How US economic policy changed post 1950s?

Though this is an old paper and must have been read by most, still those who have not should read it.

Christina Romer writes on the changes in thoughts in US economic policymaking from 1950 onwards.

 I suspect that like many visitors to this library, I find much to admire in the Johnson administration: its commitment to civil rights, the war on poverty, the expansion of the social safety net. The theme of my talk, however, will be that its conduct of macroeconomic policy was not one of them. Indeed, I will argue that far from being the high point of economic policymaking in the postwar era, the 1960s represented the beginning of a long dark period for macroeconomic policy. Both monetary and fiscal policy actions were seriously misguided in the 1960s, and led to undesirable economic outcomes.There is an interesting table at the end which sums up the debate:

1950s

  • Proto-natural rate framework
  • Normal unemployment rate is 4½ to 5%
  • It is important to achieve long-run fiscal balance; persistent deficits are unacceptable and costly

1960s

  • Permanent trade-off between inflation and unemployment
  • Acceptable unemployment rate is 4% or below
  • It is not important to achieve long-run fiscal balance; persistent deficits can be salutary and will tend to take care of themselves

1970s

  • Natural rate framework
  • Very low estimates of the natural rate (4%)
  • Inflation doesn’t respond to slack
  • It is not important to achieve long-run fiscal balance; persistent deficits can be salutary and will tend to take care of themselves

1980s and Beyond

  • Natural rate framework
  • Sensible estimates of the natural rate
  • Aggregate demand policy can lower inflation
  • Inflation is costly
  • It is not important to achieve long-run fiscal balance; deficit reduction is desirable but less important than other concerns, and deficits may take care of themselves

The main idea is that in 1980s US did move to the sensible 1950 framework except for the government debt concern. Somehow, the idea that government deficits and debt levels are not important started ion 1960s and has continued since then. Clinton and his team showed some concerns over rising debt levels but did not have any ideas in the long term debt outlook.

So US policymakers did learn from the mistakes over monetary policy and inflation but continued to err on fiscal policies. So asa  result, the belief that deficits don’t matter much continues:

Whatever the reason for the persistence of beliefs about long-run fiscal policy, the crucial fact is that beliefs have persisted. And, those beliefs are one of the legacies of the 1960s. The view that budget balance is not important even over a fairly long horizon, pioneered by the Kennedy and Johnson administrations, set in motion the long-run budget ideas and actions we see today. There was indeed a fiscal revolution in America in the 1960s, and we are still trying to recover from it more than forty years later.

 

 Read the whole thing. Quite a few insights. And as US economics policies has an impact on other economies as well, it has some insights into shift into economic policy worldwide as well.

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3 Responses to “How US economic policy changed post 1950s?”

  1. Latest Final Fantasy Games Auctions | Final Fantasy XIII Games Says:

    […] How US economic process altered post 1950s? « Mostly Economics […]

  2. Bundelkhand Darshan Says:

    This is right.
    Please keep it up.

    Pramod Rawat

  3. Rules vs Discretion – a short historical perspective « Mostly Economics Says:

    […] ideas are similar to this Christy Romer paper. She says much the […]

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