Book SummaryA Monetary and Fiscal History of the United States, 1961–2021, by Alan S. Blinder

1-Page Summary1-Page Book Summary of A Monetary and Fiscal History of the United States, 1961–2021

Evolution of U.S. Financial and Economic Policies

This section of Blinder's book chronicles the major shifts in U.S. economic policymaking from the early 1960s to the present day, focusing on how monetary and fiscal policies interrelate. The book traces the rise of activist fiscal policy under Kennedy and Johnson, its subsequent decline as monetarism grew in influence and inflation became an issue, and the eventual dominance of monetary policy under Volcker and Greenspan. Yet the narrative is not linear. The book emphasizes the cyclical nature of these shifts, with fiscal policy coming roaring back during the Reagan era and then again during the Bush and Obama administrations as responses to economic crises exceeded the capacity of monetary policy alone.

Fiscal Policy: From Kennedy's Tax Cuts to Deficits Under Reagan

Blinder begins his narrative by exploring the revolutionary shift toward activist fiscal policy that took place during the administrations of Kennedy and Johnson. Prior to that time, fiscal strategies—such as deliberate and timely changes to government spending or taxation to impact the economy—were not widely practiced in the United States.

Kennedy-Johnson Tax Reductions: A Watershed for Active Fiscal Policy

Blinder sees the 1964 tax cut enacted by Kennedy and Johnson as a watershed event in U.S. fiscal policy. It represented the inaugural intentional and openly Keynesian fiscal policy measure by the U.S. government. While Keynesian ideas about using the government's budget to affect total demand had existed for decades, they were not put into practice until Kennedy embraced the concept. The young president, influenced by a group of enthusiastically Keynesian economic advisors under the leadership of Walter Heller, chose to center his economic agenda around a significant tax reduction, even though the nation was already experiencing an economic recovery and a federal budget deficit.

Reducing taxation in a non-recessionary environment was a radical idea then. The idea of maintaining a balanced budget was popular, and many in both Congress and within the Kennedy administration opposed the idea. Nonetheless, Kennedy pushed forward with his tax cut proposal, contending it was necessary to close the "output gap" and spur economic growth. The reduction in individual and business income tax rates passed in 1964 after Kennedy's death.

Practical Tips

• You can analyze your personal finances to identify areas where you can reduce your taxes, similar to how Kennedy's economic agenda aimed to reduce taxes to stimulate growth. Start by reviewing your tax returns from the past few years to spot trends and deductions you may have missed. Consider consulting with a tax professional to explore additional legal avenues for tax reduction, such as contributing to retirement accounts, optimizing charitable donations, or leveraging tax credits for education or energy efficiency.
• You can analyze your personal budget like a mini-economy to understand the impact of reducing expenses during times of financial stability. Just as a tax cut is proposed during an economic recovery, consider identifying non-essential expenses you can reduce or eliminate during your own periods of financial stability. This could mean cutting back on subscription services when you receive a raise or have paid off a debt, thereby creating a personal "surplus" that can be saved or invested.
• You can create a personal "balanced budget amendment" for your finances by setting strict spending limits that align with your income. Start by reviewing your monthly income and expenses, then set a cap on discretionary spending that ensures you don't exceed your earnings. For example, if you earn $3,000 a month and your fixed expenses are $2,000, cap your discretionary spending at $1,000 to maintain a balanced budget.
• You can analyze historical tax rate changes to inform your investment decisions by looking at how markets have responded to similar fiscal policies in the past. For instance, if you notice that certain sectors tend to benefit from tax cuts, consider adjusting your portfolio to include more stocks from those sectors.

1968 Tax Surcharge Failure and Rise of Monetary Policy

Blinder argues that the apparent achievement of the Kennedy-Johnson tax cut solidified the notion of employing fiscal policy to invigorate economic activity. However, the initial intentional attempt to employ fiscal measures to reduce aggregate demand growth was not nearly as successful. In 1968, with the economy overheating due to the military escalation in Vietnam, Johnson’s economic advisers urged him to enact a contractionary fiscal policy. Johnson, however, hesitated to relinquish the political advantages of a growing economy. He resisted those calls until early 1967 and encountered fierce opposition from Congress, which was reluctant to raise taxes in an unpopular war.

The Revenue and Expenditure Control Act was ultimately enacted in June 1968. It included both a temporary 10% surcharge on taxes on income and some reductions to federal spending. However, the hike in taxes had only a modest impact on total demand, and inflation kept climbing. The author notes that a contributing factor was the surcharge's explicitly temporary nature, which undermined its potency. Nonetheless, the perceived failure of the 1968 surtax to control inflation left two important legacies.

First, it discredited the Keynesian approach. Critics falsely claimed that Keynesian economics leaned toward inflationary outcomes, meaning Keynesians were quick to advocate stimulus when unemployment was high but reluctant to advocate restraint during high inflation. Second, the episode suggested that discretionary fiscal strategies might be politically viable solely for boosting economic growth, not contracting it. That responsibility would fall to the Fed.

Practical Tips

• Engage in community swap events to exchange goods...

A Monetary and Fiscal History of the United States, 1961–2021 Summary Political and Ideological Debates Surrounding Economic Policymaking

This section of Blinder's book delves into the ideological and political debates that have shaped U.S. macroeconomic policymaking over the past six decades. He examines how political considerations and ideological beliefs about government's functions often trumped good economics, leading to unwise decisions with sometimes deleterious consequences.

The Politicization of Economic Policies

The president holds political office, an elected role with political motives that economists often find puzzling, if not inexplicable. And decisions about fiscal policy, unlike monetary policy decisions in most countries, are political in nature. So, it's no shock that politics pervades U.S. fiscal policy's history, argues Blinder.

The Nixon-Burns Political Business Cycle of 1971-1973

Blinder contends that the Nixon administration, with the assistance of Fed Chair Arthur Burns, illustrates how policy makers might deliberately manipulate economic conditions to achieve political objectives. The episode began in 1971, when President Nixon announced that he now followed Keynesian economic principles. However, it was a ruse, for Nixon's main motive was to get himself reelected in 1972. To...

A Monetary and Fiscal History of the United States, 1961–2021 Summary Economic Crises and Recessions Shaping Macroeconomic Policy

Naturally, recessions and economic crises are the events that stabilization policy seeks to mitigate. The unprecedented depth and speed of the 2020 pandemic-induced recession naturally forced those shaping policy to reexamine their theories and tools. Blinder’s book details how crises and recessions, and the responses they evoke from policy makers, shape both thought and policy – sometimes for decades.

The Housing Bubble, Economic Crash, and Great Recession

Blinder traces the roots of the 2007-2009 financial crisis and the subsequent Great Recession, a crucial turning point in modern economic history, to the housing bubble plus the fixed-income bubble that inflated in the 2000s. As the crisis unfolded, monetary and fiscal strategies intervened in unprecedented ways to stem the economic and financial damage. Those interventions succeeded and thereby helped solidify the view that activist government policies can mitigate severe economic downturns.

The Causes and Consequences of the Housing Bubble

Blinder begins his discussion of the economic downturn by detailing the housing market bubble that both preceded and, in his view, contributed to the crisis. By one measure...