American Economic Policy in the 1980s.

Almost everyone in the 1990s seems to have a strong opinion about what happened in the 1980s. Most of the opinions inside and outside of academia have been shaped by vague remembrances and recent political rhetoric, and most are off base, to one degree or another. The 1980s were not nearly as dreadful from an economic perspective as the critics charge, and neither were they as prosperous as the supporters of Ronald Reagan would like to believe.

Martin Feldstein's collection of conference main essays by noted economists and discussion papers by well-known policy practitioners, American Economic Policies in the 1980s fills an extraordinary void in contemporary political discussions and history: the book substitutes fact for rhetoric. The writers provide a history of the multidimensional policy making process during that eventful decade, both in terms of what the Reagan administration sought to accomplish (and what it conceded) and in terms of what actually happened. The conference essays cover the policy spectrum, each written by a noted expert: monetary policy (Michael Mussa), tax policy (Don Fullerton), government expenditure policy (James Poterba), international trade policy (David Richardson), exchange rate policy (Jeffrey Frankel), regulatory policies (Paul Joskow, Roger Noll, Kip Viscusi, and Robert Litan), antitrust policy (Phillip Areeda), policy toward the aged (David Wise and Richard Woodbury), and even policies toward the debt of less-developed countries (Paul Krugman). The list of commentators includes Paul Volcker, James Tobin, Charles Walker, Russell Long, David Stockman, Charles Schultz, William Niskanen, William Baxter, Paula Stern, and Ruldoph Penner.

The names are listed simply as a short-hand way of describing the extent of the intellectual and practitioner power brought together in this one, albeit long, volume. It should go without saying that this volume is mandatory reading for anyone seriously interested in understanding and evaluating the 1980s. Many of the writers, not the least of whom were the editor, Martin Feldstein, and commentator and former Reagan budget director David Stockman, were inside the administration when many of the Reagan policies were formed or enacted. Feldstein's own personal reflective essay, which focuses on the deficit debate that emerged with force during his tenure as chair of the Council of Economic Advisors (1982-1984), is particularly valuable. Feldstein not only briefly summarizes some of the findings covered in depth in subsequent essays, he also stresses the policy search within the Reagan White House for ways of reducing the projected deficits, given Reagan's strong preference for low marginal tax rates and Congress' resistance to cuts in Social Security and other major social programs,

The reader learns from Feldstein and the other writers that the large deficits of the 1980s were due not only to the overly aggressive expectations of "supply siders" (who argued that tax rate cuts would lead to tax revenue increases). However, the initial deficits were also the consequence of the unexpected large decline in the inflation rate (which meant that revenues declined far more than expected because of the reduction in "bracket creep") and the equally unexpected serious decline in national production with the curbing of monetary growth. Paul Volcker, who chaired the Fed's Board of Governors from 1979 until 1987, concurs that the Federal Reserve's monetary restraint beginning in late 1979 undercut prices and the economy by more than he expected. These admissions suggest that the excessively large deficits, especially in the early 1980s, were partially a consequence of tight monetary policy, not just tax rate cuts, per se.

David Stockman adds, in an equally important commentary, that the deficits emerged from two additional sources that do not today appear to be widely appreciated, a political bidding game to lower personal and business tax rates in 1980 and 1981, which both Republicans and Democrats played. He also stresses that the deficits emerged because of the unwillingness of Reagan supporters to recognize that cuts in expenditures of the size needed to balance revenue falloffs were simply not possible, given the broad-base support that increases in Social Security and poverty programs had enjoyed in Congress, even among Republicans, over the previous two decades.

The commentators on the saving and loan deregulation - Robert Litan, William Isaac, and William Taylor - also suggest that even the looming crisis, which had important roots in the inflationary spiral of the 1960s and 1970s, was made worse, indirectly, by the looming triple-digit budget deficits. In the early 1980s, the administration could not dedicate the more than one hundred billion budget dollars that would have been required to close the then insolvent S&L's. The crisis worsened as S&L's were allowed to seek their own financial bailout through high-rates-or-return/high-risk investments, with their deposits fully protected by government insurance. Aided and abetted by politics, the government's indirect bailout gamble failed miserably.

From many of the writers, the reader not only gets a review of the facts but also a sense of history in the making. As an added attraction to economists, a number of the writers couch their commentaries in terms of the extent of the influence of academic economists/theorists. You sense that while developments in economic theory (growing disillusionment with Keynesian economics and a growing appreciation for the importance of incentives in public policies) controlled the broad outlines of the public policy debates (whether marginal rates should be paired, for example), politics certainly controlled the particulars of public policies (who, exactly, would benefit from taxes favoring private investment). What is admirable about the volume is the extent to which virtually every writer was able to keep to the straight and narrow path of careful analysis, as distinguished from commentaries that seek to advance one political position or another.

If there is a deficiency in the volume, it is that the essays focus almost exclusively on how the politics of the moment determined policies. The writers pay little or no attention to the extent to which the public policy process in this country was being directed by global economic forces and the need of U.S. policy operators to make the country's fiscal and regulatory policies more competitive. One of the unheralded problems U.S. policy makers faced was that other countries were, during the late 1970s and early 1980s, seeking to increase their attractiveness to capital by way of more competitive fiscal and regulatory policies. However, one book cannot do everything. Academics and policy makers can learn a great deal from this book.

Richard B. McKenzie University of California, Irvine