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Presidential Economics, 3d revised ed.

Herbert Stein, former chairman of President Nixon's Council of Economic Advisors and currently senior fellow at the American Enterprise Institute, has revised Presidential Economics, extending the description and analysis of macroeconomic policymaking from the late 1930s to the early 1990s. Using no graphs and only a few figures highlighting the economic performance of the American economy, Stein presents his analysis chronologically using a knowledge of economic policymaking developed over fifty years of experience in Washington, D.C.

Stein identifies and describes four distinct periods in macroeconomic policymaking postdating Hoover before Ronald Reagan took office. These include the Roosevelt years characterized by great activism and enduring programs followed by the Truman and Eisenhower years during which ideas and programs were moderated and accepted. A shorter period of activism followed during the Kennedy/Johnson administration yielding to twelve years of conflict and ambiguity. Considerable attention is then given to the Reagan years divided into two parts: the campaign called "the economics of joy" and then the presidency entitled "encounter with reality." The complete Bush record is reviewed but Stein was only able to make some preliminary remarks about Clinton's first term before this edition was published.

Stein argues that the great traumas of American economic history have been associated with recurring periods of unemployment and inflation and were caused mainly by the instability in the total demand for output or by its excessive growth. The author presents an analysis of the attempt by various administration and Federal Reserve officials to manage demand over the business cycle.

One example of demand management is presented in a chapter entitled "Nixon: Conservative Men with Liberal Ideas." Drawing on his own experiences as a member and later chairman of the Council of Economic Advisors (CEA), Stein describes the struggle of the Nixon administration to confront the inflation problem in its first two and a half years through a policy of gradually tightened monetary and fiscal policy. Elected with an unemployment rate of 3.3% but with an inflation rate of 5%, the highest since the Korean War, the CEA believed that inflation could be cured by a policy of demand restraint that would cause the unemployment rate to rise to slightly above 4%. This policy, called "gradualism," proved ineffective or perhaps was not in place long enough to have the desired impact. Later, in August of 1971 with an unemployment rate of about 6%, with no sign of an improvement in inflation and with an election upcoming in 1972, President Nixon turned to wage and price controls. The misgivings free market economists had with the move to controls were tempered partially by the Nixon administration's simultaneous policy decision to suspend the international convertibility of dollars to gold allowing the market to value the dollar.

The change from fixed to flexible exchange rates, a process completed by 1973 with the demise of the short-lived Smithsonian Agreement, the successor to Bretton Woods, has an impact on demand management policy, at least in principle. Fiscal policy's impact on domestic spending is reduced through the impact of the deficit on interest and exchange rates and consequent spending on net exports while monetary policy's impact is reinforced. Stein, however, does not consider this. Indeed, there is not much new about the Nixon presentation, particularly the section on "gradualism," a policy more recently recounted by Paul McCracken (1996). However, Stein does convey a sense of excitement of policymaking from the point of view of a major participant. He does reveal that Nixon officials had no idea how long or what form the incomes policy would take after the initial 90 day freeze. He also makes clear that monetary and fiscal policy were too expansionary while subsequent phases of the incomes policy were in place adding to inflationary pressure. During this time, Stein advocated a return to a tighter monetary and fiscal policy, dubbed the "old time religion."

A major strength of the book is its description of the transition to what Stein calls "a new consensus" by the mid to late 1970s. Stein asserts that the new consensus placed "more weight on restraining inflation and less on generating full employment by expansionary means, more on promoting economic growth and less on redistributing the available output among industries, more on monetary policy and less on fiscal policy for stabilization of the economy, more on markets and less on government regulation." However, Stein goes on to argue against the notion that the Reagan years were really revolutionary. In his own words he concludes: "There was, thus, this difference between the Roosevelt revolution and the Reagan would-be revolution. The Roosevelt revolution was incorporated in statutes, programs and agencies that were not subject to annual reconsideration and that developed constituencies - -bureaucracies and beneficiaries - that resisted counterrevolution. The Reagan changes were changes in numbers, mainly budget numbers, that are the subject of redetermination every year. They would not have the lasting effect that the Roosevelt changes had." Ironically, it took Bill Clinton, a Democratic president, to bring about a fundamental change in welfare.

Large budget deficits characterized the 1980s and Stein notes the loss of any guidelines for fiscal policy such as the full-employment budget concept, for example. Most associate it with Kennedy, but Stein reminds us that Nixon economists used it as well. He recognizes the effectiveness of built-in fiscal stabilizers that automatically produce a deficit during recessions and therefore opposes proposals to balance the budget on an annual basis; at the same time he opposes fine tuning.

Stein does make a major two part proposal regarding monetary policy. First, he argues that the Federal Reserve should aim only at nominal targets such as the price level and nominal GDP and eschew real variables like employment, unemployment or real output. Second, he advocates that the Fed use the money supply as an intermediate target of monetary policy, changing this target only in response to strong evidence that velocity had changed. Stein predicts that this kind of policy is not likely to be adopted by the Fed on its own initiative because it is totally at variance with the tradition and organization of the central bank and at odds with its legislative mandate.

It is worth noting that a policy called "inflation-targeting" is being used by a number of other central banks around the world. "Inflation-targeting" is not exactly the same policy as Stein suggests because an intermediate target like the money supply is not used; instead, the inflation rate is targeted directly. Such a policy has been adopted by Australia, Finland, Spain and Sweden. In a recent article, Ben Bernanke and Frederic Mishkin (1997) conclude that their "preliminary assessment is that this approach - when construed as a framework for making monetary policy, rather than as a rigid rule - has a number of advantages including more transparent and coherent policymaking, increased accountability, and greater attention to long-run consideration in day-to-day policy debates and decisions." Nevertheless, given the effective record of the Fed since 1982, Stein is probably correct that we are not likely to see the U.S. central bank change its policy procedures.

The last chapter of Presidential Economics is entitled "Another New Economics." In this chapter, Stein recalls the new economics of 1961, 1969, 1981 and most recently, the new economics of 1993. Stein suggests that the new economics of 1961, 1969, and 1981 did not meet expectations because economists simply did not know enough. Economists may be able to correctly predict the outcome or consequence of a particular decision, but in the real world, it is also important to answer the question "how much?" Wisely, he also observes that politicians tend to be impatient and want the beneficial effects of policies quickly and costlessly. Often, this is simply not possible.

Accessible to readers with only a modest knowledge of economics, Presidential Economics could be used for courses in American economic history, the history of economic policymaking or intermediate macroeconomics.


Ben Bernanke and Frederic Mishkin, "Inflation Targeting: A New Framework for Monetary Policy?"

Journal of Economic Perspectives, Spring 1997. Paul McCracken, "Economic Policy in the Nixon Years," Presidential Studies Quarterly, Winter 1996.

William C. Perkins Manhattanville College
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Author:Perkins, William C.
Publication:American Economist
Article Type:Book Review
Date:Sep 22, 1997
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