Alan S. Blinder ’67 is the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs and currently teaches Introduction to Macroeconomics.
He served as a member of President Bill Clinton’s Council of Economic Advisers, then as Vice Chairman of the Federal Reserve System from 1994–1996. Blinder is the author of several best-selling textbooks and is regularly published on the Wall Street Journal’s opinion page. His new book, “A Monetary and Fiscal History of the United States, 1961–2021,” was published on Oct. 11.
This interview has been edited for clarity and concision.
Alan Blinder: That’s the big story of the book — it's about a 60-year period of monetary and fiscal policy, which are sort of two ways to do the same thing. They work very differently, but they both can either push the economy to grow faster or slow it down.
It was striking to me — as I lived through this history and then as I wrote the history — that the attitudes in policy circles and the public toward which one should be rowing and which one should be in the boat sailing along changed a lot over time. It had a tremendous number of ups and downs, some of which are related to developments in economics, but more of which were related to developments in politics.
DP: After looking through the history of the power balance between monetary policy and fiscal policy, what do you think the ideal balance should be between the two?
AB: Monetary policy should be doing the heavy lifting, especially in normal times. It's done by people that understand the problem better, who are not worried about the next election. That said, when the job gets enormous, as it did after the financial crisis of 2008 and even more so during the pandemic crisis, it’s beyond foolish to say that only one of the two arms should do the heavy lifting.
DP: You talk in your book about episodes in which the Federal Reserve and the President were in agreement and instances where they were working against each other. Do you think it’s always good when the goals are aligned?
AB: I’m going to give you the paradoxical answer: no. The thrust of fiscal policy is usually dictated by political considerations, not economic considerations. They may coincide, but they may not. You can almost say it’s a happy coincidence, when the good economic decision and the good political decision are the same.
DP: You also focus on the increasing independence of the Fed, which you believe to be very important. You were at the Fed during the presidency of Bill Clinton, who notably supported its independence. What was it like working under a president who gave a lot of freedom?
AB: It was great. We didn't interact with the President. The mantra of the Clinton administration was ‘We don't comment on the Fed’. I really saw this from both sides. [I] went over to the Fed knowing, from having been in the Clinton White House, that he was really mad at the Fed for raising interest rates when this started in ’94. It was wonderful for the Fed that the White House was not beating up on us as we raised interest rates.
DP: How do you weigh concerns about the independence of the Fed, given that it’s not a democratically elected position?
AB: It’s a fair question. It’s often been said that independent central banking creates a democracy deficit. First of all, the Fed has a great deal of power within a very narrow range. The leadership of the Fed is politically appointed by the President, so elected presidents can influence Fed policy by choosing who they put on the Federal Reserve Board. I frown when I hear people say the Fed should take an active role in combating climate change, or inequality, both of which I believe in — the government should be doing a lot. But what should the Fed do about that? They don’t have the tools, and it’s not their business.
DP: I’m glad you brought that up. Last year, some progressives wanted Biden to replace Jerome Powell ’75 with someone who was a more climate-friendly candidate. What role should the Fed play in that policy issue?
AB: This is not an all-powerful government agency; it’s not elected, so we don’t want to be too expansive about its powers. I want to distinguish between monetary policy and bank regulation and supervision. In the monetary policy sphere, they don’t really have the tools. When it comes to supervising banks, they have some tools — I don’t want to exaggerate it — and I think they should use it. I think there’s a lot of validity to the argument that fossil fuels are a doomed industry, not this year, but in the long run. And if banks make too many loans to the fossil fuel industry, they’re gonna get left holding loans that don’t get paid back. So I think there’s a definite argument for taking environmental considerations on board in the regulatory supervisory sphere.
AB: It's a delicate balance; there’s no magic formula. An important part is for the Fed to estimate — underscore that verb three times, because you could be wrong — to make a judgment about how high the interest rates have to go to squeeze the inflation out gradually, without causing a catastrophe in the economy.
They got started late by everybody's assessment, including Powell’s. That’s why they’re raising interest rates so fast. I think they can slow down a little, but it probably has to go higher.
You have to keep aware that there are several steps along the line before higher interest rates slow down the economy. As I said to my [ECO] 101 students the other day, if you have a headache, and you take two aspirin, and two minutes later, you still have a headache, you don't take two more two aspirin. It takes some time. The Fed has to do something like that.
DP: Your book is also about times of inflation and recessions. What lessons does the book contain for this current moment?
AB: I think it has lots. The Fed has what is called a dual mandate in the law, but the instructions are vague: pursue maximum employment and keep a low inflation rate. Often those goals conflict and the central bank needs to decide what to concentrate on. Right now, we don’t have an employment problem — we have an inflation problem. And the Fed needs to concentrate on that.
DP: How has the fiscal responsibility of the two parties changed over time?
AB: It’s changed enormously. The Republicans used to be the party of fiscal rectitude. ‘We hate budget deficits. We don’t want so much spending. We’re even willing to raise taxes if necessary to get the deficit under control.’ That stopped with Reagan. Under Clinton, Democrats became the ‘let’s get the deficit under control’ party. Obama, in the early part of his administration, couldn’t do anything about that because the economy was in the soup. That’s not the time that you raise taxes or cut spending. So the deficit went up another notch. In the rest of the Obama administration, it started coming down again.
Recent history tells us that if the Republicans regain control of Congress with the Democrats still in the White House, the Republicans are going to start caring about the budget deficit like mad, even though they haven’t done anything about it when they’ve had power.
Editor’s Note: This interview was conducted on Monday, Nov. 7, prior to the midterm elections.
Julian Hartman-Sigall is a News contributor for the ‘Prince.’ Please direct any corrections requests to firstname.lastname@example.org.