Reviewed by Norrie Sanders
The Great Recession of 2007 – the one that Australians call the GFC – was a boon to economists. Book sales boomed as the very economists who had failed to predict the crash, tried to convince us that they knew why it occurred. If only those same economists could have predicted the recession, the world might have been able to avoid it.
The first wave of post- recession literature is now being followed by a second wave that is deeper and broader in scope. The strong link between economics and politics was born in the mid-20th century and some of the economic policy adopted since then contributed to several recessions, including the most recent crash.
The Economists’ Hour is a series of themed history lessons that provide greater insights as to why major recessions could occur at any time. Binyamin Appelbaum delves into the arcane world of neo-liberal economics, which necessitates a detailed account of the role of economists and economic theory in shaping government policy in the USA – and by inference, the world – in the last 60 years.
Recent events, including the Great Recession, have even led to predictions of the demise of free markets and, perhaps, of capitalism itself. The seeds for this were sown long before 2007, but the political consequences since then have been manifest – the rise of populist, authoritarian politicians, nationalism, xenophobia and the destabilising of world institutions and agreements.
The content demonstrates there has been a continuing tug-of-war between the major economic levers – including government regulation, budget balance, inflation, employment, money supply, private and corporate taxation.
The structure is a series of chapters on these levers. Most chapters begin in mid-20th century and finish in current times. This requires some necessary repetition, but the structure works to explore detail and nuances as well as rendering the content more digestible.
The book is divided into three parts. The first deals with markets, employment, inflation and taxation, with a detailed account of monetarism and the rise of one of America’s most polarising economists, Milton Friedman. The second part looks at the behaviour of large corporations, government regulation and valuing people and the environment. The third part broadens the geographic scope to examine currencies, and includes case studies about the economic fortunes of a few “foreign” countries, and the endless debates about the extent of government regulation.
The author has painstakingly researched and documented the evolution of these themes. It is plain that for a new economic theory to gain traction, the proponent has to achieve political legitimacy through a combination of persuasiveness, timing and luck. For any US President to take the world’s largest economy in a new direction, with little or no evidence that it will work, is a huge act of faith. Consequently, many theories are adopted not because they are proven to be better, but that they fit with a desired political ideology.
For example, President Reagan argued in the 1980s that tax cuts would produce increased government revenues. Despite being dismissed as “voodoo economics” [p110] by his rival, George Bush, the voters fell for it. Some profitable firms ended up paying no tax and others were actually subsidised by the government. The net result was a slowing of US economic growth and the economy has never again achieved the sustained growth rates of the earlier part of the 20th century. Even staunch Reagan supporter Dick Cheney reluctantly agreed, decades later, that the cuts had not worked. Perhaps he should have heard some alarm bells when tax cuts were first “proven” to him by a prominent economist who famously sketched a curve on a table napkin.
When President Clinton subsequently raised taxes, swarms of economists were appalled and predicted a shrinking of federal revenues and the economy. In the event, the opposite happened: “the economy boomed and deficits vanished” [ p120].
Economists continued to argue when President George W Bush’s proposed tax cuts in 2002 caused a schism – 450 economists signed a statement that “opposed the plan, concluding it would expand the federal debt but not the American economy”. Meanwhile, another 250 responded with a statement supporting the plan. Bush wagered incorrectly by sticking with the cuts, but was re-elected anyway. “Tax cuts once again were a political triumph and an economic failure” [p127]. In contemporary USA and Australia, we have witnessed recent tax cuts justified on similar grounds.
Politicians typically trot out the results of econometric models where they support their policies, while suppressing any results that do the opposite. Milton Friedman eschewed the need to use complex models to predict the results of economic policies, preferring what was essentially ideologically-driven trial and error:
“This emphasis on results became a defining feature of modern economics, helping to justify the rise of increasingly abstract models that treated people as rational actors – not because anyone thought that people were rational, but because the pretence was said to produce better results.” [p59]
This belief stemmed from an implacable faith in markets:
“The market would deliver stable economic growth; the role of government, he said, was to get out of the way…[later] telling audiences that the Fed [Federal Reserve] should be replaced by a computer” [P63].
Indeed, the long serving Fed chairman, Alan Greenspan, was so keen to keep government out of the way that he was quoted as saying “I have never seen a constructive regulation yet” [p303]. According to Binyamin Appelbaum, this led him to great success and great failure: “His signature triumph fittingly involved doing nothing: he resisted pressure to raise interest rates in the 1990s, judging correctly that the economy would grow without inflation…….His great failure also involved doing nothing: he repeatedly declined to curb the excesses of the financial industry” [p303].
Australians have learned recently from the Banking Royal Commission just how far those excesses can go. The author demonstrates the folly of so-called self-regulation through several case studies. Of course, this very issue was a trigger for the Great Recession, when excessive, risky lending practices in the US resulted in a chain reaction when those loans could not be repaid.
International trade has received close attention in recent years, but the seeds of protectionism were nurtured by the strength of the American economy:
“..the United States and its former enemies burrowed into a co-dependent relationship – Germans and Japanese producing; Americans consuming – entrenching economic patterns that persist up to the present” [p220]. China is just the most recent in a long line of trade partners who can produce goods more cheaply than America, and whose trade surpluses maintain the purchasing power of the greenback.
The powerhouse US economy had 75 years of trade surpluses from 1896, but by the 1970s it entered a sustained period characterised by trade deficits. This prompted President Nixon to devalue the currency and eventually, to abandon fixed exchange rates all together. The US showed that it was prepared to break long standing world agreements in favour of its own interests. “It was a declaration of economic nationalism, and in the United States, the initial action bordered on Euphoria”. Interestingly, “the Communists [Soviet Union] were also delighted” [p229], apparently hoping that capitalism might be moribund. Europe and Asia saw it as a trade war.
The world since 2007 has many parallels with the Great Depression – not least being the political opportunities that arise when people are hurting: “The market economy remains one of humankinds most awesome inventions, a powerful machine for the creation of wealth. But the measure of a society is the quality of life at the bottom of the pyramid, not the top. [This] is an important reason why the very survival of liberal democracy is now being tested by nationalist demagogues, as it was in the 1930s” [p332].
The book concludes with some sensible reflections and a few useful suggestions for policy makers, but by and large the book is descriptive. Indeed, by the time we reach the conclusions, the multi-faceted analysis of economic policy in preceding chapters has repeatedly served up one compelling lesson – that economics is more an art than a science; and that an economist who pushes a singular agenda is just as likely to be wrong as right.
Binyamin Appelbaum is not an economist, having graduated with a BA in history. He was lead writer on business and economics for The New York Times. This volume is the product of his forensic examination of events, skilfully combining economics with history. The result is a credible and very readable analysis –unencumbered by political or economic ideology.
The Economists’ Hour, mercifully, is written as a narrative rather than as an economics text. There are no graphs, pie charts or J curves in sight. The detail is sometimes overwhelming, but the book provides a clear lineage from the last century to our current economic system. The title hints that perhaps the central role of economists may be transient – but the alternative of having ill-informed national leaders tampering with such a delicate system, surely risks throwing the baby out with the bathwater.
by Binyamin Appelbaum
Picador; Pan Macmillan
448pp; $32.99 (paperback)