Economists Alan Greenspan, Janet Yellen, Paul Krugman and Joseph Stiglitz are well-known to the general public now, but few people paid attention to the occupation 50 years ago. It wasn’t until after the post-World War II boom started to fade that the role of economists began to evolve and some financial experts started to gain influence in American policymaking. They pushed the idea that the markets could have a greater impact in delivering steady growth, which was key to the increasing power and wealth among corporations, as opposed to empowering workers through unions or public investment.
A new book by Binyamin Appelbaum, who writes about business and economics for The New York Times editorial page, looks at how economists went from number crunchers to policy mega-influencers during the mid-century period. Appelbaum previously worked as a Washington, D.C., correspondent for the Times, covering economic policy and the 2008 financial crisis. He joined the Knowledge at Wharton to talk about his book, The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society. (Listen to the podcast at the top of this page.)
An edited transcript of the conversation follows.
Knowledge at Wharton: How did the role of economists begin to evolve after World War II?
Binyamin Appelbaum: The very idea of a discipline called macroeconomics — the idea that you could take stock of the entire economy, measure it and manage it — is really a product of the Great Depression. When the United States enters the Great Depression, the government literally has no idea how large the American economy is. The Senate hires an economist to figure it out, and he comes back a couple of years later and says, “Well it used to be this big and now it’s a lot smaller.” That is sort of the beginning of measuring the economy. That is what we have come to call GDP, gross domestic product. Once you can measure it, then it makes sense to start thinking about managing it. So, economists are gradually engaged in that business of managing it.
For several decades, there is this really strong idea that management should be aggressive, that the government should be extremely involved in setting prices for airline tickets, for preventing companies from getting to large, and in managing the rights of workers, in managing the ups and downs of the economy. During those mid-century years, that is the tenor of economic policy.
Knowledge at Wharton: You relate a story about former Federal Reserve chairman Paul Volcker in his early days at the New York Fed. Tell us about that.
Appelbaum: Economists are not held in particularly high regard in those early years, and Volcker is an amazing example of this. His first job at the Fed in the early 1950s was basically as a human calculator. His job was to do the numbers that the people who made decisions needed and used. One was an Iowa hog farmer to represent agricultural interests. There were no economists on the board.
“Economists argue that when you are focusing on redistribution and equality, you are limiting growth.”
Volcker comes home one night and says to his wife, “I don’t see myself having a career at the Fed. There are no opportunities for an economist.” And that was true in the early 1950s. The head of the Fed told a visitor that he kept the economists in the basement because they ask good questions but didn’t know their own limitations. Of course, by the end of the 1970s, Volcker is running the place.
Knowledge at Wharton: You note that economists were persuading political leaders during this period. How so?
Appelbaum: There are a couple of ways that happens. The first is that the government is getting increasingly complex, and economists are brought in to help rationalize and manage the business of government. That is one way that they get in the door. But then they begin to influence the aims of policy by arguing that they can make the economy work better. By the late 1960s and early 1970s, economic growth is beginning to falter. Back then, the bogeyman was Japan rather than China, but there is still this sense among Americans that we are falling behind, that other countries are doing better. In this atmosphere of uncertainty, economists emerge and say, “We can fix this. We know how to run the economy better. We can return America to prosperity.” That is a very powerful and appealing message, and policymakers really begin to take their advice to heart.
Knowledge at Wharton: Was the goal during that period to be able to grow the economy and to spread the wealth so that everybody would benefit from that growth?
Appelbaum: During the mid-century, there was a broadly shared assumption that one important role of government is to distribute opportunity and to distribute prosperity, to make sure that everyone has an opportunity to share in the economic gains. That comes to be seen by economists and ultimately by policymakers as part of the problem.
Economists argue that when you are focusing on redistribution and equality, you are limiting growth, you are getting in the way of maximum growth, and that policies should turn away from that concern for distribution and focus primarily on maximizing growth. Just get the water rising and all of the boats will go up, and if some people do much better than others, so be it. That’s not a big problem.
Knowledge at Wharton: But over the last couple of decades, that hasn’t been the way it has played out. We have a widening economic divide in this country.
Appelbaum: My book is mostly about the period from the late 1960s through 2008, what I call the economists’ hour, which is the period in which these economists are really dominant in shaping the course of public policy. During that period, they really do succeed in pushing government to focus on growth, and the very clear consequence is that inequality explodes. There are lots of reasons for the growth of inequality; economists are by no means solely responsible. But this decision to stop trying to prevent inequality, to stop taking inequality seriously as a public policy problem is a really important contributing factor.
Knowledge at Wharton: Without some of these policy changes decades ago, do you think the divide would be as large as it is now?
Appelbaum: I’ll give you a really simple comparison. If you look at the American economy and the French economy, most Americans take pride in the fact that America has grown more quickly than France. We see it as a validation of our economic model. But if you remove the top 1% of the population in both countries, what you find is that for the 99%, for the vast majority of Frenchmen and the vast majority of Americans, economic income growth has been much faster in France. It is easy to imagine a world in which you had more of a focus on distribution and less of a focus on the total size of the pie, and a lot more people ended up with larger pieces.
Knowledge at Wharton: Have other countries also seen that type of growth that allows some level of equality?
Appelbaum: The distribution of income in the United States is the most unequal of any developed nation, unless you want to count places like Chile and Mexico, which are at an earlier stage of development and have even more extreme inequality. But among established developed nations, there is no other that has the extremes of inequality that we see in the United States.
Knowledge at Wharton: You wrote that it wasn’t just that economists were at the Federal Reserve. They were working in other areas of the government and influencing those agencies and departments in different ways.
Appelbaum: That is really important because this is not primarily a story of the fact that economists took over the Federal Reserve and managed monetary policy in a particular way, or that they flattened out the tax code. Their influence was really pervasive in government. One really striking example of this is the role of economists in reshaping federal regulation, deregulating industries like transportation, communications.
Also, their role in reshaping antitrust policy, which was for a long time used for a variety of purposes to prevent large corporations from concentrating power, but in the hands of economists was reinterpreted as being solely about keeping consumer prices as low as possible. That shift ultimately came at the expense of workers. It came at the expense of democracy, to some extent. These broader goals were set aside during this period. We see economists reshaping policy in lots of small ways, as well as in the examples that get the most attention.
Knowledge at Wharton: The 1970s were a pivotal time for the country, not just with the economy but also with the political leadership.
Appelbaum: The 1970s, like the 1930s, was a period in which people lost faith in an old way of managing the economy and were groping around for new answers. There is a woman named Juanita Kreps who was Secretary of Commerce in the Carter administration and had also been a professor of economics at Duke University. In the late 1970s, she steps down from that job from the Carter administration because she says that she has lost faith in its ability to manage the economy. She also steps down as a professor at Duke University because she says that she doesn’t know what to teach her students anymore. That really encapsulates the loss of faith that the economics profession experienced in those years. The sense that their understanding of the economy was fundamentally flawed, that their approach to policy was not working. There was this real search for new answers. And it is in that vacuum that this new approach to policy really emerges.
Knowledge at Wharton: This is also the story of several economists who were very well-known during this period, one being Milton Friedman. Can you take us into the influence that Friedman had and the role he played?
“Among established developed nations, there is no other that has the extremes of inequality that we see in the United States.”
Appelbaum: Friedman is a remarkable figure. I think he had more influence on American life than any other economist, certainly in the 20th century. I don’t think there are too many people ahead of him on the list of Americans in terms of greatest influence. He really succeeded in fundamentally affecting a revolution in our approach to economic policy.
He was a child of the Great Depression. But unlike many of the people of his generation, he came out of it feeling that there was too much government. He came out it with the counterintuitive conclusion that the problem had been the government was meddling too much in the economy, and that the solution to most of our economic policy problems was for government to draw back and do less and allow markets to sort things out.
The first place where he has a profound influence on government is that he plays a central role in convincing the Nixon administration to end military conscription. People think of that as something that happens during the Vietnam War, and of course it does, but it was driven in large part by Friedman and other economists demonstrating that it was feasible to pay soldiers market rates to serve in the military rather than drafting them.
Sgt. Elvis Presley could go off and pursue a singing career, and that’s better for everyone, and someone else would be recruited to serve in his place. That’s a huge shift in military policy, but it also embodied a lot of what Friedman thought needed to happen across government. You were replacing a model in which government decided who should serve with a model in which the market essentially decided by allowing people to decide if they wanted that job. In the process you are making the military into another line of business, which had the effect of making it easier for us to stay at war because people feel like it’s not their problem and the people who are fighting chose to do it.
Knowledge at Wharton: That’s an interesting example of how there are so many elements of our culture and economy that were impacted by some of these changes that went on during this time.
Appelbaum: It really is wide-ranging. Friedman was, for example, one of the progenitors of the charter school movement. He is the guy who invented the earned income tax credit, which transformed the way that we approach low-income taxation. He was an early advocate for drug legalization, not to mention getting rid of the gold standard or reducing taxation of wealthy individuals or allowing big business to flourish — a lot of things that have broadly reshaped not just the American economy, but our lives as Americans. His outlook on the world was profoundly influential.
Knowledge at Wharton: How much influence did the economists have on the political parties at that time?
Appelbaum: I think of the economists as coming to serve as sort of the referees of what was possible in policy. What you see happening is that the economists are installed as the arbiters. Their judgments about what is going to cost the government money, how much money it will cost or what is going to benefit consumers come to bound the political process in a way that previously hadn’t been true.
The White House acquires its own economists, and Congress creates a congressional budget office staffed with its own economists. When two companies go to court to fight out an antitrust dispute, they both bring their own teams of economists. Everything is being arbitrated through the lens of economics, and you need an economist to do it. That begins to profoundly influence our politics. One important respect in which it does so is that you see a real convergence on economic policy. The difference between the Democratic Party and the Republican Party by the end of the 20th century on questions of economic policy has gotten awfully small.
Knowledge at Wharton: Arthur Laffer is another economist know for the Laffer Curve. Can you give us a sense of the impact that he has had?
Appelbaum: He is another extremely colorful character. People may think of economists as dry and focused on numbers, but some of them are quite colorful personally. Laffer is a great example of that. He’s another small guy, vivacious, life-of-the-party type who had this big idea, the Laffer curve, which showed that if you raised tax rates too high, you start collecting less money. He wasn’t quite sure where too high was, but he was convinced that America was in that range, so he argued quite effectively during the 1970s and into the 1980s for reductions in the top tax rate. A guy named Jude Wanniski at the Wall Street Journal was also hugely influential in marketing these ideas.
“The 1970s, like the 1930s, was a period in which people lost faith in an old way of managing the economy and were groping around for new answers.”
They convinced Republicans to embrace the idea that tax cuts should be the centerpiece of conservative fiscal policy. In earlier generations, it really emphasized balanced budgets as the absolutely essential goal of policy. Laffer comes in and says, “Nope, what you want to do is cut taxes as low as possible.”
Knowledge at Wharton: How does all this change going from the 1970s into the 1980s?
Appelbaum: One of the really interesting things about this period is the counterculture reaction against government, against big business, against institutions, which is such a familiar part of the story of the 1960s. The 1970s really had an important counter shock, which doesn’t get talked about as much, which is that big business and its proponents really began to see a need to respond, to make an affirmative case for the importance of capitalism.
They were very explicit about this. There is a famous memo that the Chamber of Commerce put out in the early 1970s that basically said, “We spent tens of millions of dollars every year advertising Wheaties and Fords and Hanes, and none advertising capitalism.” They explicitly begin to promote capitalism as a good thing and to organize around it and to train judges and politicians to defend it.
What you see moving into the 1980s is this new self-confident, assertive form of free market advocacy pushing back against what they saw as unfair attacks from the left and to a lesser extent from the socially conservative right. It was saying, “This is America. We are a free market, free enterprise country. That is the essence of our civilization.”
Knowledge at Wharton: Does that take even another step further when you move into the 1990s and witness the power of Wall Street?
Appelbaum: One important thing that happens when the Berlin Wall falls and the Soviet Union and communism fade out of existence as a competitor to capitalism is that people look around and say, “Hey, we’ve run this natural experiment. Capitalism won. It’s obviously the better system.” There is a doubling down on capitalism.
George Will, the conservative columnist, has this line: “The Cold War is over, and the University of Chicago has won.” Well, historically that was wrong. The way that we won the Cold War was by demonstrating that our system of government was better at providing for everyone. There was a really conscious effort during the mid-century to make sure that middle class, the lower middle class and working-class Americans were all benefitting from capitalism. But once you win the Cold War, a lot of that gets discarded.
There is this real purification of the faith in capitalism embodied by people like Alan Greenspan, who basically take the view that markets should be left to their own devices. What you get from the 1990s and into the 2000s is that capitalism essentially becomes a monopolist. And like a lot of monopolists, it’s fat and happy and not interested in talking about its shortcomings.
Knowledge at Wharton: How different was the end goal with Greenspan compared with some of these other economists noted for reshaping policy?
Appelbaum: If you think about Paul Volcker sitting in his cubicle, convinced that there was no future for him at the Fed, and you fast forward to Alan Greenspan, essentially the most powerful man in Washington during his tenure there, managing the American economy more or less by fist, that is a remarkable transformation. To have a doctorate in economics, to never have been elected to anything, and to be installed as first among equals as a policymaker really highlights how far economists had come.
People who are too young to remember it, it can be difficult to describe to them. But there was this religious faith in Greenspan. He was treated as an object of veneration. People took his pronouncements on matter of public policy as gospel. And it gave him enormous power, much of it unearned and unwarranted, to reshape public policy in the service of ideas that he considered important.
“The difference between the Democratic Party and the Republican Party by the end of the 20th century on questions of economic policy has gotten awfully small.”
Knowledge at Wharton: How do things stand today? Jerome Powell, who is not an economist, is running the Federal Reserve.
Appelbaum: The year 2008 was a real inflection point. The crisis in financial markets and the recession gave people a moment of pause to step back and say, “Once again, as in the 1930s and 1970s, what we are doing is not working. We need to think about new approaches, we need to reconsider where we are going.” Some of the consequences have not been good.
There is this resurgence of what I think of as turtle-shell nationalism, where you crawl up in a ball and hope everyone else goes away. And some of it is more productive and hopefully moving us in a direction that will be better for us. But you get things like Jay Powell, who is not an economist, now installed at the top of the Fed, which is the first time since the 1970s that the chairman of the Fed has not been an economist. It is reflective of this moment that we’re in where people are no longer sure that having an economist at the top of the Fed is the best idea.
Knowledge at Wharton: When you look back at some of these economists in your book, do you feel that maybe they went a step or two too far?
Appelbaum: This is the story of a revolution, and like many revolutions it went too far. I don’t know if I would limit it to a step or two in every area; I think there are areas in which it went quite a bit further than that. But they were dealing with real problems. There were real failures in our management of economic policy, and they succeeded in addressing many of those problems.
There were huge benefits to this turn toward markets. The fact that we all fly cheaply all the time is a direct result of the deregulation of commercial aviation, to take just one prominent example. But it went too far because, as is often the case with this type of revolution, the ideas sort of overrode the nuances, and we were left with a purified form of these ideas that didn’t account for their shortcomings.
Knowledge at Wharton: How many of these mid-century policies given to us by the economists will continue to influence us in the next 20 or 30 years?
Appelbaum: There is no question that the ideas that these economists taught to our policymakers are going to continue to influence public policy for the foreseeable future. The work of creating new paradigms of public policy is just getting started, and it takes a generation for people to learn new lessons and new approaches. Milton Friedman’s legacy is going to be with us for a long time.