Binyamin Appelbaum on "The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society"

Binyamin Appelbaum is the lead writer on business and economics for the editorial board of The New York Times, and he was previously a Washington correspondent for The Times covering the Federal Reserve and other aspects of economic policy. Binyamin is also a returning guest to the show, and joins today to talk about his new book, *The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society*. David and Binyamin also discuss Milton Friedman’s influence on economic thought during the postwar era, the history of the emergence of supply side economics, and the consequences that have arisen from committing too strongly to free market principles.

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Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected]

David Beckworth: Our guest today is Binyamin Appelbaum. Bin is the lead writer on business and economics for the editorial board of The New York Times, and previously a Washington correspondent for The Times, covering the Federal Reserve and other aspects of economic policy. Bin is also a returning guest to the show, and therefore is a proud owner of nominal GDP targeting mug. Bin joins us today though to discuss his new book *The Economists' Hour: False Prophets, Free Markets and the Fracture of Society*. Bin, welcome back to the show.

Appelbaum Thanks very much for having me.

Beckworth: All right, so you've been using your nominal GDP targeting mug?

Appelbaum: I have, yeah. It holds coffee very well.

Beckworth: Very nice. Very nice. You have a new book, *The Economists' Hour*. It's an interesting read, full of lots of history. It reflects your training as a historian. Is that right?

Appelbaum: My background as a college student was in history. It may be a little strong to say that I'm a historian, but I have a longstanding fascination with history. I think it's a really important way of understanding the present.

Beckworth: Yeah, so lots of stories, lots of fascinating stories. There's an overarching theme to it as well, points are made. We'll talk about some of the areas where maybe I view things a little differently or interpret things differently, some of the facts, but still a very interesting read. I recommend our listeners get a copy of it. It really reminded me of a book that I read when I first got into economics or my interest was stoked. I think there's some parallels, I want to share with you and see what you think.

I had had some economics courses in college. I really liked them. It never dawned on me to be an economist as a career. Went back, was working on my MBA and I picked up at a used book store, William Greider's *Secrets of the Temple*. You actually cite that in your book, use some of the material in your book, I can see. I really love that book. Even though I didn't agree with all of his conclusions, I thought it was a fascinating read because the history was so rich, he had all these inside accounts. I kept thinking of that book as I read your book. You had all these fascinating stories, lots of history in it. Again, I had some different takes on a few things, but how do you feel about me comparing you to that book?

Appelbaum: I love Greider's book. What I love about it is I think a lot of history ignores economics and a lot of economics ignores history. Those two ways of looking at the world I think are intermittently intertwined. I really appreciate Greider's ability to narrate the complexity of history to say basically this is an economic story and it's a historical story. It's about people and it's about money. It's about the intersection of economic and historical forces. I think he does that really well.

The other thing I really respect about Greider's work and try to emulate in my own is that he really tries to bring economic policy decisions down to the level of ordinary lives and to say, "This is how the economy plays out and economic policy plays out at the level of ordinary people."

Beckworth: Well, you do a great job on your book too, telling lots of stories like that. Now, why don't you get us started by telling us the big picture story of the book, the argument. What's the summary of the point you're trying to make?

Appelbaum: Yeah, this book is the history of a revolution that begins in the late 1960s and the early 1970s where economists begin to become a lot more influential in shaping public policy, and thereby reshaping life in American, and then around the rest of the world.

It's a specific kind of economist who comes to influence in those years. It's people who believe very strongly in market forces, in the idea that the government should step back from managing the economy and allow market forces to allocate resources, deregulation, minimizing the role of fiscal policy, getting out of the way, and encouraging free trade and globalization across a whole range of policy areas, some more unexpected than others. These economists are advocating a fairly simply answer to the questions of the time. If the economy isn't work, the solution is for government to step back and get out of the way. It's the story of who those people were, and how they came to hold those ideas, and how they came to convince policymakers that they were right.

Beckworth: You argue it came at a cost, right?

Appelbaum: Yeah, I think that it's a story of a revolution that goes too far. I think in the 1970s, the economy was breaking down, in part because of problems in our approach to economic policy. Many of these ideas were correctives to those problems and they worked to some extent. They were beneficial in the early years, but the embrace of those ideas went too far. I think there were three primary consequences.

I think that it's a story of a revolution that goes too far. I think in the 1970s, the economy was breaking down, in part because of problems in our approach to economic policy. Many of these ideas were correctives to those problems and they worked to some extent. They were beneficial in the early years, but the embrace of those ideas went too far.

The first is we didn't get the prosperity that we were promised. In the long-run, we're seeing growth slow in part because of disinvestment in the economy, which I think can be traced directly to the ideas of these economists. Second, inequality sword. One of the key arguments that these economists made was that you didn't need to focus on distribution, you just needed to focus on aggregate growth and our indifference to distribution is one big reason that we have a lot more inequality. Then the third consequence, which is connected to inequality is I think that our democracy is being strained in part by the fact that we now have less and less in common.

The idea of we the people, of a calm and collective purpose is harder to define and to defend, in an era when some of us have such vast wealth and most Americans have very little.

Beckworth: Yeah, and just so we're clear with our listeners, you tell a nuanced story in the book. Like you mentioned earlier, you do recognize the gains, the progress that's been made. You talk about globally the world is a better place, but in the U.S., there's been these challenges that have arisen because of these developments. It's a very nuanced story and again, I encourage listeners to look at it.

What has been the response to your book? Tell me about that.

Appelbaum: I want to emphasize that it is a story. My hope in writing this was to write in historical narrative that would be interesting and useful, irrespective of what conclusions you draw from it. You've asked me about the conclusions and I do get to those in the book, but I think even if you have a very different view of what this all meant, just the story of this revolution, and how it came to pass is enormously important and illuminating, and I think valuable.

But yeah, so the reaction to the book has been all across the spectrum as you might expect. There are people who love it and people who don't. I'd say in general, it falls into a couple of categories. There are people who think that I'm overstating the role that economists have played in the evolution of America, American society, the American economy. The extreme formulation is that I'm blaming the weatherman for the weather, but even people who are willing to acknowledge that economists played some role, some have argued that I'm attributing too much responsibility to their ideas and too little to the various powerful forces that embrace their ideas or made use of their ideas in order to change our policies.

Beckworth: Okay, very interesting. Yeah, I've seen some of the response on Twitter. I've seen both praises and then some pushback. It's worth reading though. Again, I encourage the listeners, even those who might be skeptical, my fellow economists, yeah, Bin does poke us a little bit in the book, but take a chance and read the book. It really is interesting. I think you will learn some fascinating history. Again, there's a great story to be told there.

Let me share my big thoughts on the book, and then I want to get into the stories you tell because some really fascinating stories, Milton Friedman, Robert Bork. There are some really great stories I want to get to in the time we have today. But I want to begin with what I consider maybe my big takeaways from the book. The first one is the title of the book, The Economists' Hour. You touched on this when you were talking about some of the pushback. I might have come away thinking of it more of the University of Chicago's hour or a certain type of hour. Even that's not correct because you get into supply siders who really weren't all University of Chicago type economists. But there were other economists' hours, and you mentioned this in the book, like the post World War II era, the Keynesian paradigm became very dominant, they begin to build a government, they played a role. In fact, you even mention in the book that this revolution was a counter revolution to the Keynesians. Is this more of a story about the free market hour versus the economists' hour?

The Free Market Counter-revolution Post-World War II

Appelbaum: I think there's two important points that I try to make in the book. The first is that our historical memory of how important the Keynesians were in shaping public policy is greatly overstated. I think because of the problem that economists now have in public life, people look back, and assume that the advocates of Keynesians’ ideas had similar prominence in their era and were similarly influential. I think that's just not the case.

Our historical memory of how important the Keynesians were in shaping public policy is greatly overstated. I think because of the problem that economists now have in public life, people look back, and assume that the advocates of Keynesians’ ideas had similar prominence in their era and were similarly influential. I think that's just not the case.

When you look back at who was making economic policy decisions in the mid century and what ideas they were drawing on, economists were marginalized by comparison with the present day. They were not the central decision makers. Their ideas were generally not decisive in these debates. They existed, they talked a lot, they wrote a lot. We still have the things that they said on our shelves.

But Keynes, certainly in the United States, was largely ignored in his own time. His disciples really struggled to influence public policy in the succeeding decades. The impression that we have that one school of economics simply replaced another school of economics I think is wrong.  The shift in the late '60s and the early '70s is not just the replacement of one group of economists with another group, it is really the first time that economists gained that degree of centrality. That's number one.

Now, it's true that the people who came to power in this era were a different kind of economist then, than the people who had preceded them. They were much more convinced of the virtues of markets, much more concerned about the role of government in the economy. But here is the second point, is that I think in the retelling it is convenient for a lot of people to insist that there was some type of great debate between these economists and their opponents, liberals versus conservatives to map it onto the politics of the time.

That is true to some extent. At any moment during the last half century one could map economists, and find a split between liberals and the conservatives. But what gets lost in doing that is the extent of the consensus, the degree to which both liberal and conservative economists came to agree about a certain number of very fundamental and important things. For example, the centrality of monetary policy and the need to focus monetary policy on keeping inflation as low as possible. They agreed.

My paper, The New York Times, ran an editorial in the mid 1980s advocating for the elimination of minimum wage laws on the grounds that we had surveyed all the prominent economists of the day, and found no one who thought that minimum wage laws were a good idea. That's not a Chicago school thing, that's an all economists thing. There are professional surveys from that period in which economists were asked for their thoughts about the value of tariffs. They thought there were none. Rent control, terrible idea. Opening up free trade, great.

You can go down a list of important ideas that shaped our economic policy in that period, and I think that people tend to focus on the things that remained controversial because that's where all the heat was, but it's important to step back and look at the things that weren't controversial because those actually constituted the vast majority of our economic policy. On those issues economists had achieved a very high degree of consensus.

Beckworth: Okay. Another takeaway from me is you were touching on something important. I think for me at least the prima facie evidence is the rise of populism we see. There's angst out there, not just in the U.S., around the world, so something has happened. You look at inequality a lot. You focus on that measure a lot. But one of the things I was thinking about as I read the book, what if we solved inequality? To be clear, you don't so eliminate all inequality, just the excess, so we can debate what that means, but there's always going to be some inequality, just some different natural endowments, life's unfair, things happen. But to reduce it, you want to reduce it. But some of the challenges I think I see are more than just inequality. Put it this way, if we got rid of inequality, would we still have some of the underlying questions of identity, place, agency?

Appelbaum: I think absolutely. To be clear, I think inequality is a positive force. It has real benefits. It's the incentive to work, and to achieve and to enhance new ideas. This is by no means an attack on inequality as such. It's just true of inequality, as of many things, that they're best in moderation, and that if you have too much, you start to encounter a lot of increasingly great problems.

To be clear, I think inequality is a positive force. It has real benefits. It's the incentive to work, and to achieve and to enhance new ideas. This is by no means an attack on inequality as such. It's just true of inequality, as of many things, that they're best in moderation, and that if you have too much, you start to encounter a lot of increasingly great problems.

But yes, by no means do I think that inequality is the only problem confronting us. Indeed, I start it with something else, which is my view that one of the profound consequences of this era is that the systematic denigration of government's role in the economy has handicapped our growth prospects.

One of the profound consequences of this era is that the systematic denigration of government's role in the economy has handicapped our growth prospects.

I think of the 1990s as a very interesting period in this respect. It's remembered as the last time that the economy was working really well. I think what people missed about the 1990s is the extent to which prosperity was founded in public investment in earlier decades. The United States entered the 1990s with the most educated workforce in the developed world, and with a wealth of innovations and technologies that were ready to be implemented broadly, and to increase productivity. On the back of that, we enjoyed an era of great prosperity.

But during the 1990s, we were systematically disinvesting in education, systematically reducing our investment in technology and research. The consequence is today that we don't have those same advantages. We no longer have anything like the most educated workforce in the developed world, we no longer have this steady conveyor belt of innovations that are ready to transform the economy. I think that that is a profound consequences of this era that has nothing to do with inequality per se, but has everything to do with the way that economists reshaped public policy.

Beckworth: Yeah, you mentioned earlier this sense of a divided nation we have now. Can we be truly united? It is seem like a challenge. It seemed very polarized. Even people I know, there's very strong views held. One does wonder how we get from here to there.

Let me speak to some of the achievements during this period here. I know some of the pushback you've got is there has been some good accomplishments. You do mention this in the book. Again, I want to be fair, there’s a nuanced story, you mentioned how billions were lifted out of poverty, but it's not just billions lifted out of poverty. I have a Bookings report here how half the world is now middle class. That's a pretty remarkable accomplishment that happened during this time.

Along these lines, Andrew McAfee is new book called *More from Less: The Surprising Story of How We Learned to Prosper Using Fewer Resources-and What Happens Next*. His argument is the U.S. economy is dematerializing. We're using fewer resources to produce the stuff that we do, we use, we can consume. A cellphone is a good example. He gives the illustration of how if you take a RadioShack ad from the 1980s, there's 15 items on there that are now all apps in our phone. We often talk about, then I've seen this before using the context it's cheap, everything's cheaper now. We're much better off.

But he goes and takes an analogy a step farther. He says, "Look, it's not necessarily that it's cheaper, but there's less stuff, physical stuff. We don't carry boomboxes around, CDs, some computers, cameras. It's all on the phone, so we're physically using fewer resources." It's an amazing accomplishment and he says this starts actually in the 1970s.

The U.S. economy is dramatically doing better in terms of the environment. Climate change is still a real struggle, real issue. We have that, we have all these people lifted out of poverty. That seems like a remarkable accomplishment. Could it have happened, I guess is my question, in the absence of the cutthroat capitalism that you describe in the book?

Appelbaum: I think the transformation is real. My son has this Richard Scarry book, this children's book with these pages that show objects and their names. There's this shelf in a kid's room and it's got the record player, and the radio and the books. None of those things exist anymore. It's just a phone now. All those objects have been condensed down into a single… so that is a real and undoubted transformation, and obviously hugely beneficial.

This is not an argument against change. I think the change was good. The question is, how do you manage it, and what role should policy play in managing it and in managing the distribution of the benefits? The pace of change I think is enormously important as a policy consideration. The distribution of benefits and of costs, these are the issues that policymakers essentially stopped grappling with and decided that they were just going to let the market sort it out. I think that was a huge mistake.

The distribution of benefits and of costs, these are the issues that policymakers essentially stopped grappling with and decided that they were just going to let the market sort it out. I think that was a huge mistake.

Then obviously the second question is, well, would this have happened? Would we have had the same degree of change if we had been taking this more hands-on approach. Obviously, counterfactuals are very difficult. It's a hypothetical world and we don't know exactly what it would have looked like, but I would point out again that the roots of that change are in an earlier period in which the government was playing this role in the economy.

One of the stories I tell in the book is about the invention of the transistor. When the transistor was invented by AT&T, by Bell Labs, its research facility, the government required AT&T to share that technology with its competitors. Within months of the invention of the transistor, AT&T held this remarkable conference in New York where its main rivals and smaller companies were invited to come learn in detail, not just what a transistor did, but how to make it. Then they issued a textbook, a recipe which was known as Ma Bell's Cookbook by a generation of electrical engineers because it explained exactly how to make this thing, this incredibly valuable new technology.

What happens is that engineers from Sony take that idea back to Japan and start making transistor radios, which are the first great commercial electronic product of the modern area. Texas Instruments shortly perfects silicon transistors, which is the first step in the personal computer revolution. The government forced the sharing of this technology, wrote rules for the marketplace in a way that it later stopped doing.

When we come forward and say, "But would we have cellphones if the government had intervened in the economy?" We wouldn't have cellphones if the government hadn't intervened in the economy.

Beckworth: Fair point. Alright. What would be your prescription moving forward? I'm jumping to the conclusion now of your book. Again, we'll get to the specific chapters in a minute, but how would have policy address these challenges that have been created by this counter-revolution?

How Do We Address the Counter-revolution?

Appelbaum: There is no silver bullet. The book takes the form of a series of chapters discussing different aspects of economic policy. For each one I think the answers are different and I don't pretend to have all of the answers. This is primarily a work of history. It's about what went wrong. How we fix it, I think, is an important and central question that I'm not presuming to answer in this book.

But in general, I would say the following thing. Markets are human constructs. They don't exist outside of government. The idea of the market as some natural thing that orders itself is ridiculous. Our task, the task of our policymakers in particular is to write good rules for markets, to consciously set out to craft rules that will promote prosperity and that will distribute that prosperity in the way that we as a society regard as best. Those are conversations that we need to start having again. That is the role of government, is to do a better job of writing those rules.

Markets are human constructs. They don't exist outside of government. The idea of the market as some natural thing that orders itself is ridiculous. Our task, the task of our policymakers in particular is to write good rules for markets, to consciously set out to craft rules that will promote prosperity and that will distribute that prosperity in the way that we as a society regard as best.

Beckworth: That will be your next book, after we have all these policies. You'll do another history on how we dealt with the challenges of dealing with the consequences of the counter revolution.

Alright, well let's get into specific chapters. I want to start with the first few. I really enjoyed them because they dealt with Milton Friedman a lot. He's almost like a central figure in this book. I'm not sure if you're painting him just as the pivotal force, or a hero or a villain. How would you describe his role in this whole process?

Milton Friedman’s Role in Shaping the Postwar Economic Landscape

Appelbaum: I think he is in the most important economist of the 20th century. I think he had this incredible influence across a remarkably wide range of areas in reshaping the role of economists in society, in reshaping our conception of what economics is, how it should be done, its interface with policymaking. I just view him as this giant figure who loomed over the landscape. Somewhat underappreciated, I think in his own time, notwithstanding how prominent he was as a prominent figure, but the degree to which he exercised a gravitational force over the rest of the discipline, I think, is quite remarkable.

Beckworth: Yeah, you mentioned in there how certain left of center economists came around to like him, support him, endorse him, say, "This is a Friedman world."

Appelbaum: Yeah, if you had asked economists who they regarded as their most important peer for much of the 20th century, I think Paul Samuelson would have probably been a leading answer to that question. He was often portrayed as the great man of his own era.

What's remarkable, if you take Paul Samuelson's economics textbooks says an example is the degree to which he successively rewrites them closer and closer to Friedman's ideas over the course of the century. People saw him as the representative of the mainstream and of conventional wisdom. That's fair enough, but the fact is that Samuelson conceded many of his great debates with Friedman over the course of the century.

Beckworth: Yeah, in my area of central banking and monetary policy that's very true. His legacy is central banks are run in the way he would have envisioned. They don't target monetary aggregates, but the same principal ideas that they are very much the center force in terms of counter cyclical management is his prescription.

Appelbaum: Absolutely. The idea that monetarism lost, I think it's wrong.

Beckworth: Yeah, yeah. No, he may have wanted a more rules-based approach, but his views, I think, are very much with us today. I want to go through some of the history of him because it's really fascinating to see his role. The first few chapters get into this, but you also touch on him throughout the book. But it was interesting to read about him and his role in the draft. I had heard this before, but I think it's story worth telling. He himself, I think you said saw his work on the draft as one of his biggest accomplishments in his career, right?

Appelbaum: He did. He said that it was the thing that he was most proud of. Even to the end of his life, having done so many other things, had a profound influence on public policy in so many other ways. I start the book with this story because I think it's fascinating. It happened first, it's the first time that Milton Friedman really successfully puts his stamp on public policy and it captures much of what follows.

By the draft, we're talking about military conscription, the fact that in the decades after World War II, the United States government annually required tens of thousands, or even hundreds of thousands of young men to serve in the military. It chose them in a bureaucratic process that was basically regarded as optimal. The idea was that the government would decide who should serve in the military. Local draft boards would sit in judgment and decide which young men in each community should serve their community as members of the military.

Friedman and his allies come along. As early as the 1950s, he's making this argument, but it to begins to gain traction in the 1960s and they say this is wrong. It would be better in several respects more moral, more economically efficient, and better for the United States militarily instead to pay people to serve in the military, to say to them basically, "We will pay you as much as is required to hire as many soldiers as we need," and it will be an all volunteer force. Instead of drafting Sergeant Elvis Presley and requiring him to serve his country, Sergeant Presley can go pursue his singing career, and someone else will be paid to serve in that role, someone who is excited about being a soldier, and for whom that's the highest and best use of their time.

Beckworth: Yeah, so I got to read an excerpt of your book where he has this interaction with General Westmoreland, who was the Army Chief of Staff, and as we know very famous figure in the Vietnam War. I want to read this. It's wonderful. He was very witty, sharp on his feet. That's one thing about Milton Friedman, until the very end, he had a sharp mind and productive life. I'm going to read this, page 40 and 41 in your book.

It says, “a defining moment came on a Sunday morning of December 1969. Gates invited the heads of various branches of the military to meet with the commission. General William Westmoreland, the Army's Chief of Staff regarded the commission's work as an assault on the Army, the only branch of the service that relied on conscription. ‘I did not relish the prospect of commending an army of mercenaries,’ Westmoreland told the commissioners. Friedman, smelling blood in the water responded, ‘General, would you rather command an army of slaves?’ Westmoreland, ‘I do not like to see hear patriotic draftees referred to as slaves.’ Friedman, ‘I do not like to hear patriotic volunteers referred to as mercenaries. After all, in that same sense, I'm a mercenary professor who has his hair cut by a mercenary barber, his ills taken care of by a mercenary physician, and his legal affairs handled by a mercenary lawyer. And if you will pardon me, you sir are a mercenary general.’"

Wow. He would be one tough person to debate or to handle an exchange of ideas.

Appelbaum: There's a famous saying about Friedman, that it was best to debate him when he was not in the room.

Beckworth: Right. Well, I'm sure General Westmoreland learned that lesson very well after that exchange. But his work on the draft is an amazing story in itself. You also mentioned interestingly that the New Deal saved him and his wife from being unemployed. They were pinching pennies, they were finding it hard to get work during The Great Depression and the New Deal put him to work.

Appelbaum: Yes, it did. That was the one time in his life that Friedman worked for the federal government. He, in later years, resisted various opportunities to come to Washington and to serve again. But in those early years, he worked in the machinery of The New Deal. In some respects seems to have aligned himself intellectually with some of the views of The New Deal on economic issues. This is when he was quite young, of course. But it ended up being a formative experience for him, primarily in the sense that it informed his judgment, that the government was the wrong answer to pretty much every problem.

But the draft is a fascinating episode for another reason, which is that one of the things that I set out to this do in this book and didn't know how well I would succeed in doing was to trace the path of ideas from the minds of their originators into the law, and into society, and to see how well one could establish that economists and their ideas had actually been the force that reshaped policy.

In the case of the draft, the record is remarkably clear and complete. We can watch the reasons that economists articulated for opposing the draft, march from Friedman to the Nixon campaign in 1968, be embraced by the candidate, and then watch the new administration push them into law, step by step with Friedman playing a role sitting as you had just read, on the commission that advised the president on these issues. You can really watch economists reshaping the government's approach to a key public policy issue and doing it in a way that really created a template for their transformation of other areas of public policy.

You can really watch economists reshaping the government's approach to a key public policy issue and doing it in a way that really created a template for their transformation of other areas of public policy.

Beckworth: You also mentioned in the book that Friedman, early on, was concerned about inequality.

Appelbaum: He absolutely was. He and George Stigler, his great friend, acknowledged ... Inequality was generally acknowledged as an issue in the 1930s and the 1940s. It was impossible to be addressing issues of public policy without acknowledging the dimension, which was how does this affect inequality? Friedman did something very interesting in those years. He and Stigler, the one paper they ever wrote together was a pamphlet on the evils of rent control. In that pamphlet, they wrote this passage that said basically “inequality is an important and legitimate issue for public policy to confront. This is the wrong way to confront it.” The libertarian foundation that was funding that work flipped out and put a footnote in the pamphlet without their permission that basically said, "Look, even these two bleeding heart liberals think rent control is a bad idea," which infuriated Friedman and Stigler.

But at that time, they basically had to acknowledge the legitimacy of inequality as an issue. That falls out of their writing over time. The extent to which they actually regarded it as an issue in the 1940s I think is hard to say, but it certainly was something that it was impossible to write about public policy without addressing that question of, well how does this effect inequality?

Friedman’s Impact on Monetary Policy

Beckworth: Okay, well let's move onto Friedman's work with monetary policy and making money matter again, taking it seriously. Many of listeners may be aware of his famous work on the monetary history of the United States, which again, another interesting little tidbit I learned from this, it was actually commissioned I believe in 1949. He said it would take eight months to write. It took him 14 years. Wow, that's almost a two decade, a decade and a half project. That was an amazing story.

Initially, they weren't thrilled about the direction he was going to take it, right?

Appelbaum: The commission came from a foundation that was headed by an economist who was of this older school, Keynesian aligned. The view at the time was basically that what mattered was not the quantity of money, which became Friedman's famous argument, but velocity, how frequently money was used in the economy. It was seen as really the central issue. What this foundation wanted was a study of velocity, a study of how frequently money was used and how that related to the business cycle. They were seeking data on what they regarded as a basic tenet of macroeconomic policy.

This is the early years of macroeconomic policy when the theory had advanced far beyond the limited supply of data. People were looking to begin to ground their understanding of the world in numbers. They turned to Friedman and Anna Schwartz, his great collaborator, and said to them basically, "Can you look into this and document it?" Friedman from the outset made clear that he had no intention of fulfilling the request. He wrote back and said basically, "I'm interested in a very different question. I disagree with your premise. I'll take your money. I'm going to do a very different study," and off he went. He set out to prove something very different, which is that velocity, and therefore the government's role as a spending force, the government's fiscal policy basically was impotent, and the focus of macroeconomic policy was necessarily on the central bank and on the quantity of money.

He set out to prove something very different, which is that velocity, and therefore the government's role as a spending force, the government's fiscal policy basically was impotent, and the focus of macroeconomic policy was necessarily on the central bank and on the quantity of money.

Beckworth: Yeah, and you really illustrate well how he was a lonely voice, a voice crying in the wilderness, watch money, watch money. But most people didn't take him seriously for a long time. You mentioned the peak or the turning point in this counter-revolution, it's often called the monetarist counter-revolution, was his 1967 speech at the American Economic Association meeting. Tell us about that turning point and why it was consequential.

Appelbaum: What's remarkable about Friedman's early career is that he was highly regarded as an economist, but not for this work. His early contributions were in statistics, really down in the engine room of economics. He was regarded as rather brilliant in that respect. People held him in high regard, and so they were willing to listen to what he had to say about this other issue. But no one took him particularly seriously. They thought that he was crazy and often said so in as many words. But what happens over time is that Friedman begins to win little battles, begins to make small points, begins to use his model to successfully predicts what's happening in the economy.

Over time, people begin to embrace this idea that okay, maybe the quantity of money matters, maybe monetary policy is important than we were initially acknowledging. But to his great frustration, they embraced this as just another tool of activist government policy. If monetary policy matters, they conclude that this is another way for the government to boost employment during periods of slack in the economy that you can add monetary policy to the toolbox of Keynesian activist economics.

Friedman, who becomes the president of the American Economic Association, goes to deliver his presidential address. It's a direct rebuttal to this view. He goes and he says basically, "You guys are misunderstanding what I'm saying. It's not that monetary policy can be used to fine tune economic conditions, we basically were making policy in darkness. The most that we can do is just to steer a steady course, to increase the money supply at a steady rate. Anything more than that is bound to be counterproductive. That's the most that we can do that will good be good for the economy. This whole effort to build a system of controls, and levers, and activist management of the economy is misguided and counterproductive, and will produce the wrong results."

There's a very technical model behind all of this, which remains influential. But the bottom line point that he is making is the government needs to step back, and acknowledge its limitations in the face of uncertainty, and adopt a disciplined and minimalist approach to macroeconomic policy.

Beckworth: Yeah, so monetarism becomes more widely accepted. I don't know if it reaches a peak or it reaches the height of its influence within the early '80s. Here in the United States, Paul Volcker invoked it, at least some form of it. Now some have argued that it was a ruse for political reasons. He was going to target the monetary base so that rates could go really, really high, give him cover. But other places tried it as well. How successful was monetarism in the early '80s?

The Impact of Monetarism in the 1980s

Appelbaum: I think first off, people who think that Paul Volcker embraced this purely as a ruse should in the first place listen to Paul Volcker's own testimony on this subject, and in the second place, read more of what Paul Volcker said at the time because it's pretty clear that he took this set of ideas seriously, if not in exactly the form that Friedman had articulated them. Volcker was raised up in a tradition of economics that was well outside of Keynesianism at Princeton, where he studied as an undergraduate, was a place where Keynes had made no impression whatsoever and he subscribed to this world view. I think that's very clear.

But the adoption of this premise that monetary policy ought to be the central or even sole lever of macroeconomic policy, it becomes universal. It's enormously influential. The exact mechanism of focusing on quantity of money proves essentially impossible in practice and is largely abandoned in favor of inflation targeting. Some people view that transition as the death of monetarism.

I take a very different view. I think Friedman's central point that a central bank needed to keep things very simple, and maintain a steady course, and minimize its interference in the economy. These ideas essentially prevail. Inflation targeting is in some sense Friedman's triumph. In that period, and therefore I think really the peak of his ideas is not under Volcker in the early '80s, but in the '90s and into the 2000s when inflation targeting becomes the dominant paradigm of monetary policy.

I think Friedman's central point that a central bank needed to keep things very simple, and maintain a steady course, and minimize its interference in the economy. These ideas essentially prevail. Inflation targeting is in some sense Friedman's triumph.

Beckworth: Well, that's interesting way of looking at that. Even the short-term high was actually surpassed by a longer term shift and how central banking is done, which was premised on his view. That's fascinating.

Now, you mentioned in the book several banks that tried this, and you alluded to this, velocity was not stable, but the Bank of Canada tried it, the Bank of England, the Bundesbank did it even longer. In fact, they had it as part of their mandate up until the European Central Bank comes along. But there were these velocity problems, so the use of money would swing back and forth, which goes back to the original paper he was supposed to write, right?

Appelbaum: Yeah.

Beckworth: What happens to velocity? Which I'll put a little plug in while we're here, that's what nominal GDP targeting is all about. One way to look at nominal GDP targeting is it’s a velocity adjusted money supply measure. But put that to the side for the time being.

It is interesting that that was the death knell of the apparent use of monetarism, but your point is, it still went under the radar and it manifested itself as inflation targeting. He still won the war at the end of the day.

Appelbaum: Yeah, at least until the Great Recession. He certainly, he was winning at that time.

Beckworth: Yeah, and that actually raises a question I meant to ask earlier. The book is *The Economists' Hour*, and maybe partly Milton Friedman's hour. But is the hour really over? I know there's all these attacks, and some stigma that the economists had taken on, and rethinking economics. But I look around, it still seems like economists are pretty influential, or is it ... How do you take that or see that?

Appelbaum: Undoubtedly it's true that economists remain very influential, but I think that 2008 is an inflection point. Over the last decade, as in the 1930s and the 1970s, we've seen a period in which the certainty about a particular approach to economic policy has been profoundly shaken. It's undoubtedly true that its influence remains in many ways pervasive, but there is a questioning of basic assumptions, a consideration of new ideas, an openness to new approaches that I think marks a period in which something fundamental has changed.

What exactly emerges from it remains unclear. I have no doubt that economists will be part of whatever comes next, but this era in which the faith of economists in markets, and the faith of policymakers and economists was essentially universal and unquestioned. I think that era has closed.

I have no doubt that economists will be part of whatever comes next, but this era in which the faith of economists in markets, and the faith of policymakers and economists was essentially universal and unquestioned. I think that era has closed.

Beckworth: All right. Well, I want to go back briefly to Paul Volcker and the Great Inflation, and his war on the Great Inflation, and the Double-Dip Recession in the early '80s. You have a whole chapter that's titled One Nation Underemployed. I think the key takeaway is that too much was done. The battle fought was too hard. Could have been done easier. It needed to be fought, but maybe a little gentler touch, is that right?

Paul Volcker, Alan Greenspan, and the Effects of Inflation

Appelbaum: It is the premise. I think that what everyone thinks about how Volcker handled the early 1980s, whether you could have gotten to the same place more gently, what I think is even more important is the period that follows under Alan Greenspan in which the Fed places such a priority on minimizing inflation that it is tolerating an unnecessarily high level of unemployment.

There is a remarkable episode in which Greenspan goes before a congressional committee and testifies that he is sure that two percent inflation is better than three percent, and one percent inflation is better than two percent, and no inflation is better than one percent, that each of these steps down towards zero will improve economic conditions in the United States, in assertion for which he privately concedes to his colleagues, he has absolutely no evidence. Indeed, to this moment, we have absolutely no evidence.

He's advocating for this absolute minimization of inflation at the expense of higher unemployment. It becomes a fetish, it becomes a religious conviction that less inflation is always better, and the cost is that millions of Americans remain out of work. That I think is what I mean when I say that the revolution went too far.

It becomes a religious conviction that less inflation is always better, and the cost is that millions of Americans remain out of work. That I think is what I mean when I say that the revolution went too far.

It was clear that the Fed needed to take firmer control of inflation. It was clear that what was happening in the late 1970s was suboptimal. But by the 1990s, the Fed is doing it in a way that also goes too far.

Beckworth: Well, you know I've been critical along those same lines the past decade. I think maybe what we saw the past decade, a low inflation is the straitjacket created by that journey down. But let me go back and maybe play devil's advocate for Alan Greenspan and the Fed during that period. How do we know what counterfactual would have been like if they hadn't gone down that path? How do we know that unemployment truly was at a level that could have sustained a little more easing without creating problems for inflation. How confident are we that an alternative path could be taken successfully?

Appelbaum: I think the counterfactuals, as we said earlier, are always difficult. We truly don't know what an alternate version of history would have looked like. What we can say with confidence is that the Fed in that era saw its mission as focused on inflation reduction and was willing to tolerate higher employment than it regarded as absolutely necessarily in order to achieve those inflations, those opportunistic disinflations. Each time the economy crashed, that its focus was on inflation, it did not see unemployment as a separate objective, it saw it as a subsidiary objective, something that you would maximize by focusing on low inflation.

There are papers that have been written, calculating that delta and trying to estimate how much more unemployment than necessary the Fed tolerated, but I think what we can say with confidence is that the approach taken by policymakers did not regard making sure Americans had jobs as an equal priority alongside minimizing inflation.

Beckworth: Well, you're a great person to be thinking about this and asking this question because you covered the Fed very closely, during this past decade, so you've seen this firsthand. One of the critiques I've had is that I think the Fed, and not just the Fed, but I think central bankers in general, maybe it's a human cognitive bias, but we think in terms of growth rates and not levels, that if we get close to two percent, we freak out, as opposed to thinking about where we should be or could have been.

I say it's a human condition because back in the 1930s and 1936, I mentioned on the show before, the Fed began to tighten policy because they were worried about inflation taking off in the 1930s and there's still this huge hole in the economy. They're thinking about little inflation as opposed to where the price it would have been had there been no Great Depression. It just blows my mind that back then they would be thinking about that, but then I come to the present, well, maybe it's not so strange that they're thinking the same thoughts today. Maybe it's some hard wiring in our brain that we just somehow have to get over, but what are your thoughts after working closely on this for the past decade as a Fed reporter?

Appelbaum: I think the idea that we have anchoring effects is very real and pretty well documented. Yeah, listen, I think the Fed was too cautious over the last decade. I think that a fear of inflation and to some extent a fear of political consequences inhibited their willingness, even as they began to rethink the importance of unemployment, and to focus on unemployment as something that the Fed had both the ability and the responsibility to reduce. It was still the case that they moved too cautiously, that they were afraid of a specter of inflation that never really materialized. They continually, repeatedly, year after year overestimated how much inflation would come into the economy, that they as a result underestimated how much stimulus they should be providing to the economy.

I should step back and say that I think the role of monetary policy in our post crisis trails is overstated because it was the only part of the government that was actually functioning. There's a broader story here as well about the terrible mistakes of fiscal policy during these same years. But as regards the role of monetary policy, it seems clear. Indeed, the protagonists have said as much that there was too much caution and not enough action.

Beckworth: Yeah, so what do you think going forward is going to happen to the monetary policy in the U.S.? I ask this with the observation in mind that interest rates around the world are going down, so traditional monetary policy may be very limited in the next recession, may have very little to do at all, imagine the ten-year getting closer to zero, it's below two percent. Do you see more coordination between fiscal policy and monetary policy in the future because they are forced into a corner and really can't do anything else?

Appelbaum: Whether it's explicit coordination or just a recognition that fiscal policy needs to play a larger role, I don't see another way out of our predicament. I think that we have reached a point where the ability of monetary policy to be the sole manager of our macroeconomic issues, it's run out of steam basically. It's so clear that monetary policy is limited in its ability to confront these problems and is increasingly trapped in this world of low interest rates that the need for some alternative conception of how government interacts with the economy is central.

It's so clear that monetary policy is limited in its ability to confront these problems and is increasingly trapped in this world of low interest rates that the need for some alternative conception of how government interacts with the economy is central.

I think we're seeing people grapple with it and both trying to expand the limits of what monetary policy is capable of, but simultaneously to acknowledge that there's just not unlimited room for monetary policy to operate. What emerges from that is fascinating and will be the result not just of theory, but of political context.

Beckworth: Yeah, no. I hope it's something thoughtful, systematic. We've had several shows on helicopter drops here. Now that's my worry is we're going to hit a crisis that's going to be ad hoc, make it up as we go along, it's not going to work well, one big mess as opposed to let's thoughtfully think through ahead of time whether it's bigger automatic stabilizers, or my preference would be giving the Fed the ability to do some fiscal policy in a crisis.

Well, let's get back to your book. I got distracted there, current monetary policy, because you have many more chapters and we don't have a lot of time, but I want to move onto a chapter called Representation Without Taxation. This is the supply side story. Robert Mundell, Art Laffer, Jude Wanniski, tell us about them and the role they've played in this revolution.

The Story of Supply Side Economics

Appelbaum: Robert Mundell is one of the great forgotten figures of 20th century economics. Obviously his fans know who he is, but his centrality to two of the defining economic policy revolutions of the 20th century is I think an amazingly obscured story.

He's the guy who basically dreamed up the Euro and he's intellectually the father of what we call supply side economics, of the idea that initially the best approach to stagflation in the 1970s was a combination of tax cuts and strict monetary policy. That emphasis on tax cuts as a stimulative force is embraced during the 1970s by Republicans and in fact by Democrats in that period as well, and comes to be seen as the dominant mode of fiscal policy, the idea that you basically can deal with your problems by cutting taxes, that reducing marginal tax rates in particular, which is a modification introduced by his disciple Arthur Laffer is the best way to stimulate economic growth. The story of how they convinced the Republican Party to embrace that set of ideas is I think a fascinating chapter in this history of the march of ideas into public policy.

Beckworth: Well yeah, it was interesting to read how they worked with Jack Kemp and some of the Republicans, and how Milton Friedman and others collaborated out of necessity, not because they agreed with them in theory, right?

Appelbaum: Right.

Beckworth: It was a marriage of convenience.

Appelbaum: One of that Friedman, in particular, never liked or fully participated in.

Beckworth: Right, right. Even Reagan, I'm sure, wasn't completely sold on all the ideas they had, but it was a convenient arrangement.

Appelbaum: I think Reagan's history ... I'm not a historian of Ronald Reagan, and I don't want to overstate my confidence, but I do think that there is some really interesting evidence that has come to the floor about Reagan's own intellectual involvement in these ideas, and the degree to which he really came to believe them and to understand them, and to make them in his own form.

In particular, he gave these radio broadcasts during the period between his time as Governor of California and as President of the United States, in which he articulated a fairly cogent and sophisticated economic philosophy, including a commitment to supply side ideas that I think really sheds new light on the caricatures of Reagan as a political opportunist, or as someone who was used by some of his advisors. I think when you read those transcripts, which he wrote himself, you get a different sense of who he was.

Beckworth: He was a true believer.

Appelbaum: I think he was.

Beckworth: Okay, fair enough.

But they had a lasting impact, you argue in the book. The lasting impact was the big deficits or was it something else?

Appelbaum: I think it is on several fronts. I think it contributes to all of the things we have talked about. The flattening of the curve and the restriction on government revenues limited the ability of the American government to play a constructive role in the economy to invest in infrastructure or research, or public services. It increases inequality, it reduces the government's role as a counterweight against inequality, it reduces the extent of redistribution. You move from a world in which the wealthiest Americans are paying more than half of their annual income to the government in the form of various taxes to a world in which they're paying around a third of that income. That's a big shift in terms of the government's role as a counterweight. As we've talked about, I think that has consequences for the functioning of our democracy.

Beckworth: Let me ask this question. It's related to this. Some of the budget deficit growth, this would probably be after Reagan, so maybe more in the late '80s and definitely the '90s to the present, but some of the budget deficit growth can be attributed to the demand for safe assets. This is a hobby horse I get on often. In other words, it's easy to run budget deficits because the world is knocking at the U.S. door, begging for debt, offering really low rates. It's an endogenous response to what's going on. To what extent do you see that the problems you've just outlined being enabled, made easy by what's going on in the global economy?

Appelbaum: That becomes a central factor at several points in the story. One of Mundell's great insights is that you shouldn't think of a budget deficit as a constraint on domestic economic activity because we can just borrow the money from other countries. His initial example is Saudi Arabia. By the 1980s it's really Japan. The Reagan Administration, it begins to run large deficits. There are still old timers there who are concerned about the consequences, and then they discover to their delight, it's this amazing episode that all of a sudden Japanese buyers are snapping up these bonds. They literally pass a law creating a new kind of treasury bond that's easier to use to cheat on your taxes in other countries, and then they go market it in Japan. They embrace this trend.

There's no question that the availability of foreign capital transforms domestic fiscal policy and does it again in the 2000s, in part because of a sense that say if we need to be a supplier of safe assets, which is specifically part of the rationale for not getting rid of the federal debt in the early 2000s, but also because the availability of that foreign capital just enables us to live a lifestyle that otherwise would be unaffordable.

To be clear, I think there is something to these ideas. The United States does have this singular benefit and ability to do that and it shouldn't be dismissed out of hand. I don't think the argument for higher taxes is necessarily that you want to get rid of that debt. The argument is that it creates a higher baseline.

Beckworth: Okay. In Chapter Eight, you touch on the story where you talk about the money problem. You get into the history of monetary system, which touches on the U.S. being this supplier of safe assets. We don't have time to get to that chapter, but I did want to touch on a few other points in the book. Again, I encourage the listeners to buy the book, read the whole book for yourself because we don't have time to cover everything, but you have a chapter on the value of life. Give us the punchline from that chapter.

The Value of Life

Appelbaum: I think that one of the great ... Part of the book that I find most interesting, frankly, and was least familiar to me is the role that economists played in reshaping regulation and reshaping the way the government approaches regulation, both by essentially ending this extended period in which the government was actively involved in what's called economic regulation, price controls determining how much of things could be sold, and where, and how, really convincing government to stop doing that, and also reshaping the rising force of health and safety, and environmental regulation.

The big thing that happens there is the advent of what's called cost-benefit analysis, meaning the systematic consideration and quantification, generally in dollar terms, of the cost and benefits of proposed regulations. If you're going to start quantifying costs and benefits, for most regulations or at least for most of the expensive regulations, the biggest benefit is going to be the number of lives that you're saving.

The central question becomes how do you place a value on human life? I frankly think the story of how they did that, of how that idea emerged is just one of the most fascinating narratives in this book.

Beckworth: It becomes important as you mentioned in that chapter because all these different government agencies emerged during this period or thereafter, Department of Transportation, EPA, OSHA, and you have to look closely at this question, right?

Appelbaum: Yeah, it's a defining question, if you're going to decide how safe cars should be, how much pollution should be allowed in the air, what safety restrictions should be imposed on consumer products, these questions all basically come down to how much money the government should require a private industry to spend to preserve a given number of human lives, to limit the number of deaths caused. There will be some deaths ...

One of the great debates in this period, when this begins to happen, when the government begins to say, "Okay, we're going to be explicit about this calculus," some people object and they say, "Oh, no. Human life is invaluable. It's amoral outrage to place a price tag on life." But the truth is, it's apparent in the process. When you write a regulation, you are making a judgment about the value of human life. What economics allows and forces policymakers to do is to think about it explicitly, to weigh those costs and benefits, to say, "Is it worth requiring car makers to spend an extra thousand dollars on stronger car roofs? Well, let's figure out how many people that's going to save and then we're going to need to make that decision based on a value judgment about how much those lives are worth."

But the truth is, it's apparent in the process. When you write a regulation, you are making a judgment about the value of human life.

Beckworth: Yeah, as an economist, I must admit, I was very sympathetic to this part of the story, because we do cost-benefit analysis all the time, every day. When I'm speeding to work, I'm doing a cost-benefit calculation what the chances of me being caught by a cop or having a wreck, versus the benefit of ... It may be even a poorly informed cost-benefit calculation, but we are always doing this and this is just taking it to the next level.

Appelbaum: It's a huge advance. I think it's enormously ... Some people have misread my account, my summary of this as an attack on cost-benefit analysis. I want to be clear that the contrary is true. I think the cost-benefit analysis is an enormously valuable technology that has greatly improved policymaking, but precisely because its importance, I think that it is necessary and appropriate for us to discuss exactly how it is done, and by whom and on what terms.

Cost-benefit analysis is an enormously valuable technology that has greatly improved policymaking, but precisely because its importance, I think that it is necessary and appropriate for us to discuss exactly how it is done, and by whom and on what terms.

Beckworth: Now does all parts of the government use cost-benefit analysis now?

Appelbaum: There are some types of regulation that are explicitly shielded from cost-benefit analysis. For example, the Clean Air Act. It's written into the Clean Air Act that the government can't consider the costs. There's a lot of active litigation and movement about the extent to which clean air regulation is actually shielded from cost-benefit analysis, but there are still some types of rulemaking that are shielded from it.

Also, the existing laws don't bind, for example, the Federal Reserve and its regulatory functions, although the Fed has independently committed now to perform cost-benefit analyses. It's not yet universal. I think in general we're still moving in that direction, but we're not all the way to that point.

Beckworth: Okay, well our time is coming to an end. Any parting thoughts? Any wisdom you'd give to all the economists out there as they may be the next participants in the next economists’ hour?

Appelbaum: I think more than to the economists, the reason that I wrote this book was that I want people to grasp how central economics has become to our society, how important the decisions are that are made by economists, and by beginning to understand that, to take ownership of it and to participate in these debates about what rules we should have, what we want from markets and how we get that.

The reason that I wrote this book was that I want people to grasp how central economics has become to our society, how important the decisions are that are made by economists, and by beginning to understand that, to take ownership of it and to participate in these debates about what rules we should have, what we want from markets and how we get that.

Beckworth: Okay, with that, our time is up. Our guest today has been Binyamin Appelbaum. His book is *The Economists' Hour: False Profits, Free Markets and the Fracture of Society.* Be sure to get a copy. Bin, thank you for coming on the show.

Appelbaum: Thank you.

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. If you haven't already, please subscribe via iTunes or your favorite podcast app. While you're there, please consider rating this and leaving a review. This helps other thoughtful people like you find the podcast. Thanks for listening.

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