Patrick Grady
Binyamin Appelbaum Takes Aim at Economists, and Misses
October 7, 2019

The Economists' Hour
False Prophets, Free Markets, and the Fracture of Society
by Binyamin Appelbaum
Little Brown and Company (2019)
448 Pages, $26.95

The Economists' Hour is an interesting read for economists who don't mind criticism from journalists. It gives us a light, amusing break from our traditional dry economics fare. The juicy anecdotes about many of our profession's leaders are very entertaining. But while Appelbaum is a much better writer than most economists, as would be expected given that he write's for the New York Times, his knowledge of the history of economic thought and policy is not on the level of a world-class professionally trained economist.

Nevertheless, the initiated, who are already schooled in economics, can safely read it without risk of being taken in by Appelbaum's anti-free market slant. But those, who know little about economics, should only open the book at their own peril because it does not provide a balanced perspective on the rise of the economics profession to its current prominence and the contribution it has made across a wide range of human endeavors.

The bottom line is that this book is not a history of economic thought since the war. It is not a comprehensive examination of the most famous economists of the period and of their main contributions to economic science. Only a few of the most flamboyant, who have become media celebrities, are featured. Many genuine pathbreaking researchers are ignored. Whole new revolutionary fields like behavioral economics or environmental economics do not even get a mention. Instead, the purpose of the book was to promote a "progressive" political agenda and to call economists to account for what Appelbaum perceives to be their excessive dedication to promoting free-market policies.

Specifically, the book's main thesis is that economists have risen from the obscurity of their ivory towers and the basement of the Federal Reserve after the war to prominence during the four decades between 1969 and 2008, a period Appelbaum calls the "Economists' Hour." And this has not been to the world's benefit as their primarily free-market influence on economic policies is the primary source of present economic problems. In particular, he blames economists in their roles both as policy advisors and decision-makers for driving the global economy the brink of financial collapse in 2008 and for pushing inequality to a level "not seen since the days of Jay Gatsby."

While lesser economists make cameo appearances in the book, the Prince of Economic Darkness in Appelbaum's morality tale is Milton Friedman, the Nobel Laureate from the University of Chicago who despite his diminutive stature cast a giant shadow over the period Appelbaum labels the "Economist's Hour," both through his academic works and his contributions to popular policy discussion in the media.

Milton Friedman together with his brother-in-law Aron Director and his friend George Stigler were the intellectual font and driving force of the Chicago School of Economics which promoted free markets, limited government, lower taxes, and reduced regulation. Friedman himself spawned monetarism, which challenged the post-war Keynesian orthodoxy and contended that the economy was self-stabilizing as long as it wasn't destabilized by perverse changes in the money supply such as he documented had occurred during the Great Depression.

While Paul Samuelson wrote the textbook Economics, which introduced generations of post-war economics students to a mainstream Keynesian version of economics, he was always trying to catch up with Milton Friedman who took the profession down the free-market road.

Milton Friedman was even behind Nixon's abolition of the Selective Service draft, which is an interesting alley Appelbaum takes us down, introducing the blind economist Walter Oi who was tasked with writing the report for Nixon.

Appelbaum attempts to bash Friedman and the Chicago School with an extensive discussion of the role of Chicago trained economists (the Chicago boys) in Chile after the overthrow of the socialist government of Salvador Allende by General Augusto Pinochet. While this was an interesting episode that provides some amunition to fire at the Chicago School, it was not exactly something at the center of postwar global trends, occurring as it did in a small rather remote country. But even so, Appelbaum's thumbs down on the experiment would seem to be belied by the current standing of Chile as one of the most successful South American Countries. For example, in 2017 Chile had the highest level of GDP per capita in South America. And in 2018 it was ranked 33rd in the world and first in Latin America according to the World Economic Forum's Global Competitiveness Index.

Against that backdrop, Chile's performance doesn't look so bad, especially compared to, say, the disaster in socialist Venezuela. The Chicago boys must not have provided such terrible advice to the Chilean Government after all.

Mainstream economists of all political stripes come under fire from Appelbaum. Obama Administration stalwarts like Larry Summers and Paul Volcker are excoriated for the excessive attachment to fiscal orthodoxy and their lax attitude to financial regulation. But not by as much as Alan Greenspan who apparently did let his ideological distaste for regulation override his responsibilities for financial market regulation in the period leading up to the Financial Crisis when things were spiralling out of control.

Appelbaum peters out in his last chapter called "Conclusion." It provides a not very thorough postmortem on the Great Recession of 2008-9, which he offers to justify his declaration that the episode marked the end of the Economists' Hour.

The chapter starts by quoting Fed Chair Ben Bernanke's homage at Friedman's 90th birthday party. It was there that Bernanke, one of the few economists that Appelbaum doesn't reproach, promised that, thanks to Friedman's work, most notably Friedman and Schwartz's Monetary History of the United States, that monetary policy will never precipitate another Great Depression. And it didn't. The Fed injected enough money into the system during the crisis beginning in 2008 that the financial system didn't collapse, and after about a year the economy began to recover again, albeit weakly.

Another major accomplishment of post-war economics that should be featured in the Economists' Hour isn't. It stemmed from Friedman's emphasis on the the direct link between monetary policy and inflation and is the continuing low level of inflation that has persisted since the early 1990s when several central banks began inflation targeting. Even in the United States, which did not formally adopt inflation targeting, the rate of inflation has been in the 3 per cent and lower range since that time. The knowledge gained through the painful experience of dealing with and analyzing costly inflationary episodes has taught economists that central banks can maintain a low rate of inflation, if they so choose, and as they should.

Obama's economic policies were a great disappointment to Appelbaum although the reader may be left wondering exactly why? He seems to imply that the $787 billion stimulus program was not enough and that the subsequent move to austerity was misguided. The tax increases on those with higher incomes were evidently not enough. Appelbaum also largely ignores the Dodd–Frank Wall Street Reform and Consumer Protection Act, which was an effort to comprehensively reform the financial sector and prevent another crisis. Instead, he only mentions the creation of the Consumer Financial Protection Bureau, which was but a small piece of the reform.

Appelbaum's leftist disdain for Obama's economic policies (although all the rage among current Democrat candidates running for President) pales next to his visceral distaste for all things Trump. But don't expect to find a detailed analysis of Trump's policies. This might be because Appelbaum ran out of steam at the end of the book or because the long lags in publication prevented him from covering the Trump Administration's initiative.

While Appelbaum asserts without evidence that "Trump's contempt for economics - and for its basic building blocks, statistics and reasoning - is without parallel among modern American presidents." He overlooks that Trump has pursued free-market policies of tax cuts and deregulation that could have come directly out of the Chicago School playbook. Not surprisingly, these policies have produced strong real income growth (disposable income was up over $5,000 per household in June 2019 since the passage of the tax cut in December 2017) and the lowest unemployment in 50 years (3.5 per cent in September 2019).

Appelbaum condemns Trumps hard-ball trade negotiating strategy, particularly with respect to China, where he decries Peter Navarro's role as the economic Rasputin. Yet, on the other hand, he holds up Taiwan's development strategy of managed trade as a model. So clearly he's not a free-trader like most economists. I wonder why he's not willing to wait and see if Trump's approach works since he gives so much credit to Taiwan's interventionism.

Appelbaum's main beef with economists is that they focus too much on economic growth and not enough on inequality. While he contends that free market economic policies have been raising inequality, his argument is not very convincing. He does not even consider that there are powerful forces, like globalization and technological change, buffeting the world economy, that could account for the increase in inequality. Even economists are puzzled by increasing inequality within the major industrialized countries. You can't blame everything that happens to the economy on economists.

Appelbaum's tome notwithstanding, the rumors of the demise of the Economists' Hour are greatly exaggerated as long as Trump remains in the White House.