Fiscal And Monetary Policy Quotes

The central lesson of the COVID-19 fiscal response is that money is not scarce. Without delay, governments around the world appropriated budgets that dwarfed any other post-war crisis policy.

In fiscal policy as in monetary policy, all political considerations aside, we simply do not know enough to be able to use deliberate changes in taxation or expenditures as a sensitive stabilizing mechanism.

As long as there are no routes back to full employment except that of somehow restoring business confidence, he pointed out, business lobbies in effect have veto power over government actions: propose doing anything they dislike, such as raising taxes or enhancing workers' bargaining power, and they can issue dire warnings that this will reduce confidence and plunge the nation into depression. But let monetary and fiscal policy be deployed to fight unemployment, and suddenly business confidence becomes less necessary, and the need to cater to capitalists' concern is much reduced.

What with the doctrines that are now widely accepted and the policies accordingly expected from the monetary authorities, there can be little doubt that current union policies must lead to continuous and progressive infl ation. The chief reason for this is that the dominant “fullemployment” doctrines explicitly relieve the unions of the responsibility for any unemployment and place the duty of preserving full employment on the monetary and fiscal authorities. The only way in which the latter can prevent union policy from producing unemployment is, however, to counter through inflation whatever excessive rises in real wages unions tend to cause.

The euro and the ECB were designed in a way that blocks government money creation for any purpose other than to support the banks and bondholders. Their monetary and fiscal straitjacket obliges the eurozone economies to rely on bank creation of credit and debt. The financial sector takes over the role of economic planner, putting its technicians in charge of monetary and fiscal policy without democratic voice or referendums over debt and tax policies.

For fiscal policy, the appropriate counterpart to the monetary rule would be to plan expenditure programs entirely in terms of what the community wants to do through government rather than privately, and without any regard to problems of year-to-year economic stability; to plan tax rates so as to provide sufficient revenues to cover planned expenditures on the average of one year with another, again without regard to year-to-year changes in economic stability; and to avoid erratic changes in either governmental expenditures or taxes.

The idea that the euro has “failed” is dangerously naive. The euro is doing exactly what its progenitor – and the wealthy 1%-ers who adopted it – predicted and planned for it to do. … Removing a government's control over currency would prevent nasty little elected officials from using Keynesian monetary and fiscal juice to pull a nation out of recession. “It puts monetary policy out of the reach of politicians,” [Robert] Mundell explained]. “Without fiscal policy, the only way nations can keep jobs is by the competitive reduction of rules on business.” … Hence, currency union is class war by other means. — Greg Palast, “Robert Mundell, evil genius of the euro.” Unlike

THE economic consequences of fluctuations in the objective exchange-value of money have such important bearings on the life of the community and of the individual that as soon as the State had abandoned the attempt to exploit for fiscal ends its authority in monetary matters, and as soon as the large-scale development of the modern economic community had enabled the State to exert a decisive influence on the kind of money chosen by the market, it was an obvious step to think of attaining certain socio-political aims by influencing these consequences in a systematic manner. Modern currency policy is something essentially new; it differs fundamentally from earlier State activity in the monetary sphere.

Neoliberalism doesn’t want to do away with politics – neoliberalism wants to put politics at the service of the market. Neoliberals don’t think that the economy should be left in peace, but rather they are for the economy being guided, supported and protected through the spreading of social norms that facilitate competition and rational behaviour. Neoliberal economic theory isn’t built on keeping the hands of politics off the market, it’s built on keeping the hands of politics busy with satisfying the needs of the market. It’s not true that neoliberalism doesn’t want to pursue monetary, fiscal, family or criminal policies. It is rather that monetary, fiscal, family and criminal policies should all be used to procure what the market needs.

Keynes argued that when short-term and long-term interest rates had reached their respective lower bounds, further increases in the money supply would just be absorbed by the hoarding of money and would not lead to lower interest rates and higher spending. Once caught in this liquidity trap, the economy could persist in a depressed state indefinitely. Since economies were likely to find themselves in such conditions only infrequently, Hicks described Keynes’s theory as special rather than general, and relevant only to depression conditions. And this has remained the textbook interpretation of Keynes ever since. Its main implication is that in a liquidity trap monetary policy is impotent, whereas fiscal policy is powerful because additional government expenditure is quickly translated into higher output.

Many models are constructed to account for regularly observed phenomena. By design, their direct implications are consistent with reality. But others are built up from first principles, using the profession’s preferred building blocks. They may be mathematically elegant and match up well with the prevailing modeling conventions of the day. However, this does not make them necessarily more useful, especially when their conclusions have a tenuous relationship with reality. Macroeconomists have been particularly prone to this problem. In recent decades they have put considerable effort into developing macro models that require sophisticated mathematical tools, populated by fully rational, infinitely lived individuals solving complicated dynamic optimization problems under uncertainty. These are models that are “microfounded,” in the profession’s parlance: The macro-level implications are derived from the behavior of individuals, rather than simply postulated. This is a good thing, in principle. For example, aggregate saving behavior derives from the optimization problem in which a representative consumer maximizes his consumption while adhering to a lifetime (intertemporal) budget constraint.† Keynesian models, by contrast, take a shortcut, assuming a fixed relationship between saving and national income. However, these models shed limited light on the classical questions of macroeconomics: Why are there economic booms and recessions? What generates unemployment? What roles can fiscal and monetary policy play in stabilizing the economy? In trying to render their models tractable, economists neglected many important aspects of the real world. In particular, they assumed away imperfections and frictions in markets for labor, capital, and goods. The ups and downs of the economy were ascribed to exogenous and vague “shocks” to technology and consumer preferences. The unemployed weren’t looking for jobs they couldn’t find; they represented a worker’s optimal trade-off between leisure and labor. Perhaps unsurprisingly, these models were poor forecasters of major macroeconomic variables such as inflation and growth.8 As long as the economy hummed along at a steady clip and unemployment was low, these shortcomings were not particularly evident. But their failures become more apparent and costly in the aftermath of the financial crisis of 2008–9. These newfangled models simply could not explain the magnitude and duration of the recession that followed. They needed, at the very least, to incorporate more realism about financial-market imperfections. Traditional Keynesian models, despite their lack of microfoundations, could explain how economies can get stuck with high unemployment and seemed more relevant than ever. Yet the advocates of the new models were reluctant to give up on them—not because these models did a better job of tracking reality, but because they were what models were supposed to look like. Their modeling strategy trumped the realism of conclusions. Economists’ attachment to particular modeling conventions—rational, forward-looking individuals, well-functioning markets, and so on—often leads them to overlook obvious conflicts with the world around them.

KEYNESIAN ECONOMICS AND STIMULUS Keynesian economics is based on the notion that unemployment arises when total or aggregate demand in an economy falls short of the economy’s ability to supply goods and services. When products go unsold, jobs are lost. Aggregate demand, in turn, comes from two sources: the private sector (which is the majority) and the government. At times, aggregate demand is too buoyant—goods fly off the shelves and labor is in great demand—and we get rising inflation. At other times, aggregate demand is inadequate—goods are hard to sell and jobs are hard to find. In those cases, Keynes argued in the 1930s, governments can boost employment by cutting interest rates (what we now call looser monetary policy), raising their own spending, or cutting people’s taxes (what we now call looser fiscal policy). By the same logic, when there is too much demand, governments can fight actual or incipient inflation by raising interest rates (tightening monetary policy), increasing taxes, or reducing its own spending (thus tightening fiscal policy). That’s part of standard Keynesian economics, too, although Keynes, writing during the Great Depression, did not emphasize it. Setting aside the underlying theory, the central Keynesian policy idea is that the government can—and, Keynes argued, should—act as a kind of balance wheel, stimulating aggregate demand when it’s too weak and restraining aggregate demand when it’s too strong. For decades, American economists took for granted that most of that job should and would be done by monetary policy. Fiscal policy, they thought, was too slow, too cumbersome, and too political. And in the months after the Lehman Brothers failure, the Federal Reserve did, indeed, pull out all the stops—while fiscal policy did nothing. But what happens when, as was more or less the case by December 2008, the central bank has done almost everything it can, and yet the economy is still sinking? That’s why eyes started turning toward Congress and the president—that is, toward fiscal stimulus—after the 2008 election.

Politicians are the only people in the world who create problems and then campaign against them. Have you ever wondered why, if both the Democrats and Republicans are against deficits, we have deficits? Have you ever wondered why if all politicians are against inflation and high taxes, we have inflation and high taxes? You and I don’t propose a federal budget. The president does. You and I don’t have Constitutional authority to vote on appropriations. The House of Representatives does. You and I don’t write the tax code. Congress does. You and I don’t set fiscal policy. Congress does. You and I don’t control monetary policy. The Federal Reserve Bank does. One hundred senators, 435 congressmen, one president and nine Supreme Court justices — 545 human beings out of 235 million — are directly, legally, morally and individually responsible for the domestic problems that plague this country. I excused the members of the Federal Reserve Board because that problem was created by the Congress. In 1913, Congress delegated its Constitutional duty to provide a sound currency to a federally chartered by private central bank. I exclude all of the special interests and lobbyists for a sound reason. They have no legal authority. They have no ability to coerce a senator, a congressman or a president to do one cotton-picking thing. I don’t care if they offer a politician $1 million in cash. The politician has the power to accept or reject it. No matter what the lobbyist promises, it is the legislators’ responsibility to determine how he votes. Don’t you see the con game that is played on the people by the politicians? Those 545 human beings spend much of their energy convincing you that what they did is not their fault. They cooperate in this common con regardless of party. What separates a politician from a normal human being is an excessive amount of gall. No normal human being would have the gall of Tip O’Neill, who stood up and criticized Ronald Reagan for creating deficits. The president can only propose a budget. He cannot force the Congress to accept it. The Constitution, which is the supreme law of the land, gives sole responsibility to the House of Representatives for originating appropriations and taxes. Those 545 people and they alone are responsible. They and they alone should be held accountable by the people who are their bosses — provided they have the gumption to manage their own employees.

...the centrality of competitiveness as the key to growth is a recurrent EU motif. Two decades of EC directives on increasing competition in every area, from telecommunications to power generation to collateralizing wholesale funding markets for banks, all bear the same ordoliberal imprint. Similarly, the consistent focus on the periphery states’ loss of competitiveness and the need for deep wage and cost reductions therein, while the role of surplus countries in generating the crisis is utterly ignored, speaks to a deeply ordoliberal understanding of economic management. Savers, after all, cannot be sinners. Similarly, the most recent German innovation of a constitutional debt brake (Schuldenbremse) for all EU countries regardless of their business cycles or structural positions, coupled with a new rules-based fiscal treaty as the solution to the crisis, is simply an ever-tighter ordo by another name. If states have broken the rules, the only possible policy is a diet of strict austerity to bring them back into conformity with the rules, plus automatic sanctions for those who cannot stay within the rules. There are no fallacies of composition, only good and bad policies. And since states, from an ordoliberal viewpoint, cannot be relied upon to provide the necessary austerity because they are prone to capture, we must have rules and an independent monetary authority to ensure that states conform to the ordo imperative; hence, the ECB. Then, and only then, will growth return. In the case of Greece and Italy in 2011, if that meant deposing a few democratically elected governments, then so be it. The most remarkable thing about this ordoliberalization of Europe is how it replicates the same error often attributed to the Anglo-American economies: the insistence that all developing states follow their liberal instruction sheets to get rich, the so-called Washington Consensus approach to development that we shall discuss shortly. The basic objection made by late-developing states, such as the countries of East Asia, to the Washington Consensus/Anglo-American idea “liberalize and then growth follows” was twofold. First, this understanding mistakes the outcomes of growth, stable public finances, low inflation, cost competitiveness, and so on, for the causes of growth. Second, the liberal path to growth only makes sense if you are an early developer, since you have no competitors—pace the United Kingdom in the eighteenth century and the United States in the nineteenth century. Yet in the contemporary world, development is almost always state led.

The message: Paris and Rome must reform their economies, removing barriers to the creation of businesses and jobs. Countries with the flexibility to spend more while staying within EU deficit rules should do so, creating what Mr Draghi described as “a more growth-friendly overall fiscal stance for the euro area”. Though the ECB president did not name names, that suggestion was widely interpreted as a call for Germany, the eurozone’s dominant economic power, to raid its fiscal coffers. “The part of Mr Draghi’s speech on the fiscal stance was an innovation,” says Lucrezia Reichlin, a professor at London Business School and a former head of research at the ECB. “The idea of co-ordination between monetary and fiscal policy from a euro area perspective is a hint to Germany.” France, already used to the ECB’s grumbles that it should do more to restructure the economy, received Mr Draghi’s calls warmly.

The question is whether the ECB will be able to fight low inflation by itself. Mr Draghi signalled that the central bank could only do so much when he called last week for governments in the eurozone to do more to boost growth by loosening fiscal policy and introducing structural reforms. Wolfgang Schäuble, Germany’s finance minister, told Bloomberg News this week that monetary policy had “come to the end” of its instruments, stating: “I don’t think that the ECB’s monetary policy has the instruments to fight deflation.

In the chaotic decades following the overthrow of the Qin dynasty in 202 BC, the emperors of the newly installed Han dynasty pursued a loose fiscal and monetary policy, spending beyond their means and financing their deficit by issuing new money.

The gold standard had its advantages, no doubt. Exchange rate stability made for predictable pricing in trade and reduced transaction costs, while the long-run stability of prices acted as an anchor for inflation expectations. Being on gold may also have reduced the costs of borrowing by committing governments to pursue prudent fiscal and monetary policies.

investors tended to infer future changes in fiscal and monetary policy from political events, which were regularly reported in private correspondence, in newspapers and by telegraph agencies. Among the most influential bases for their inferences were three assumptions: that any war would disrupt trade and hence lower tax revenues for all governments; that direct involvement in war would increase a state’s expenditure as well as reducing its tax revenues, leading to substantial new borrowings; and that the impact of war on the private sector would make it hard for monetary authorities in combatant countries to maintain the convertibility of paper banknotes into gold, thereby increasing the risk of inflation.

Indeed, the consensual nature of the EU itself has meant that EU-level institutions are far weaker than certain federal institutions in the United States. These weaknesses were made painfully evident in the European debt crisis of 2010–2013. The United States Federal Reserve, Treasury, and Congress responded quite forcefully to its financial crisis, with a massive expansion of the Federal Reserve’s balance sheet, the $700 billion TARP, a second $700 billion stimulus package in 2009, and continuing asset purchases by the Fed under successive versions of quantitative easing. Under emergency circumstances, the executive branch was able to browbeat the Congress into supporting its initiatives. The European Union, by contrast, has taken a much more hesitant and piecemeal approach to the euro crisis. Lacking a monetary authority with the same powers as the Federal Reserve, and with fiscal policy remaining the preserve of national-level governments, European policy makers have had fewer tools than their American counterparts to deal with economic shocks.

The truth is, a trade deficit is not in and of itself something to fear. America doesn’t need to zero out its trade deficit to protect jobs and rebuild communities. As long as the federal government stands ready to use its fiscal capacity to maintain full employment at home, there is no reason to resort to a trade war. Instead, we can envision a new world trade order that works better, not for corporations seeking to exploit cheap labor and escape regulations, but for millions of workers who’ve received such a raw deal under previous “free trade” policies in the post-NAFTA era. Reenvisioning trade also can lead to better policies for developing countries and for the global environment.

Sticking with the $2 trillion infrastructure proposal, MMT would have us begin by asking if it would be safe for Congress to authorize $2 trillion in new spending without offsets. A careful analysis of the economy’s existing (and anticipated) slack would guide lawmakers in making that determination. If the CBO and other independent analysts concluded it would risk pushing inflation above some desired inflation rate, then lawmakers could begin to assemble a menu of options to identify the most effective ways to mitigate that risk. Perhaps one-third, one-half, or three-fourths of the spending would need to be offset. It’s also possible that none would require offsets. Or perhaps the economy is so close to its full employment potential that PAYGO is the right policy. The point is, Congress should work backward to arrive at the answer rather than beginning with the presumption that every new dollar of spending needs to be fully offset. That helps to protect us from unwarranted tax increases and undesired inflation. It also ensures that there is always a check on any new spending. The best way to fight inflation is before it happens. In one sense, we have gotten lucky. Congress routinely makes large fiscal commitments without pausing to evaluate inflation risks. It can add hundreds of billions of dollars to the defense budget or pass tax cuts that add trillions to the fiscal deficit over time, and for the most part, we come out unscathed—at least in terms of inflation. That’s because there’s normally enough slack to absorb bigger deficits. Although excess capacity has served as a sort of insurance policy against a Congress that ignores inflation risk, maintaining idle resources comes at a price. It depresses our collective well-being by depriving us of the array of things we could have enjoyed if we had put our resources to good use. MMT aims to change that. MMT is about harnessing the power of the public purse to build an economy that lives up to its full potential while maintaining appropriate checks on that power. No one would think of Spider-Man as a superhero if he refused to use his powers to protect and serve. With great power comes great responsibility. The power of the purse belongs to all of us. It is wielded by democratically elected members of Congress, but we should think of it as a power that exists to serve us all. Overspending is an abuse of power, but so is refusing to act when more can be done to elevate the human condition without risking inflation.

Hughes has put forward a number of promising policy proposals to remain competitive. These include collaboration between the U.S. private and public sectors to increase competitiveness; fiscal and monetary reform; technological innovation; the creation of a lifelong learning culture;3 and increased U.S. civilian research and development.

The Chinese people and the American people are not each other’s enemies. Rather, the main conflict in both countries is that between the elites and their wider populations. This has been driven by fiscal, industrial and monetary policies that have pushed widening wealth and income inequalities within both countries and led to significant imbalances in the commercial and financial relationship between them.

The father of the scientific method, Francis Bacon, said it this way, “A little philosophy inclineth men’s minds to atheism, but depth in philosophy bringeth men’s minds about to religion.”11

One of the reasons I was so bullish on the Deutsche mark was a radical currency theory proposed by George Soros in his book, The Alchemy of Finance. His theory was that if a huge deficit were accompanied by an expansionary fiscal policy and tight monetary policy, the country’s currency would actually rise.

called monetary policy. Fiscal policy is set by Congress, but the president has some control, too. Monetary policy is run almost entirely by government officials at the Federal Reserve System, the most powerful of whom, the Board of Governors, are appointed by the president for fourteen-year terms; the chair and vice chair are appointed by the board for four-year terms.

Bernanke, however, did not appreciate being put on the spot and tried to sidestep the question. “That is really fiscal policy, not monetary policy,” he said in his professorial tone.

To me, with more fiscal help unlikely, it seemed clear that the economy needed more support from monetary policy.

European countries might suspect that he would take the side of the debtor countries in making monetary policy or in fiscal disputes.

Tight fiscal policies were arguably offsetting much of the effect of our monetary efforts.

Since fiscal stimulus is politically unpalatable, governments have been left with only one mechanism for reviving their sluggish economies: monetary policy.

Jim Cramer’s Mad Money is one of the most popular shows on CNBC, a cable TV network that specializes in business and financial news. Cramer, who mostly offers investment advice, is known for his sense of showmanship. But few viewers were prepared for his outburst on August 3, 2007, when he began screaming about what he saw as inadequate action from the Federal Reserve: “Bernanke is being an academic! It is no time to be an academic. . . . He has no idea how bad it is out there. He has no idea! He has no idea! . . . and Bill Poole? Has no idea what it’s like out there! . . . They’re nuts! They know nothing! . . . The Fed is asleep! Bill Poole is a shame! He’s shameful!!” Who are Bernanke and Bill Poole? In the previous chapter we described the role of the Federal Reserve System, the U.S. central bank. At the time of Cramer’s tirade, Ben Bernanke, a former Princeton professor of economics, was the chair of the Fed’s Board of Governors, and William Poole, also a former economics professor, was the president of the Federal Reserve Bank of St. Louis. Both men, because of their positions, are members of the Federal Open Market Committee, which meets eight times a year to set monetary policy. In August 2007, Cramerwas crying outforthe Fed to change monetary policy in order to address what he perceived to be a growing financial crisis. Why was Cramer screaming at the Federal Reserve rather than, say, the U.S. Treasury—or, for that matter, the president? The answer is that the Fed’s control of monetary policy makes it the first line of response to macroeconomic difficulties—very much including the financial crisis that had Cramer so upset. Indeed, within a few weeks the Fed swung into action with a dramatic reversal of its previous policies. In Section 4, we developed the aggregate demand and supply model and introduced the use of fiscal policy to stabilize the economy. In Section 5, we introduced money, banking, and the Federal Reserve System, and began to look at how monetary policy is used to stabilize the economy. In this section, we use the models introduced in Sections 4 and 5 to further develop our understanding of stabilization policies (both fiscal and monetary), including their long-run effects on the economy. In addition, we introduce the Phillips curve—a short-run trade-off between unexpected inflation and unemployment—and investigate the role of expectations in the economy. We end the section with a brief summary of the history of macroeconomic thought and how the modern consensus view of stabilization policy has developed.

Soros (2013) notes that the euro crisis has already transformed the EU from a free association of states enjoying equal rights to a more or less enduring relationship between debtors and creditors. The creditors risk losing a good deal of money if a member states leaves the union, while the debtors are forced to accept conditions which can only aggravate their economic depression, and place them in a subordinate position for an indefinite period of time. In this way the euro crisis threatens to destroy the EU itself. According to the American financier these are the consequences of the fatal flaw of the European monetary union: in creating the ECB as a fully independent central bank the member states indebted themselves in a currency which they cannot control. As a consequence, when the risk of a Greek default became concrete, the financial markets reacted by reducing the status of all heavily indebted members of the euro zone to that of developing countries with large debts in foreign currencies. In this way, these members of the euro zone were treated as if they alone were responsible for their present condition. The correct response to this situation, Soros concludes, would be the creation of Eurobonds and a banking union, together with the necessary structural reforms. However, Germany refuses to choose between the two alternatives: either accept the Eurobonds or leave the euro zone. On the other hand, a solution of the crisis would also require a level of centralization of the economic and fiscal policies of the member states that is, most likely, politically unfeasible. Thus the end of monetary union appears to be only a question of time, while the position of the major German parties – pro monetary union but against Eurobonds – is clearly contradictory.

The legitimacy crisis sparked by the crisis of monetary union is aggravated by the refusal of the larger member states to accept their share of responsibility for the present predicament. A convenient theory has been advanced in order to justify this hypocritical stance. The theory, as summarized by Fritz Scharpf (2011: 21–2), runs something like this: if successive Greek governments had not engaged in reckless borrowing the euro crisis would not have arisen; and if the Commission had not been deceived by faked records, rigorous enforcement of the Stability Pact would have prevented it. So, even though the more ‘virtuous’ members are now unable to refuse to help the ‘sinners’, such conditions should never be allowed to occur again. Such arguments, which in the ‘rescuer’ countries still dominate debate about the origins of the crisis, are used to justify the disciplinary measures discussed in the preceding pages. The emphasis is on continuous, and rapid, reduction of total public-sector debt; on the European supervision of national budgeting processes; on greater harmonization of fiscal and social policy; on earlier interventions and sanctions; and on ‘reverse majority’ rules for the adoption of more severe sanctions by ECOFIN. As most experts agree, however, the received view on the causes of the euro crisis is only partly correct for Greece and completely wrong for countries such as Ireland and Spain. At any rate, it should not be forgotten that Greece was admitted in 2001 as the twelfth member of monetary union in spite of the fact that all governments knew that Greek financial statistics were unreliable.

Monetary policy involves changes in money supply or interest rates by the central bank of a country and fiscal policy involves changes in government expenditure and/or taxes.

Another contentious issue concerned how to treat countries that, even after rigorous austerity, were unable to pay their debts. Should they be bailed out by other eurozone members and the International Monetary Fund? Or should private lenders, many of them European banks, bear some of the losses as well? The situation was analogous to the question of whether to impose losses on the senior creditors of Washington Mutual during the crisis. We (Tim, especially) had opposed that, because we feared that it would fan the panic and increase contagion. For similar reasons, we opposed forcing private creditors to bear losses if a eurozone country defaulted. Jean-Claude Trichet strongly agreed with us, though he opposed other U.S. positions. (In particular, he did not see much scope for monetary or fiscal policy to help the eurozone economy, preferring to focus on budget balancing and structural reforms.) On the issue of country default, though, Jean-Claude’s worry, like ours, was that, once the genie was out of the bottle, lenders’ confidence in other vulnerable European borrowers would evaporate.

The full employment advocates’ optimism, even if genuine, could not possibly have been more misplaced, as the context of the Carter administration’s other actions in the fall of 1978 quickly revealed. Almost simultaneous to the passing of the full employment bill, Carter announced a three-part anti-inflation strategy that included restrictive fiscal and monetary policy, voluntary wage-price guidelines, and regulatory reform—almost all of which cut against the spirit of the original Humphrey-Hawkins Full Employment Act. Congress, for the first time since it went Democratic in 1932, passed a tax cut not to redistribute wealth but to give relief to the upper middle class, suggesting a very new mood among Democrats more broadly. With inflation climbing into the double digits in 1979 (topping out at 13.5 percent in his last year in office), Carter had, according to Herbert Stein, “assumed the look of a conservative in economics.

The panic of 2007–2009 had hit Western Europe hard. Following the Lehman shock, many European countries experienced output declines and job losses similar to those in the United States. Many Europeans, especially politicians, had blamed Anglo-American “cowboy capitalism” for their predicament. (At international meetings, Tim and I never denied the United States’ responsibility for the original crisis, although the European banks that eagerly bought securitized subprime loans were hardly blameless.) This new European crisis, however, was almost entirely homegrown. Fundamentally, it arose because of a mismatch in European monetary and fiscal arrangements. Sixteen countries, in 2010, shared a common currency, the euro, but each—within ill-enforced limits—pursued separate tax and spending policies. The adoption of the euro was a grand experiment, part of a broader move, started in the 1950s, toward greater economic integration. By drawing member states closer economically, Europe’s leaders hoped not only to promote growth but also to increase political unity, which they saw as a necessary antidote to a long history of intra-European warfare, including two catastrophic world wars. Perhaps, they hoped, Germans, Italians, and Portuguese would someday think of themselves as citizens of Europe first and citizens of their home country second.

Markets are reasonably efficient institutions for allocating society’s scarce economic resources and lead to high productivity and average living standards. Efficiency, however, does not guarantee fairness (or “justice”) in the allocation of incomes. Fairness requires the government to redistribute income among the citizenry, especially from the richest members of the society to the poorest and most vulnerable members. Markets systematically underprovide certain “public goods,” such as infrastructure, environmental regulation, education, and scientific research, whose adequate supply depends on the government. The market economy is prone to financial instability, which can be alleviated through active government policies, including financial regulation and well-directed monetary and fiscal policies. Samuelson

These policies would come back to haunt Europe in the aftermath of the 2008 collapse. Instead of the vigorous, countercyclical fiscal, monetary, and debt relief policies called for in the wake of a 1929-scale crash, Europe’s institutions promoted austerity reminiscent of the post–World War I era. The debt and deficit limits of Maastricht precluded strong fiscal stimulus, and the government of Angela Merkel resisted emergency waivers. Germany, an export champion, which in effect had an artificially cheap currency in the euro, profited from other nations’ misery. Germany could prosper by running a large export surplus (equal to almost 10 percent of its GDP), but not all nations can have surpluses. The European Central Bank, which reported to nineteen different national masters that used the euro, had neither the tools nor the mandate available to the US Federal Reserve. The ECB did cut interest rates, but it did not engage in the scale of credit creation pursued by the Fed. The Germans successfully resisted any Europeanizing of the sovereign debt of the EU’s weaker nations, pressing them instead to regain the confidence of capital markets by deflating. Sovereign debt financing by the ECB went mainly to repay private and state creditors, not to rekindle growth. Thus did “fortress Europe,” which advocates and detractors circa 1981 both saw as a kind of social democratic alternative to the liberal capitalism of the Anglo-Saxon nations, replicate the worst aspects of a global system captive to the demands of speculative private capital. The Maastricht constitution not only internalized those norms, but enforced them. The dream of managed capitalism on one continent became a laissez-faire nightmare—not laissez-faire in the sense of no rules, but rather rules structured to serve corporations and banks at the expense of workers and citizens. The fortress became a brig. There was plenty to criticize in the US response to the 2008 collapse—too small a stimulus, too much focus on deficit reduction, too little attention to labor policy, too feeble a financial restructuring—but by 2016, US unemployment had come back down to less than 5 percent. In Europe, it remained stuck at more than 10 percent, with all of the social dynamite produced by persistent joblessness.