March 7, 2019


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Opec+ group cuts production, Liz Truss fights back, toxic work colleagues
Fund outlines ‘overwhelming’ case for lowering greenhouse gas emissions via taxes and investment incentives by 2030
The Netherlands’ amazing success in high-tech farming shows complying with EU rules can be a competitive advantage
The first ever bellicose use of nukes in Europe would require a corresponding economic response
Plus, US job vacancies plunge and Herschel Walker’s Senate campaign rocked by abortion scandal
And China the great deflator
Consumer spending could become the backbone of a new growth model but that would require Beijing to relinquish some political control
Trade surplus contraction must be balanced by a cut in the gap between domestic savings and investment
Rules will slow efforts to obtain semiconductors for supercomputers and military use
August’s drop in labour demand may offer relief to Federal Reserve in its inflation fight
China’s macroeconomic, microeconomic and environmental difficulties remain largely unaddressed
Bank’s decision follows investor concerns over country’s market infrastructure
Plus, North Korea fires ballistic missile over Japan and BlackRock reshapes top team
And a Japanese big short
In the first part of a series, the impact of falling house prices is spreading to local government finances and the broader economy
On Taxing the Rich: An A-Ha! Moment

I say this with all the love in the world: economists have a special knack for taking certain economic ideas or concepts and finding the most counterintuitive or unclear ways of describing them. To anyone other than an economist, the phrase “public good” sounds like “good provided by the public sector.” Try to jump in and explain that, no, to be a public good, something needs to be both non-rival and non-excludable, and you’re likely to be met with glazed eyes.

This is one reason why I enjoy finding the ideas of economics clearly described or illustrated in works of fiction. When done well, it can help bring that “aha!” moment that makes an idea clear to someone in a way that charts, graphs, and technical verbiage simply can’t. But fiction isn’t the only avenue for that – we can find it in everyday life as well. One important idea in economics that is, in my opinion, terribly described is this:

“The legal incidence of a tax is not the same as its economic incidence.”

This is an important idea. And for those whose goal is improving the well-being of the poor by increasing taxes on the rich, understanding it is crucial. The fact that the law says the wealthy will be stuck with the bill for a tax does not mean the wealthy are the ones who will truly pay the cost.

To see why, let’s consider a service I’ve used many times – an online sales platform called Swappa. As an unabashed tech nerd, I’ve bought a ton of gadgets over the years. (Probably too many, but that’s a story for a separate post.) And when some new shiny toy has come out that I’ve decided I want, I would use Swappa to sell my current gadget to offset the cost of the new one. Swappa, of course, makes a fee with every sale it facilitates. But they also tell you, the seller, not to worry about that – the fee will be paid by the buyer, not the seller. They accomplish this by adding their fee to the posted price when you list an item. So if I put an item up for $500, they will actually list it at $525, and when it’s bought, the buyer pays $525, Swappa keeps $25, and I get $500.

That’s nice in theory, but in practice, it doesn’t work that way. I know the buyer will have to pay this extra fee, and the buyer doesn’t care one bit how much of it goes to me or Swappa. So I have to take that into account when I list an item. If I think something I’m listing will sell for $500, I don’t actually list it for $500, because I know the final price will come out too high for it to be bought. So instead, I list it at $475, Swappa adds its fee, and the price the buyer sees is now $500. According to Swappa, that $25 fee is paid by the buyer, but in reality, it’s paid by me, the seller. When put this way, it seems obvious.

Less obvious to many is how the same idea is at play with the taxes and other costs associated with all kinds of economic regulation. Saying “We’ll require employers to provide more benefits to their employees” just means “We’ll require employees to take lower pay from their employers to buy more benefits.”  In his excellent book Catastrophic Care: Why Everything We Think We Know About Health Care Is Wrong, David Goldhill describes this from his point of view as an employer:

Since [newly hired employee] Becky’s single without dependents, my company will pay $5,679 this year for her health insurance; she’ll pay $2,112. Or so she thinks. In reality, Becky is paying all $7,791 of her insurance premium…To understand this seeming paradox, put yourself in my company’s position when we originally decide whether to create that job for Becky. We weigh two factors: the value of Becky’s work to our company and the cost to us of hiring Becky. Notice the issue is “cost to us,” not wages or salary, because an employee always costs an employer more than just her wages…Whether she knows it or not, her compensation is bearing the burden of our $5,679 contribution to her insurance premiums.

Many activists will, on the one hand, insist on laws to push for more health insurance coverage, longer paid parental leave, and/or a litany of other benefits, while on the other hand worry about stagnating wages. What they miss is the connection between the two. One might think the goal should be to find the “right” or “best” combination of wages and benefits, but there is no right, one-size-fits-all answer to this question. Nor is there any reason why one must be arbitrarily conjured up by policymakers. Different people will have different preferences about how their compensation is divided between cash and benefits. So why not let people have the option to choose the combination that works best for them?


Kevin Corcoran is a Marine Corps veteran and a consultant in healthcare economics and analytics and holds a Bachelor of Science in Economics from George Mason University. 

Thoughts on the neoliberal wave

There have been some recent retrospectives on the neoliberal wave that swept the world in the final quarter of the 20th century. I’d like to add the perspective of someone who lived though that era.  Many things that look obvious to us today, only seem so in retrospect:

South Korea has a better economic model than North Korea. The British government should not run auto manufacturing firms. Air fares should not be set by government officials. Tax rates on income should not exceed 90%.

Those claims may seem obvious today, but they were far from obvious when I entered college in 1973.  For instance, there is a  1967 CIA report suggesting that North Korea was richer than South Korea, a full 14 years after the Korean War ended.  (True or not, that was the perception.)  The UK had a top tax rate of 98% on investment income.

It helps to look beyond the US.  The French refer to 1945-75 as “Les Trente Glorieuses”, three decades of stellar economic growth.   And it wasn’t just France.  Most of Europe, Latin America and the Soviet bloc experienced very strong growth.  There was no obvious need for reform.

Also keep in mind that the Great Depression, WWII, and the rise of socialist ideology had pushed the world in a much more statist direction from 1929-1973.   So this rapid growth was occurring under an economic model that rejected laissez-faire capitalist ideology.

After the mid-1970s, almost the entire world hit a wall.  Growth slowed almost everywhere.  Voters became increasingly frustrated.

But there was one important exception—the “tiger economies” of East Asia.  Between the mid-1970s and the mid-1980s places like South Korea, Taiwan, Hong Kong and Singapore experienced extremely rapid growth in RGDP.  Japan was no longer an outlier, no longer the only successful non-white economy.   More and more economists began seeing East Asia’s export-oriented model as superior to Latin America’s import substitution model.  I recall reading the Far Eastern Economic Review as a college student (yeah, I had no life), and being deeply impressed by what was being reported.

Today, some pundits (wrongly) suggest that places like South Korea boomed due to statist policies.  That is not true, and certainly was not the perception back in the 1970s.  When I entered college, the alternative to South Korea was not seen as Hong Kong’s laissez-faire, it was North Korea’s statist economy.  And it was not yet 100% clear which model was better.

Many things came together to produce the neoliberal wave:

1. East Asia’s export-oriented low tax economies were growing much faster than other countries during 1975-85.

2.  Voters became increasing opposed to high taxes in places where living standard were stagnating.

3.  Regulations in areas such as transportation and finance were causing increasingly glaring inefficiencies.

4.  Western Europe stopped catching up with America, and leveled off roughly 25% below our per capita GDP level.  Inefficient state-owned European firms were seen as being a part of the problem.

5.  Communist economies began to stagnate.

Once the neoliberal wave got going, it fed on itself.  Places like Australia, New Zealand and Chile did better after they liberalized.  (Whenever I say “better”, I mean relative to other places—hardly anywhere did better than in 1945-75 in an absolute sense.). Although neoliberalism is often associated with Ronald Reagan, the neoliberal wave was actually more pronounced outside the US.

Free market ideologues like Milton Friedman gained added prestige for making successful predictions on unrelated subjects, such as the unreliability of Phillips Curve model and the importance of monetary policy in controlling inflation.  Indeed, some on the left wrongly conflated “monetarism” with “neoliberalism”.

The meaning of the term “economic reform” changed.  Prior to the 1970s, it meant an increased role for the government.  After the 1970s, it meant a decreased role for the government.  Indeed the term “neoliberalism” was necessary because by the 1970s many people (especially in America) had begun to associate liberalism with statism. In that case, what does it mean to “liberalize” an economy?

Brad DeLong suggests that the neoliberal era ended about 2010, which seems about right.  But it’s too soon to have any perspective on these trends.  Others have observed that there were countertrends, with regulations on housing, occupational licensing and the environment becoming stricter during the neoliberal era.  As always, it’s a very complicated picture.

You could write a 1000 word essay on the causes of neoliberalism, or look at one picture:

HT:  Doug Irwin






It was Dr. Robert Stadler who had once corrected a student: “Free scientific inquiry? The first adjective is redundant.”

This is from p. 178 of my paperback version of Atlas Shrugged by Ayn Rand. When I read it recently, I thought of Anthony Fauci and Francis Collins, head of the National Institutes for Health, plotting to shut up Jay Bhattacharya, Martin Kulldorf, and Sunetra Gupta after they published the Great Barrington Declaration. Here’s a link to the emails. I also thought of Fauci’s “a lot of what you’re seeing as attacks on me quite frankly are attacks on science” line in a 2021 interview. When you criticize a scientist, you might be attacking science but what Fauci didn’t seem even to countenance is that you might actually be criticizing his thinking and wanting him to give more than sound bites to justify his conclusions.

More generally, we are seeing in academia a strong attack on intellectual inquiry. Various people are afraid that they they’ll say the wrong thing and lose even tenured positions. James Sweet, the head of the American Historical  Association, apologizes for some thoughtful comments on the 1619 Project, for example.


A Wall Street Journal story illustrates the economics of violence, what UCLA economist Jack Hirshleifer called “the dark side of the force.” Reporting on a rabble-rousing speech given by Vladimir Putin, the WSJ mentions a war-mongering supporter, one of the Instagram “military bloggers,” who made some rousing statements of his own (“With Risks Rising at Home, Putin Takes Anti-Western Rhetoric to New Heights,” October 2, 2022):

Another military blogger, Vladlen Tatarsky, recorded his own video from the Kremlin with a different message.

“We’ll conquer everyone, we’ll kill everyone, we’ll loot whoever we need to, and everything will be as we like it,” he said.

This project has been a frequent feature of the history of mankind. Civilization—which can only be classical-liberal civilization, or else it’s regimentation—has tried to replace violence with the ideal of an abstract social order based on voluntary exchange. But would-be conquerors, killers, and looters will always exist. If they can be bribed in the sense that they choose the prosperity of a free society instead of following their tribal instincts, the problem is solved. (This is easier to attain within a single society where institutions for obtaining consent are available.) When that doesn’t work, fighting them or being ready to fight is the only solution, although the defense of liberal civilization does impose some severe constraints on the means used. Of course, a particular prudence is also required in the nuclear age.

The Division of Labor and the Diminution of Man
The elderly patient presented with difficulty walking. The patient was referred to an orthopedic surgeon, who traced the problem to osteoarthritis in the patient’s hips, knees, and feet. An otolaryngologist saw the patient and diagnosed a malfunction of the inner ear, the organ of balance. A consultant neurologist determined that the patient was suffering from peripheral neuropathy. The situation evoked the ancient allegory of the blind men and the elephant. One reaches out and feels the trunk, concluding it is a vine; another the tusk, determining that it must be a sword; and still another the leg, pronouncing it a tree. Who among us—both the poor patient and elephant might ask—apprehends the big picture, and therefore stands a chance of understanding the whole organism? The profession of medicine is full of such stories.

The difficulty can be attributed only partly to a narrowness of perspective. To be sure, each specialist approaches the patient with blinders on, with the gaze confined to a particular part. The ophthalmologist sees only the eyes, the pulmonologist the lungs, and the urologist the kidneys and bladder. But beneath this characteristic divvying up of the body among specialties is a deeper difficulty—the universal impulse to analyze. From the Latin meaning literally “to cut up,” analysis breaks the complex down into the simpler and the whole organism into component organ systems, organs, tissues, cells, cellular organelles, and so on. In an effort to understand in the greatest possible depth, we end up practicing a form of reductionism, producing an understanding that is a mile deep but only an inch wide. It evokes a passage from Solzhenitsyn’s “The Cancer Ward.”

The patient’s organism isn’t aware that our knowledge is divided into separate branches. You see, the organism isn’t divided. As Voltaire said, “Doctors prescribe medicines about which they know little for an organism about which they know even less.” How can we understand the patient as a single subject? After all, the anatomist who draws the charts operates on corpses; the living aren’t his province, are they? A radiologist makes a name for himself on bone fractures; the gastrointestinal tract is outside his field, isn’t it? The patient gets tossed from ‘specialist’ to ‘specialist’ like a basketball. That’s why a doctor can remain a passionate beekeeper, all through his career. If you wanted to understand the patient as a single subject, there’d be no room left in you for any other passion. That’s the way it is. The doctor should be a single subject as well. The doctor ought to be an all-rounder.”

Underlying specialization is a foundational idea, often associated with Adam Smith—the division of labor. Of course, this is a very old notion. The ancient Greeks Plato and Xenophon both refer to it. Plato’s Republic, we are told, will require numerous specialists—such as farmers, builders, and weavers—and Xenophon’s “Education of Cyrus” suggests that large cities will outperform small ones, because they permit people to focus on a single trade, such as making shoes, rather than attempting to perform all of the necessary trades for themselves. In the years leading up to Smith, Bernard de Mandeville says much the same in his Fable of the Bees, describing how specialization improves the quality of goods available to all, and in his Treatise on Human Nature, Smith’s friend David Hume extols the virtues of the “partition of employment,” whereby a single ability is brought to its highest expression.

Even Smith’s famous example of the pin-maker is not entirely novel. In 1761, Henri-Louis Duhamel du Monceau published his The Art of the Pin-Maker, in which he traces the surprisingly low price of pins to the great increase in productivity made possible by assigning the various stages in pin production to different specialists. Yet fifteen years later in The Wealth of Nations, Smith picks up the division of labor and the example of the pin factory and develops them beyond any of his predecessors, asking each of his readers to imagine how many pins he or she might be able to craft in a day. The most likely answer, he says, is none, or perhaps one. But by analyzing the process of pin production into its component steps and then assigning a different worker to focus solely on each, the daily productivity of each worker can be magnified by a factor of 4,800:

One man draws out the wire; another straights it; a third cuts it; a fourth points it; a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on is a peculiar business; to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them…. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day; that is, certainly, not the two hundred and fortieth, perhaps not the four thousand eight hundredth, part of what they are at present capable of performing, in consequence of a proper division and combination of their different operations.1

With such dramatic increases in productivity in view, it is easy to see why Smith calls the division of labor “the greatest improvement in the productive powers of labor, and the greatest part of skill, dexterity, and judgment with which it is anywhere directed, or applied.” And such specialization pays dividends far beyond mere increases in productivity and lower per-unit costs. If a musician had to play all the instruments in an orchestra, the time necessary to become proficient with each would be dramatically expanded, but by focusing on only one, the period of study is considerably shortened. Moreover, some musicians may be better suited to certain instruments than others, enabling them to concentrate on those to which they are best adapted. This also enhances the prospects for innovation, since those who know their instrument well can draw on a superior repertoire of technique in experimenting with it.

Yet there are important downsides to the division of labor, which can redound to the detriment not only of those on whom workers labor, such as patients, but also workers themselves. Imagine the worker who does nothing but install the passenger-side rear hubcap on an automobile for eight hours per day; or a medical specialist such as an ophthalmologist who does nothing all day but make an incision to remove the clouded lenses of cataract patients; or an academic whose sole classroom responsibility is to deliver a lecture on Marx’s theory of the estrangement of labor. Such individuals might soon become bored with their work, gradually losing interest and engagement and over time sliding into burnout. Called upon to perform the same repetitive task day after day, year after year, they begin to feel more like machines than human beings.

Smith recognizes this problem and the toll it can take on the laborer. The division of labor may function very well when it comes to increasing efficiency, productivity, and quality, but its effect on the worker can be highly deleterious:

The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life.

In Smith’s account, workers may not only lose interest but also lose themselves in their work. Because they are called upon to do little more than mindlessly repeat the same few motions over and over again, they become mindless. As their task becomes ever more deeply engrained in muscle memory, they no longer need to think, becoming “stupid” and “ignorant.” A “torpor” of the mind sets in, whereby discussion, virtues of character, and the faculty of discernment wither away all but completely. Over time, such workers tend to become what they are treated as: automata. Their employer, or the system at large—prizing efficiency and profit over humanity—treats them as something less than they are and thereby turns them into something less than they are meant to be.

Similar concerns, applied to the welfare of a democratic society, can be found in Tocqueville’s Democracy in America.2 Considering the plight of the pin maker, Tocqueville muses on the prospects for democratic self-government of a people composed of such specialists. Simply put, people who do nothing but put heads on pins all day are liable to become pinheads themselves.

When a workman is unceasingly and exclusively engaged in the fabrication of one thing, he ultimately does his work with singular dexterity; but at the same time he loses the general faculty of applying his mind to the direction of the work. He every day becomes more adroit and less industrious; so that it may be said of him that in proportion as the workman improves, the man is degraded. What can be expected of a man who has spent twenty years of his life in making heads for pins? And to what can that mighty human intelligence which has so often stirred the world be applied in him except it be to investigate the best method of making pins’ heads? When a workman has spent a considerable portion of his existence in this manner, his thoughts are forever set upon the object of his daily toil; his body has contracted certain fixed habits, which it can never shake off; in a word, he no longer belongs to himself, but to the calling that he has chosen.

Again, workers become machines, adapted to nothing but the specialized task to which they devote themselves for half their waking hours or more at work. He does not determine how to perform his motions. He does not pay attention to what the other workers on the assembly line are doing. He may not even understand the finished product, at least not in terms of the many steps involved in its construction. From the point of view of those who employ him, he is little more than an economic entity, an interchangeable part in a production process who can be replaced at will. He is but a unit of production from whom his employer naturally aims to extract maximal value. He becomes what Aristotle described as a slave, that is, a human tool—seen, heard, treated, and valued strictly for what he can produce.

How well equipped, Tocqueville asks, will such human tools be for self-government? Will they jealously guard their own liberties? Will they respect the liberties of others? Will they take any interest in or even see their neighbors? Will they recognize what they share in common? Will they feel any sense of responsibility for those they work and live with? From Tocqueville’s point of view, the answer is no, and such a contraction of the human field of vision and sphere of responsibility can only result in a reduction of human beings generally. Such human beings will prove to be poorly fitted for self-government and ripe for the machinations of tyrants. Treated strictly as wage earners and consumers, mere economic entities, they will lack the education and experience necessary to thrive as citizens and neighbors and members of a society of free and responsible individuals.

To avoid the pitfalls of the division of labor and thereby preserve the liberty and responsibility of laborers and the society they make up, several steps are called for. First, we must do what we can to ensure that, as much as possible, people are spared work that dehumanizes. In some cases, this means substituting automation for highly repetitive tasks. While such automation may reduce costs and increase productivity, we should never lose sight of the fact that one of its primary purposes is to avoid dehumanization. To be sure, the capabilities of workers vary, and work that one might regard as menial might be well suited to the capabilities of another. Having work is good in itself, but we should wherever possible ensure that workers are not scorned or derided for their work and that work is never designed in such a way that it inevitably stunts and diminishes the worker.

What might this look like in practice? I think of a member of the housekeeping staff of a hospital whose job description consisted primarily of mopping floors, a position that she had held for approximately three decades. When her supervisors monitored her work, they quickly realized that she spent as much time leaning on her mop as she did pushing it. But her apparent lack of productivity did not stem from sloth or disability. Instead, she spent a good bit of her time talking with and enriching the experiences of others—coworkers, visitors, families, and patients. She brought to her work a sympathetic ear and a kind word for everyone. When she left a room or a hallway, the days of those with whom she came into contact were almost invariably brightened. Technically, she was doing work that many might consider menial, but she was engaged and contributing in ways that far exceeded her job description.

“No matter what kind of work someone does, it should provide opportunities to engage, thrive, and contribute as a human being.”

No matter what kind of work someone does, it should provide opportunities to engage, thrive, and contribute as a human being. In drafting job descriptions, we should ensure that there is room to study, experiment, and improve the work, thereby making it meaningful to the worker and even more important to others. It should also provide opportunities for a sense of achievement—not just that a worker broke the record for the most widgets produced in an hour, but that workers contributed to our understanding of the job and its purpose and how to make it better. Every worker deserves the opportunity to make a difference, and to do so, workers must bear responsibility for their work, including such aspects as when, where, how, by whom, why, and even what gets done. With such trust comes the opportunity for real human growth.

When we design jobs, we should envision them not just for units of labor but for citizens, neighbors, friends, and family members. We don’t merely want a society in which the shelves of big box stores overflow with low-cost, high-quality manufactured goods. We also, and much more deeply, long for a United States in which our fellow Americans are well-prepared and deeply committed to carrying on this great experiment in self-government. When we think of a job description, we need to envision the effect such work will have on the worker, and in particular, the fitness of workers as members of a society of free and responsible individuals. Every job is more than just a job. It is also an opportunity to help another human being develop as a member, a contributor, and perhaps even a leader in a society dedicated to freedom and responsibility.

For more on these topics, see

Insights from Adam Smith on the Erosion of Sympathy in Medicine, by Richard Gunderman., June 23, 2021. Division of Labor, by Michael Munger. CEE. The Pin Factory. “Work, Wages, and Capitalism,” by Stephen Davies. Library of Economics and Liberty, Apr. 4, 2022.

This gets at a key feature of the work experience to which Smith and Tocqueville each allude—namely, that work should provide an opportunity for human flourishing. It should neither be so easy that no one needs to try nor so difficult that all effort is futile, but sufficiently challenging that workers feel the need to concentrate and invest themselves in it. Professions such as medicine and higher education should not stunt human development but foster it, and not just by cramming more and more facts into heads but by calling forth such human excellences as courage, honesty, compassion, and wisdom. This means engaging not just the worker’s hands and feet or memory and calculation but also the whole creative person. When we divide labor, we risk slicing up and reducing the laborer, but by keeping the whole worker in mind, we can promote work that is both productive and humanly fruitful.


[1] Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776. Library of Economics and Liberty.

[2] Alexis de Tocqueville, Democracy in America, 1840. Online Library of Liberty.

*Richard Gunderman is Chancellor’s Professor of Radiology, Pediatrics, Medical Education, Philosophy, Liberal Arts, Philanthropy, and Medical Humanities and Health Studies at Indiana University. He is also John A Campbell Professor of Radiology and in 2019-21 serves as Bicentennial Professor. He received his AB Summa Cum Laude from Wabash College; MD and PhD (Committee on Social Thought) with honors from the University of Chicago; and MPH from Indiana University.

A Keynesian’s Macroeconomic History
41DmwF0p7GL._SX327_BO1204203200_-198x300.jpg One main reason why rational expectations macroeconomics, in particular its implication that the Phillips Curve for anticipated changes in money is vertical even in the short run, caught on was the allegation that the incumbent Keynesian tradition had failed to either control or explain high inflation. “Failed to control,” I suppose, is true, though the cost of stabilizing inflation in the face of huge supply shocks would have been devastating. But “failed to explain” was clearly a false charge once you gave Keynesian economists a few months to extend their framework to include supply shocks. Alan S. Blinder, A Monetary and Fiscal History of the United States, 1961-2021,1 p. 106-107 In the summer of 1975, the macroeconomic staff of the newly-created Congressional Budget Office was joined by a young economist from the faculty of Princeton University and an even younger research assistant recently graduated from Swarthmore College. Both would go on to write histories of macroeconomic events starting in the 1960s, looking at how different schools of economics interpreted those events. Mine, written in 2013, was never submitted to a publisher, but you can find it if you Google “Arnold Kling macro memoir”.2 Alan Blinder’s is published by Princeton University Press, with a publication date of October 2022.

Macroeconomics is the study of fluctuations in key economy-wide indicators, such as unemployment, inflation, interest rates and Gross Domestic Product (GDP). Concerning methods for studying macro, my memoir says,

Historians looking at the outbreak of the first World War can list possible causes. They can give reasons for paying attention to some factors more than others, perhaps based on analysis of other historical events. However, nobody would propose that a system of equations is the best way to summarize the factors that might have caused the war to break out. I think we ought to review and discuss historical events the way that historians review and discuss wars and revolutions. We need to take note of the various changes that take place in each decade that affect the way that the economy performs and the way that it responds to shocks and to policy interventions.

Blinder proceeds to undertake this sort of historical overview. This makes the book an excellent supplement, and perhaps a needed counterweight, to standard macro texts that focus on equations, often depicted in diagrams.

Blinder recounts dramatic policy moves, such as the Nixon Administration’s wage-price freeze of 1971, President Reagan’s tax cut, and Federal Reserve Chairman Paul Volcker’s battle against inflation. He also explains what economists were thinking at the time, with their ideas sometimes stimulated by events, and sometimes not. Finally, he interprets macroeconomic history through his preferred macroeconomic framework.

Blinder’s interpretations are those of an unreconstructed late-1970s textbook Keynesian. In this framework, there are three impulses that drive macroeconomic fluctuations. These are fiscal policy, monetary policy, and supply shocks. In fact, a better title for the book might have been A Monetary, Fiscal, and Supply Shock History of the United States, 1961-2021.

As he recounts the events and the ideas of economists, Blinder also describes the lessons that politicians learned. For example, it is important to try to avoid a slump during an election year.

The fiscal inaction as the 1960-61 recession developed was particularly noteworthy because it greatly chagrined the Vice President, Richard M. Nixon…. Nixon believed that the recession cost him the 1960 election, and he may well have been right. p.9

In later decades, Jimmy Carter and George H.W. Bush would suffer similarly. But as President, Nixon pulled out all the monetary and fiscal stops in 1972 to make sure that there would be no recession. He won re-election in a landslide.

Another lesson learned was to outsource the responsibility for restraint to the Federal Reserve. In the 1960s fiscal stimulus to promote a stronger economy seemed to work, but at the end of the decade when fiscal restraint was called for, what was enacted was too little, too late.

Finally, a die (of sorts) was cast. In theory, fiscal policy is symmetric. You raise taxes or cut spending to rein in aggregate demand, just as you cut taxes or boost spending to spur aggregate demand. In practice, however, fiscal policy in the future would be used (with rare exceptions) only to expand demand. When contracting demand was the order of the day, policy makers would turn to monetary policy instead, thereby taking the onus off politicians. p. 22

This worked out well for President Reagan, who could take credit for slashing tax rates while letting the Fed do the dirty work of fighting inflation. From Blinder’s perspective, fiscal policy and monetary policy at the time were working at cross-purposes, with the former expansionary and the latter contractionary. To the surprise of many Keynesians, monetary policy proved stronger, in part because of currency appreciation.

The trade-weighted value of the U.S. dollar against a basket of other major currencies soared by 54 percent between September of 1980 and March of 1985…. As a share of real GDP, the trade deficit rose from roughly zero in 1980-1982 to about 2.4 percent of GDP in 1984 p. 146-147

In the three-impulse framework, it would be much better if fiscal and monetary policy worked together. But this only seems to happen when an expansion is called for. When inflation needs to be fought, Congress and the President refrain from doing any fighting.

I have my disagreements with Blinder. The one that I feel most strongly about concerns the use of statistically-estimated equations, or macroeconometric models. I was first exposed to some of their shortcomings the summer of 1975 when I was Blinder’s research assistant, and over the next several years I came to see them as suffering from fatal flaws. In my macro memoir I wrote,

… macroeconomic data is not stationary, which invalidates many of the techniques used in macreconometric models, especially the use of lagged dependent variables. … A separate issue with econometric methods is raised in an iconoclastic book by Edward Leamer, called Specification Searches. Leamer points out that statistical theory assumes that the investigator engages in a single confrontation with the data. However, econometricians in practice try and fit many different specifications to the data, until the investigator is happy with both the quality of the fit of the equation to the data and also with the consistency of the findings with the investigator’s prior views. This process of searching for specifications makes results unreliable and lacking in objectivity.

Blinder continues to treat macroeconometrics as a scientific tool. I would caution readers that many economists distrust, with good reason, the sort of statistical analysis that he often cites.

My disagreement with the three-impulse framework is relatively milder. In fact, I prefer it to other frameworks, including Modern Monetary Theory3 or Market Monetarism4. But I think that there are many forces at work, and some of these are at least as important as fiscal policy, monetary policy, and supply shocks.

“The question of why interest rates have declined, and whether the decline is sustainable, is quite important, and it ought to worry policymakers.”

For example, there are secular trends. The interest rates that Blinder describes in the early chapters of the book will come as a shock to any reader who came of age in this century. Such readers will be amazed at how high the interest rates were that prevailed in earlier decades, even when inflation was low. The question of why interest rates have declined, and whether the decline is sustainable, is quite important, and it ought to worry policymakers.

Another issue of sustainability concerns the growth of government debt from about 25 percent of GDP in the 1970s to around 100 percent today, with a much larger share being held by the Fed. Under these circumstances, can higher interest rates be used to fight inflation in a way that does not severely disrupt financial markets?

Also, it seems to me that structural changes have taken place which probably affect macroeconomic performance and policy. The manufacturing sector is far less significant than it was in 1961, and within the service sector there is a growing disconnect between the fortunes of workers in the most menial jobs and those in the “laptop class.”

As Blinder points out, the financial sector was simpler in the 1960s. There was no interstate banking, far fewer index funds, mortgage securities, currency swaps, derivatives, or cryptocurrencies. Even in the early 1980s when Paul Volcker was sending interest rates close to 20 percent, it was illegal to pay interest on a checking account. It is highly improbable that the way monetary policy works now is identical to the way that it worked then.

The Internet has also changed the economy in many ways. I think it is unwise to keep relying on the three-impulse model without thinking hard about how these structural changes might have affected the way the economy behaves.

Blinder has harsh words for “rational expectations macroeconomics,” and I share his inclinations. But I would go further and say that we do not appreciate the extent to which economic outcomes, notably inflation, reflect the habits and beliefs of consumers and investors, nor do we understand the dynamics of how those habits and beliefs change. This reduces my confidence in any given macroeconomic framework.

For more on these topics, see

“The Practitioner’s Challenge,” by Arnold Kling. Library of Economics and Liberty, July 3, 2017. Aggregate Demand, by Arnold Kling. Economics Topics Detail. Podcast episode Charles Calomiris on the Financial Crisis. EconTalk. Financial Crisis of 2008. Econlib College Guide.

The Financial Crisis of 2008 is the point where Blinder and I diverge. He interprets fiscal and monetary policy as if they were textbook stimulative impulses, executed using some novel tactics. Blinder sees the policy responses as a success, with the only drawback the ingratitude of the public.

In my memoir, I saw policymakers as doing something other than finding new ways to inject stimulus. While Blinder is comfortable characterizing the circumstances that prevailed in 2008 as a case of a textbook aggregate demand shortfall, it seemed to me that policymakers were making up a new theory of macroeconomics on the fly. Given that the theory of fiscal expansion favors broad-based measures to spur consumer spending and business investment, why did so much of the fiscal stimulus take the form of aid to specific corporations, especially banks? Given that monetary expansion is supposed to work by increasing bank lending, why was the Fed stuffing the banks with excess reserves, which by definition are not turned into loans? Blinder does not raise such questions, much less answer them. In my memoir I agonize over them, trying and failing to work backwards from the policy responses to infer a theory behind them. I also struggle to develop and articulate an alternative to the three-impulse framework.

I believe that economics students will derive considerable value from reading Blinder’s Monetary and Fiscal History. And I hope that some of them also choose to read my macro memoir alongside it, to see where our perspectives overlap and where they differ.


[1] Alan Blinder, A Monetary and Fiscal History of the United States, 1961-2021. Princeton University Press, 2022.

[2] Arnold Kling, “Memoirs of a Would-be Macroeconomist.” PDF file. (Or google “Arnold Kling macro memoir”.)

[3] Arnold Kling, “Deficits—Budgetary and Conceptual.” Law and Liberty, July 17, 2020.

[4] Arnold Kling, “If I Were a Market Monetarist.” Library of Economics and Liberty, November 1, 2021.

*Arnold Kling has a Ph.D. in economics from the Massachusetts Institute of Technology. He is the author of several books, including Crisis of Abundance: Rethinking How We Pay for Health Care; Invisible Wealth: The Hidden Story of How Markets Work; Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy; and Specialization and Trade: A Re-introduction to Economics. He contributed to EconLog from January 2003 through August 2012.

Read more of what Arnold Kling’s been reading. For more book reviews and articles by Arnold Kling, see the Archive.

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In his latest Financial Times column, “Undercover Economist” Tim Harford reminds us of two important points about GDP per capita and economic growth: they are not a measure of welfare (think about Middle East oil plutocracies), but they are highly correlated with individual welfare. Individual welfare is of course the only thing we should, or even can, be concerned with. While voicing some proper caveats, Harford expresses the two important points as follows (“Liz Truss’s Growth Delusion,” September 30, 2022):

Gross domestic product is not, and never has been, an attempt to measure the wellbeing of a society. …

Nevertheless, it is striking how countries with a high GDP also have flourishing citizens. Pick your issue, from life expectancy to child mortality, from opportunities for women to the protection of basic human rights, cleaner streets, lower crime, even better-quality art, from TV to opera. Somehow, people who live in richer countries are likely to be enjoying more of the good stuff.

Having much command over goods and services is not a sufficient condition for individual happiness, but it usually helps.

Note that Harford does not criticize Liz Truss, the new British prime minister, for focusing on economic growth, but instead for neglecting some of its essential and constituent conditions:

Her rant about the “disgrace” of cheese imports suggests someone who hasn’t appreciated the importance of free trade in goods to a prosperous modern economy. …

Her vast and open-ended energy price cap is a kick in the teeth for market forces. By some measures the largest fiscal event in living memory, it feels closer to Mao than Thatcher. And it is unnecessary: a truly pro-growth government would have achieved the same social goal by letting prices rise, but giving an offsetting cash grant to each household.

On the benefits of trade—whether domestic or international does not matter—remember James Buchanan, who was expressing a very Smithian idea (James M. Buchanan and Richard A. Musgrave, Public Finance and Public Choice: Two Contrasting Visions of the State [MIT Press, 1999], p. 245):

If I observe someone with apples and somebody else with oranges, I don’t want to try to say a particular allocation of oranges and apples in a final position is better than in the other allocation. If I observe them trading without defrauding each other, whatever emerges, emerges, and that is the way I define what is efficient.

Jacob Soll’s “free market”

In the City Journal, I have reviewed Jacob Soll’s new book, Free Market: The History of an Idea.

Books arguing that “free market thought fails to account for periodic and devastating market failure,” or claiming that Milton Friedman stood for “libertarian corporate social-Darwinism” and rebuking him for his supposed affinity for Augusto Pinochet’s Chile, are not in short supply. That modern free-market economists were “crusading Cold War warriors with little patience for nuance or for contradictions in their own thought” is a ritornello of many scholars. …

Yet Jacob Soll is smarter than his many competitors. His Free Market: The History of an Idea starts with Cicero and doesn’t get to Friedman until page 250. Soll enlists the wisdom of the ancients and 2,000 years of history in his battle—the enemy being, in this case, the idea of a deregulated economy, in which the government is severely limited. Soll refrains from using pejoratives like “neo-liberalism” and refers instead to the “free market.” Such chivalry—calling his adversaries what they would like to be called—is commendable. Still, a clearer definition of “free-market thought” and an explanation for his use of this expression would have been helpful in a broadside against individualism or capitalism.

Soll is certainly more learned (and more interesting, when he speaks of things he actually studied and pondered) than your average critic of “neoliberalism” and, thank God, doesn’t use that word. Still the book is disappointing. Barton Swaim wrote a powerful review for the Wall Street Journal, a few days ago. Professor Soll replied to that explaining that “my critiques of free-market thinkers aren’t made in bad faith. I admire Friedrich Hayek and Milton Friedman and treasure individual liberties and economic freedoms. I simply remain perplexed that subsequent leaders dedicated to such ideas supported alliances with segregationists, whose ideas were the stark opposite of universal libertarianism”.

I did not touch the point of that juxtaposition in my review, thinking that was just derivative, in Soll’s work, from his wider worldview. Note that even in Swaim’s excellent article this is merely tangential, whereas he aptly points out that “for Mr. Soll’s book to work—and this is true of many such books by economists, pundits and historians of the political left—he has to pretend that the free marketeers have basically run the show for the past 70 years”. So, Soll’s reply (though of course circumscribed by the needs of brevity) focuses on scoring a rhetorical point rather than addressing a substantial issue. It didn’t make me think higher of him .

Sonat Birnecker Hart on Whiskey

bourbon-2.jpg Scholar and distiller Sonat Birnecker Hart of the Koval Distillery talks with EconTalk host Russ Roberts about her career move from academia to whiskey-making. She explains that the heart is the key to great flavor–when making whiskey, and when making the right choices in life.



The bad news is that America’s housing affordability crisis has gotten even worse. Rents will probably come down over time in places where housing construction isn’t prevented by excessive regulation. (Sorry, this is one policy area where blue states generally get it wrong while many red states get it right.) But NIMBYism in places like California and, yes, New York will do even more damage in the remote-work era.

The housing story, then, is that the pandemic changed the way we live and work — or, more likely, brought forward changes that were going to happen eventually. This led people to want more space at home. And that’s OK. What we need now is to let markets give people what they want, at a price more people can afford.

This is from Paul Krugman, “Wonking Out: How the Remote Work Craze Made Housing Affordability Worse,” New York Times, September 30, 2022.

HT2 Cyril Morong.


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