance of balancing economic theories with practical considerations and the needs of the broader population.
The Dangers of Unregulated Markets
The push for deregulation, championed by economists like Alan Greenspan, has often led to financial disasters. Greenspan, who served as the chairman of the Federal Reserve from 1987 to 2006, was a staunch advocate for completely unregulated markets. Throughout his career, he argued against laws requiring banks to disclose financial information and declined to curtail risky lending practices.
One example of the dangers of unregulated markets can be seen in the history of credit derivatives. Introduced in the 1990s, these complex financial instruments allowed investors to bet on whether borrowers would repay their debts. The banking industry successfully lobbied to keep the derivatives market unregulated, which allowed them to sell derivatives based on false promises and make increasingly risky bets.
The consequences of this lack of regulation became apparent in a series of financial crises. In 1994, Orange County, California, lost more than a billion dollars on derivatives and had to file for bankruptcy. A year later, the UK-based Barings Bank suffered the same fate.
However, these crises were merely precursors to larger disasters. In the late 1990s, banks created another risky financial instrument: the subprime mortgage. These were loans with confusing conditions and often predatory interest rates, typically offered to low-income families who often couldn't afford to repay them. Despite warnings from interest groups, Greenspan and the Federal Reserve, adhering to their anti-regulation ideology, allowed this practice to continue unchecked.
Over the next decade, the subprime industry grew into a massive financial bubble. When this bubble finally burst in 2008, it triggered a worldwide financial crisis – a disaster that could have been greatly mitigated by appropriate regulations.
The history of unregulated markets demonstrates the potential for short-term profits to lead to long-term instability and economic harm. It underscores the importance of balanced and thoughtful regulation in maintaining a stable and fair economic system.
Final Thoughts
"The Economists' Hour" by Binyamin Appelbaum provides a critical examination of how economic theories, particularly those advocating for low taxes, unregulated markets, and limited government intervention, have shaped American policy and society since World War II. The book traces the rise of influential economists like Milton Friedman, George Shultz, Arthur Laffer, and George Stigler, and how their ideas became the dominant ideology for political figures in the United States and around the world.
Appelbaum's work highlights how the adoption of these economic theories has led to significant changes in various aspects of American life, from military conscription to financial regulations. While these policies were often implemented with the promise of greater efficiency and prosperity, the book argues that they have instead resulted in stagnant wages, a weakened industrial and manufacturing sector, and historically high levels of inequality.
The author presents a series of case studies and examples to illustrate the impact of these economic policies:
The end of the military draft, which was influenced by free-market economists arguing for a volunteer army based on market principles.
The shift from Keynesian economics to monetarism and supply-side economics, particularly during the Reagan era, which led to massive tax cuts and deregulation.
The pursuit of economic efficiency over fairness, which allowed for the rise of monopolies and increased market concentration in various industries.
The adoption of cost-benefit analysis in government decision-making, which often prioritized economic considerations over moral or ethical concerns.
The end of the Bretton Woods system of fixed exchange rates, which created a more volatile global financial system.
The implementation of free-market policies in Chile under Pinochet's dictatorship, which led to economic turmoil and increased inequality.
The dangers of unregulated financial markets, as exemplified by the rise of credit derivatives and subprime mortgages, which ultimately contributed to the 2008 financial crisis.
Throughout these examples, Appelbaum demonstrates how the increasing influence of economists in policymaking has often led to unintended consequences and exacerbated social and economic inequalities. The book serves as a cautionary tale about the potential dangers of applying economic theories without considering their broader societal impacts.
"The Economists' Hour" challenges readers to critically examine the role of economic thinking in shaping public policy and to consider the need for a more balanced approach that takes into account not just economic efficiency, but also social equity, environmental sustainability, and democratic values.
As we reflect on the lessons presented in this book, it becomes clear that while economic theories can provide valuable insights, they should not be the sole basis for policymaking. Instead, a more holistic approach that considers the complex interplay of economic, social, and political factors is necessary to create policies that truly benefit society as a whole.
The book's exploration of the rise and impact of free-market economics serves as a reminder of the importance of diverse perspectives in shaping public policy. It suggests that we need to be cautious about embracing any single economic ideology too wholeheartedly and instead strive for a more nuanced understanding of how economic policies affect different segments of society.
As we move forward, the lessons from "The Economists' Hour" can help inform a more balanced approach to economic policymaking. This might involve:
Recognizing the limitations of purely market-based solutions and the potential need for thoughtful regulation in certain areas.
Considering the long-term social and environmental impacts of economic policies, not just short-term economic gains.
Balancing the pursuit of economic efficiency with concerns for equity and fairness.
Encouraging a diversity of voices and perspectives in economic policymaking, including those of non-economists who can provide insights into the broader societal impacts of economic decisions.
Developing more comprehensive metrics for measuring societal well-being beyond just GDP growth or stock market performance.
Fostering a greater understanding of economics among the general public to enable more informed civic participation in economic policy debates.
In conclusion, "The Economists' Hour" provides a valuable historical perspective on the influence of economic thinking in American policy and society. By critically examining this history, we can better understand the strengths and limitations of various economic theories and work towards developing more balanced and effective approaches to addressing the complex challenges of our time. The book serves as a call to action for policymakers, economists, and citizens alike to engage in more nuanced and inclusive discussions about the role of economics in shaping our collective future.