The textbook picture is that fiscal policy and monetary policy are two different weapons of countercyclical stabilization. Students of macroeconomics learn their different properties. For instance, they learn Mundell’s result that the relative effectiveness of fiscal and monetary policy depends on the exchange rate regime. Under either fixed or flexible exchange rates, both fiscal and monetary accommodation stimulate higher output. However, in a fixed exchange rate regime, monetary accommodation is more effective than fiscal accommodation because fiscal stimulus worsens the balance of payments while monetary stimulus improves it; conversely, in a flexible exchange rate regime, monetary accommodation is less effective than fiscal accommodation because the worsening of the trade balance due to a fiscal expansion weakens the domestic currency, thereby stimulating higher output, whereas an improving trade balance due to a monetary expansion strengthens the domestic currency, thereby tempering the direct stimulus to output. So, the standard picture is that monetary policy is more effective than fiscal policy in a fixed exchange-rate regime, while fiscal policy is more effective than monetary policy in a flexible exchange rate regime.
But if the standard Mundellian picture were accurate, US monetary policy would’ve been the principal weapon of countercyclical stabilization policy under the Bretton Woods system of fixed exchange rates, to be eventually replaced by fiscal policy after the Nixon capitulation. In fact, we see precisely the opposite pattern: politicians tried to manage the macroeconomy until the 1970s, after which they handed over control over economic affairs to the technocrats. This world historical transfer of power was quite sudden. The Volcker coup is the classic instance of the actions of highly constrained historical actors: as the dollar continued its slide, surrounded by bankers and other informed investors at Camp David, Carter was forced to appoint the chair of the New York Fed and a known inflation hawk to head the Federal Reserve. As Volcker reports the affair, ‘on July 15, he descended from the mountain and made a speech’. Haha:
So much for the Volcker coup. But who is this William M. Martin? I hadn’t heard of the fellow. Apparently, he was the longest serving Fed Chair since the founding of the central bank in 1913! He served from 1951 to 1970, and can be formally said to have presided over the entire postwar boom. Yet, no one knows his name. Why not? Well, he just didn’t the enjoy the sort of power later technocrats would come to exercise over the US and world economy.
I have been thinking a lot about the spurt of productivity growth that began in the late-1990s. Neoliberalism seemed to have worked for almost a decade around the turn of the millennium. Why could the Clinton boom not be sustained? In a tweet storm, I suggested that the hypertrophy of the two magnetic and predatory sectors — finance and tech — may be responsible. My suspicion is that the new regimes of accumulation in these two plumbing sectors — the housing finance boom powered by the great sucking sound of the wholesale funding flywheel and tech’s discovery of the surveillance model of harvesting platform rents — diverted capital, talent, and work to rent-seeking instead of productivity-enhancing activities in the economic system.
But like country fixed-effects, time fixed-effects are not easily mobilized for specific explanations. Something caused that spurt of productivity growth in the late-1990s and its arrest in the early-2000s. It is not entirely clear which of the departures is responsible. What is clear is that “Saint Greenspan,” who had been running the Fed since 1987, was held to be the man most responsible for the “Great Moderation” and what seemed like the stunning success of the “New Economy.” That Greenspan is the most celebrated central banker of them all is borne out by Google’s ngrams that count the frequency of mentions — a better approximation of ngrams is the Hindi word, charcha, roughly translated as favorable mentions in high places. He dwarfs the rest of the pantheon of American central bankers in charcha.
Even Volcker has a respectable showing,
… as do the other central banking chairs of the 1970s. Miller,
… and Burns.
In sharp contrast, the fellow who ran the Fed for longer than Greenspan or anybody else, and formally presided over the most prosperous twenty years in US economic history, enjoyed zero charcha. No one mentions him, whether to champion or decry. He is simply ignored by the sorts of people who write books. The obvious reason is that monetary policy is not even close to the action in the postwar period of broad-based growth.
So we live in a strange world indeed. One in which standard graduate textbooks for the technocrats proclaim an upside-down world. From a historical point of view, it is entirely understandable why technocratic monetarism takes over from political Keynesianism after a serious bout of price instability. But from a social scientific point of view, the two weapons are equally available at all times; and in as much as regimes matter, it is monetary policy, not fiscal policy, which should’ve taken a back seat in the flexible exchange rate regime — at least after price stability was achieved in the mid-1980s.
I have tried to bring out the contradictions of the Mundellian frame. But I could’ve gone in other directions. For the shift from the postwar to the neoliberal era in monetary policy was not just one from fixed to flexible exchange rates, but also a shift from using the quantity of money to the price of money to target, respectively, and in effect, inflation and unemployment to only inflation. But my point is simply that the past, specifically, the postwar era, was a foreign country. And nothing says that as well as Martin Who?
Very interesting commentary.
There are a lot of elements in play from the 1950s through the present, such as using the "fight against inflation" to justify keeping unemployed 5% of people who wanted to work. This coincided with long-term declining labor shares of income.
A de facto open borders policy for immigrants, who badly needed jobs.
Read "Trade Wars are Class Wars" by Michael Pettis for fresh, non-polemic insights into international trade. Short story: The nation that reduces labor share of income (and boosts investment) wins industrial location. There really is no such thing as "free," "fair" or "foul" international trade. Comparative advantage is an antique concept, so thoroughly are trade flows the result of government policies.
There are is another important angle, neither here nor there in the long-running Keynes v. monetarists fight, and that is property zoning. In a nutshell, property zoning has gotten chronically tighter, raising housing costs, to prohibitive levels along the West Coast, NYC, Boston, and several other markets.
The end result of all of the above is the reduction of middle-class living standards, in many regards now propped up by two working parents instead of just one.
Japan is another mystery. No matter how big their deficits or how much of the national debt is bought back by the Bank of Japan, they have minor deflation.
You’ll find you’ll have greater luck ringing people’s memory bell if you use the name he was known by - William McChesney Martin. He was canned by Tricky Dick early in Nixon’s first term in favor of Arthur Burns, who was more the Trickster’s kinda guy when it came to election year interest rates.
As for memory-holing WMM’s policies, they got lost in the decades of macro myth-making by Friedmanites and real business cycle types who laid stagflation at the feet of their Keynesian enemies (especially LBJ guns and butter) and claimed Volker’s experiments as their own victories, thereby “proving” monetary policy was where the action was and should remain. By the time we get to the 90s, supply side and read my lips had fossilized, so even automatic stabilizers had become for the GOP “encouraging dependency of the underclass.” It now required propitiating an unholy alliance between the bien pensant political media and the deficit gods to create elbow room for some badly needed domestic spending.
That’s the parochial US “sociology of knowledge” macro story. There’s a parallel, intertwined global financialization story that WMM didn’t have to deal with until the very end of his time at the Fed, when the Eurodollar market had just begun to be really significant.
From the end of the 60s we start seeing periodic Minsky moments at home, debt crises abroad (with US banks smack in the middle), and continual searching for exchange rate regimes that wouldn’t be subject to repeated dramatic revision - which together gave the global bond markets an especially strong whip hand well into the 90s at the earliest. The increased importance of finance, and its penchant for boom and bust, made interest and exchange rates and the Fed’s operations to limit damaging spillovers especially key, which placed even more power in Greenspan’s hands to ensure ongoing market confidence. Fiscal policy seemed safe to ignore, except as it might make difficulties for conducting monetary policy. Obviously not the circumstances during which WMM was Fed Chair.