Monday, November 8, 2010

"American Economic Policy in the 1980's" A Book Review

SilverOz here. In what I believe is a first for the Bonddad Blog, I am going to be writing a book review of an excellent tome I recently finished that was produced by the National Bureau of Economic Research (NBER) in 1994. The book is edited by (and is essentially a conference report) and comes with an introduction from Martin Feldstein and includes essays by many who were intricately involved in the formulation (or oversight) of economic policy during that decade of decadence (including Paul Volcker, David Stockman, Paul Krugman, and many more). "American Economic policy in the 1980's" is broken up into twelve chapters, each of which details a specific policy area during the decade in excellent first hand economic detail. These chapters include: a personal overview by Feldstein, monetary policy, tax policy, budget policy, exchange rate policy, economic regulation, health and safety regulation, financial regulation, antitrust policy, trade policy, LDC debt policy, and policy toward the aged. I will provide a brief synopsis of some of the highlights of the book in the review that follows.

Feldstein et al have done an excellent job of providing us with an overview of the economic policy of the decade through a window that was still close enough to the time period in question to prevent longer term changes in perception from skewing the reasons why certain policies were undertaken at the time. The book itself reads like an economic version of "Only Yesterday" by Frederick Lewis Allen (one of my all time favorite history books), as it is written without much time bias and thus stays very true to the thinking of the 1980's.

A couple of interesting notes from the book include that the Economic Recovery Tax Act of 1981 did not (as proposed by Reagan) include bracket indexing (the bracket indexing is really what ended up creating the large gap between revenues and spending as the decade went on, not the cuts themselves). The sudden and complete victory over inflation likely had more of an impact on the deficit than the cuts themselves, since the bracketing was delayed until 1985 (which under the assumed paradigm would have limited the "real" impact of the tax cuts), thus moving up the victory over inflation to 1982 made virtually all of the cuts "real" even before bracketing could lock them in place. And that a fair amount in the act was actually "bid up" by Democrats in an effort to offer their own alternative and eventually most of the proposals were included in the final bill. Another interesting note (although one fairly widely known) is that "too big to fail" originated in 1984 with the bailout of Continental Illinois Bank which is discussed in this book by some of the very individuals who worked on the case.

Overall, the book does an excellent job of explaining and providing background rational and economic logic behind many of the financial and economic policies in the 1980's from a perspective that is (for the most part) uncomplicated by political agendas or time horizons that have changed the outcomes of certain policies well beyond their initial intent. My favorite quote from the book comes from Robert E. Litan's essay on "U.S. Financial Markets and Insitutions in the 1980s: A Decade of Turbulence" where he states (and remember, the essay was written before 1994) "ultimately more significant, advances in data-processing made it possible for quasi-governmental financing agencies and private investment banks to "securitize" mortgage instruments by packaging them into bundles and then distribute units of the resulting trusts to individual investors, nonbank financial institutions (pension funds, mutual funds, and insurance companies), as well as to depositories. By turning formerly illiquid loans into tradeable commodities, the securitization process was gradually undermining the economic rationale for depository institutions as specialized evaluators and monitors of credit; markets instead were providing that role" (pg 525). This shows that mortgage securitization was something that caused worry even back in the 1980's and early 90's. That may be the most unique foresight about a financial innovation that took off in the 1980's and its impact on our economy today from a period well before securitization has entered the modern nomenclature.

My final word is that this book is well worth its relatively high cost for those interested in either economic policy formations or for a unique look at the 1980s as a decade.