{"id":"5ff2e0b76cee070006eae29c","slug":"the-economists-hour-en","title":"The Economists’ Hour","audio_url":"https://hls.blinkist.io/bibs/5ff2e0b76cee070006eae29c/5ff2e0b76cee070006eae29e-T1609752851.m4a?Expires=1656186547&Signature=OoERxIuN6UjMBob2IOHKQ4apZnKtlsnXZjLVJXJ1lbQjkiEQyvYhbdgK0QJZX8m76Ezi2IcQw~5E2WYl9HAU3ToSlzYQ~tf44m~dKV4tcEKVaLBbWN5QLgMo11XjCwkUdH1vCZRkEAoOGG3LKsW0R97sc~Nr3o26fUdFtI5WgouaM9Vnx75TY~OqZ6xCJN9M0fJIj~CmxK3thS04BtU-eJyWJmLqnrhAr5p8MskBMeKVECmaZv95ewfsMGf~cT~6pOkM-bP3kJE00u5vYMJXL0sx913VYaaeiBSTIkqYJYbdLH0bPEgggTdFffj1dZiZJIMw9QOcPHWRhOl-xd82gA__&Key-Pair-Id=APKAJXJM6BB7FFZXUB4A","chapters":[{"id":"5ff2e0b76cee070006eae29e","title":"Free-market economists advocated for ending the draft – and won.","text":"

It’s May 11, 1966. Chaos erupts at the University of Chicago. Hundreds of students storm the school’s administrative buildings. They chant, wave flags, and sing protest songs. Their demand is simple: they want the United States to end the military draft.

Dramatic actions like this often claim much of the credit for the eventual end of military conscription. But they don’t deserve all the accolades. The truth is, behind the scenes, another entirely different group also fought to end mandatory military service.

So, who were these unlikely activists? Right-wing economists. Throughout the 1960s and 1970s, their constant boosting of free-market ideology helped conservative politicians justify ending the draft.

The key message here is: Free-market economists advocated for ending the draft – and won.

In the decades after World War Two, the United States used a draft system to staff its colossal military. This meant that a certain number of fighting-aged men were obligated to enlist, whether they wanted to or not. This arrangement became increasingly unpopular as the Vietnam War ramped up in the 1960s. But politicians were reluctant to end it. They believed that relying on volunteer recruits would be costly and never attract enough men.

An emerging circle of economists had a different opinion. This group included Milton Friedman, Martin Anderson, and Walter Oi. These thinkers believed that compelling men to enlist was an unethical infringement of their rights. They argued that what the government should do was to offer a fair wage for service and only hire those who voluntarily signed up. Essentially, they thought being a soldier should be like any other job on the job market.

They laid out their case in speeches, papers, and books. For them, an all-volunteer system would be fairer, but more importantly, more cost-efficient. Yes, the government would have to pay more to attract recruits, but enlistees would be more motivated and serve longer terms. Critics were worried that a system like that would disproportionately attract poorer individuals with fewer options. But this concern was brushed aside.

These ideas eventually gained traction, especially after Martin Anderson personally delivered a memo about the plan to presidential candidate Richard Nixon. Moved by the argument, Nixon campaigned on ending the draft. And, after being elected in 1968, he pushed for the creation of an all-volunteer army. He succeeded. The draft was abolished in 1971.

This policy shift was the first big victory for economists like Anderson, Friedman, and Oi. And the decades that followed would bring many more.

"},{"id":"5ff2e0b76cee070006eae29f","title":"During the 1960s, the power of Keynesian thinking began to wane.","text":"

From the launch of Sputnik in 1957 to the first man on the moon in 1969, the space race was one of the defining competitions of the 1960s. However, the contest between the USSR and the United States wasn’t the only rivalry playing out during that tumultuous decade.

There was another feud within the American government – this one between economists. On one side were the Keynesians, named after their chief theorist, John Maynard Keynes. And on the other, was the Chicago School, headed up by Milton Friedman and his associates.

At the heart of the debate was a simple question: How much should the state try to manage the economy?

The key message here is: During the 1960s, the power of Keynesian thinking began to wane.

In the 1930s, the Great Depression crippled the world’s economy. Stock prices plunged, production collapsed, and one in four American workers was unemployed. In the face of this disaster, British economist John Maynard Keynes offered a solution. He argued that the government should reinvigorate the economy with massive public spending programs. This would put people to work and put money in their pockets to buy more goods and services.

President Franklin Roosevelt used a moderate version of this approach to see the country through the crisis. In the decades that followed, the United States roughly stuck to this plan, albeit with minor tweaks. By the late 1960s, President Johnson had used this logic to justify his large and successful social programs like Medicare, Medicaid, and other anti-poverty programs. Keynesianism was in control.

But there was a catch. All that spending led to inflation. While pure Keynesianism called for high taxes to curb this problem, that policy was too politically unpopular to implement. So, lawmakers were left with a puzzle. How should the government continue managing the economy? Friedman and his associates offered their solution: the government should step out of the way.

In December 1967, Friedman delivered a passionate address to the American Economic Association. In it, he argued that the state shouldn’t have a heavy hand in the economy at all. He allowed that the Federal Reserve might try curbing inflation by tinkering with the supply of money – but that was it. This strategy is called monetarism. This approach was a radical departure, but over the next decade, Friedman’s ideas would only become more popular.

"},{"id":"5ff2e0b76cee070006eae2a0","title":"Under Reagan, supply-side economics and tax cuts reigned supreme.","text":"

By the late 1970s, one word appeared in every headline, news broadcast, and watercooler conversation: stagflation. This portmanteau described the two problems ailing the economy: stagnant job growth and excessive inflation.

Stagnation was a serious problem. President Carter appointed Paul Volcker as the head of the Federal Reserve in a desperate attempt to get things back on track. Volcker believed Friedman’s monetarist views. So, he immediately began restricting the money supply. The goal was to slow inflation, but the result was high interest rates, factory closures, and spikes in unemployment.

Two years later, when Reagan entered the White House, more than eight million Americans were out of work. The policy was rough for everyday people, but it was a blessing for the financial industry. As the years rolled on, this became a common theme as a new economic theory gained dominance.

The key message here is: Under Reagan, supply-side economics and tax cuts reigned supreme.

When Reagan took office in the 1980s, the United States was still adjusting to the fallout of Volker’s monetarist policies. It seemed that reducing inflation always came paired with a rise in unemployment. This meant that consumer demand remained low, which dragged the economy into a recession. The Keynesian solution to this dilemma would be to increase demand through government spending. But a new group of economists suggested an entirely different approach.

In the 1960s and 1970s, economists like Robert Mundell and Arthur Laffer began advocating tax cuts as the solution to both inflation and unemployment. Their idea was that cutting taxes on incomes, corporations, and investment would bolster business and increase the supply of goods and services in the economy. This supply-side theory stated that the resulting economic boom would enrich the wealthy, and then that wealth would trickle down in the form of higher wages for workers at the bottom.

Reagan loved this idea and put it into action with a series of massive tax cuts across the board. In 1981, he lowered the top income tax to 50 percent then, a few years later, cut it even further to 33 percent. The result was less impressive than expected. Despite a modest increase in economic activity, the average American did not see a boost in wages or savings. In fact, inequality rose faster than at any time since World War Two.

The government’s budget suffered as well. With lower taxes, there was less revenue for infrastructure, social programs, and other essential services. To make up the gap, the administration resorted to cutting services and massive deficit spending. Despite the flaws, this method of economic management, dubbed Reaganomics, remains popular with lawmakers today.

"},{"id":"5ff2e0b76cee070006eae2a1","title":"The pursuit of economic efficiency allowed monopolies to control the markets.","text":"

In 1952, AT&T patented a revolutionary new device, the transistor. Rather than keep this novel technology to itself, the telecommunications giant did the opposite. It published a full instruction manual so that its rivals could build their own transistors. How generous!

Well, not really. AT&T didn’t distribute this information as an act of kindness. They were forced to share. The government recognized that giving one big company control of important technology was dangerous.

This wasn’t entirely surprising, either. Beginning with the Sherman Antitrust Act in 1890, the government often stepped in to regulate the marketplace and limit corporate power. Yet, as new strains of economic thinking become popular, this important government function waned.

The key message here is: The pursuit of economic efficiency allowed monopolies to control the markets.

Up until the 1970s, the government acted as sort of a referee in the market. It would use its authority to break up big businesses, prevent massive mergers, and enforce labor laws. The goal was to keep monopolies from accruing too much power and stamping out all competition.

However, economists like George Stigler saw things differently. They argued that governments should worry about efficiency, not fairness. Essentially, firms should be free to do as they liked, as long they delivered low prices to consumers. To popularize this view, companies like Exxon, General Electric, and IBM financed influential institutes to teach lawmakers this way of thinking. By 1990, more than 40 percent of federal judges had attended these academies.

As a result, the state began to take more of a hands-off approach to business. And corporate mergers accelerated throughout the 1970s and 1980s. For instance, by 1992, the five largest meatpacking companies went from owning 25 percent of the market to more than 70 percent. But perhaps the biggest success of this movement came with the deregulation of the airline industry.

Since 1938, the government had tightly regulated the airline industry. This ensured that airlines operated at a high standard, but it also kept ticket prices high. In the late 1970s, the US ceased enforcing these controls. In the subsequent vacuum, airlines competed aggressively by slashing prices, packing planes, and cutting unprofitable routes. At first, this made flying more affordable. But, eventually, monopolies formed, and by the 2010s, just four companies carried 80 percent of US passengers and charged higher prices than their more regulated European counterparts.

"},{"id":"5ff2e0b76cee070006eae2a2","title":"Economists replaced moral reasoning with cost-benefit analysis.","text":"

Let’s say you run a trucking company. One day, there’s a horrific collision between one of your trucks and a passenger car. Three people die. Afterward, engineers examine the wreckage and determine that installing a few extra components on each truck could prevent future crashes from being fatal.

Now, this seems like an obvious thing to do. But an economist might have a different perspective. Installing all that safety equipment is expensive. And, if collisions are relatively rare, you might be spending a lot to save just a few people. So, are the upgrades worth it? That depends. How much is a human life worth?

It may seem crass to judge human life in terms of dollars and cents. But, in past decades, economists have made this type of cost-benefit analysis central to government regulation.

The key message here is: Economists replaced moral reasoning with cost-benefit analysis.

Cost-benefit analysis is a form of reasoning that quantifies any activity in terms of its potential upsides and downsides. It was first formulated by the economist Charles Hitch. At the dawn of the Cold War, he applied this mode of systemic thinking to help the Department of Defense decide which weapons were the most cost-effective investments for the American military.

This type of thinking was slow to catch on elsewhere. Throughout the late 1960s and early 1970s, the government regularly used new agencies like the Environmental Protection Agency and the Occupational Safety and Health Administration to enforce worker and environmental regulations. These laws required things like air filters in factories and limits on pollution. The goal was to protect people regardless of the cost.

But this didn’t last. Thinkers like Howard Gates and Jim Tozzi pushed the idea that any regulation should be subject to cost-benefit analysis. Of course, doing this required calculating the cost of a human life. In 1972, Gates used a series of obscure metrics to estimate that one life was worth about $200,000 dollars. With this figure in hand, free-market economists could push back against new regulations for costing more than they would save.

The Reagan administration ran with this idea. In February 1981, they used an executive order to compel all regulatory agencies to abide by cost-benefit analysis. In the ensuing years, regulations were increasingly cast aside on economic grounds – even if they would save lives. Subsequent administrations have done little to displace this analysis, and today, the cost of a human life is still used to determine whether a law is “worth it.”

"},{"id":"5ff2e0b86cee070006eae2a3","title":"Ending fixed exchange rates created a large, volatile new system of trade.","text":"

In the summer of 1944, the Allied countries gathered at a small mountain resort in Bretton Woods, New Hampshire. Together, they hammered out a deal to manage all international trade in the capitalist world.

The result was the Bretton Woods Agreement. This contract set fixed exchange rates between currencies with the United States dollar as the standard. This arrangement aimed to make trade more predictable by stabilizing the value of currencies. And, amazingly, it worked – at least for a few decades.

Then, in August 1971, it came to an end. That summer, President Nixon retreated to another mountain resort, Camp David. Here, working with economist George Shultz, the president decided to withdraw from Bretton Woods.

The key message here is: Ending fixed exchange rates created a large, volatile new system of trade.

In the decades after World War Two, the Bretton Woods system seemed like a win-win for everyone involved. Without fixed exchange rates, a country could theoretically devalue its own currency to make its exports cheaper. This type of competition could lead to instability and hamper international trade as countries moved to protect their own industries. In contrast, having everyone’s currency pegged to the dollar at a fixed rate kept things more stable.

This still led to issues over time. Economies like Germany and Japan rebounded quickly by selling goods into the flourishing United States market. As a result, foreign businesses and banks amassed a huge amount of dollars. The problem was that under Bretton Woods, the US was obligated to back each dollar with gold. So, having so many dollars in circulation made this promise impossible to keep. By 1971, something had to give.

Shultz, taking a cue from his associate Friedman, suggested that the United States should simply stop fixing the value of the dollar. Instead, the country should float its value or let the market decide how much a dollar was worth compared to a yen, lira, or pound. This is exactly what Nixon did, with tumultuous results.

In the ensuing years, the value of all currencies shot up and down as investors began betting in newly created international money markets. The US dollar, being relatively stable, became extremely valuable and strong. This was an advantage for consumers, who could now buy more international goods. But it sank US manufacturers, who struggled to compete against the cheaper international imports. By the mid-1980s, millions of factory workers were left unemployed.

"},{"id":"5ff2e0b86cee070006eae2a4","title":"Pinochet put Friedman’s ideas into practice – with chaotic results.","text":"

Santiago, Chile, 1973. Explosions rock the presidential palace. The forces of Augusto Pinochet, along with a little help from the CIA, overthrow Salvador Allende, the country’s duly elected president. In the following years, Pinochet’s army rounds up, tortures, and executes thousands of dissidents.

Pinochet’s bloody coup and subsequent reign are a dark stain in the county’s complex history. Yet, Milton Friedman saw it as an opportunity. So, in 1975, the economist flew south to personally meet with and advise the ruthless dictator.

In the following decades, Pinochet and his economic advisor, Sergio de Castro, put many of Friedman’s economic ideas to the test. The result is an economic system that does little to help the Chilean people.

The key message here is: Pinochet put Friedman’s ideas into practice – with chaotic results.

Chile was never the richest country in the world. Yet, by the early 1970s, it wasn’t doing too badly. Throughout the previous decades, the government used state power to carefully foster an emerging industrial economy. By 1973, the county’s per-capita income was 12 percent higher than the average for Latin America. Allende aimed to continue this development, but Pinochet took a different path.

After violently seizing power, the general handed control of the country's economy to Los Chicago Boys, a group of right-wing, free-market economists educated at the University of Chicago. The Boys dutifully implemented Friedman’s favorite policies – they slashed government programs, tightened the money supply, and privatized industries. As a result, Chile’s economy convulsed. Huge swaths of the country’s working class lost their jobs while a small number of Pinochet’s supporters became very wealthy.

On top of this, Pinochet eliminated the country's capital controls and financial regulations. This allowed foreign investors to buy up many of Chile’s natural resources and forced Chilean businesses to borrow massive amounts of foreign currency. By the early 1980s, Chile was more in debt than any other country in the region. By the end of the decade, the poor management made the country less prosperous than Cuba.

In 1990, Pinochet was finally ousted, but the legacy of his free-market experiment remains. Where the country was once on the brink of more equitable growth, it must now rectify decades of inequality and political repression. But there are signs of progress! In 2016, 10 percent of the population flooded the streets to protest for higher pensions, and a growing student movement looks poised to create real political change.

"},{"id":"5ff2e0b86cee070006eae2a5","title":"Unregulated markets often lead to financial disasters.","text":"

In the eyes of economist Alan Greenspan, the only good form of regulation was no regulation at all. Throughout his career, he championed the idea that corporations, banks, hedge funds, and really every industry worked best when completely free from government interference.

In 1964, Greenspan made his public debut with a series of lectures defending the moral righteousness of completely unchecked markets. In the 1970s, he advocated against laws requiring banks to disclose financial information. And, in the 1980s and 1990s, as chairman of the Federal Reserve, he declined to curtail risky subprime mortgage lending.

To Greenspan’s credit, he was incredibly consistent in his views. He continued advocating for unregulated markets even as reality proved him wrong time and again. Even a brief survey of the last few decades yields numerous examples of unregulated industries quickly spiraling out of control.

The key message here is: Unregulated markets often lead to financial disasters.

One of the primary reasons for financial regulations is to rein in activity that, while potentially profitable for some, is risky for everyone else. An instructive example of this comes from the history of credit derivatives. First introduced in the 1990s, these complicated financial instruments essentially let investors bet on whether or not borrowers would repay their debts.

The banking industry lobbied hard to keep the derivatives market unregulated. This allowed them to sell derivatives based on false promises and make increasingly risky bets. The outcome was a series of high profile financial busts. In 1994, Orange County, California, lost more than a billion dollars on derivatives and had to file for bankruptcy. A year later, the UK-based Barings Bank suffered the same fate.

But, these crises merely foreshadowed bigger disasters yet to come. In the late 1990s, banks created yet another popular and risky financial instrument, the subprime mortgage. These mortgages were special loans made with confusing conditions and often predatory interest rates. Banks made big money offering these loans to low-income families who could often not pay them back.

Interest groups begged Greenspan and the Federal Reserve to regulate this industry. However, the Fed adhered to Greenspan’s anti-regulation ideology and let the practice continue. Over the next decade, the subprime industry grew and grew into a massive financial bubble. Finally, in 2008, the bubble burst. The result was a worldwide financial crisis – a disaster that a few regulations could have greatly mitigated.

"}]}

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