While writing this book, I was asked many times “What’s your punch line, your ‘elevator pitch,’ the 90-second capsule summary of 60 years of monetary and fiscal history?”

As the work progressed, the answer became more and more obvious: there is no punch line. What is clear is that the complex interplay among ideas, events, politics and policy at the core of this book did not proceed in a linear fashion. Rather, it looked more like a bunch of wheels within wheels, spinning endlessly in time and space.

That said, certain themes do emerge from the historical narrative. I have selected four that carry lessons for today.

Monetary versus fiscal policy. The book’s title, of course, evokes Milton Friedman and Anna Schwartz’s classic work A Monetary History of the United States, 1857-1960. But the addition of two vitally important words — “and Fiscal” — to my title broadens the focus considerably.

The waxing and waning of monetary versus fiscal policy, both in the intellectual realm and in the world of practical policymaking, is an important thread that runs through the historical narrative. Economists in 2021 thought about the two types of stabilization policy quite differently than they had in 1961, and policymakers in 2021 acted quite differently than policymakers in 1961. How and why that changed so many times over 60 years is perhaps the principal focus of this book. The addition of fiscal policy to the narrative also forced me to delve much more deeply into the politics of policy than Friedman and Schwartz did.

Keynesian economics. Friedman and Schwartz were, of course, monetarists who rejected Keynesianism both as theory and as policy, and they were not alone. So, a second major theme of this book is the repeated ascendance and descendance of Keynesianism, a process that accompanied, and in some ways underpinned, evolving attitudes toward monetary and fiscal policy.

Budget deficits. Discussions of fiscal policy over 60 years have often revolved around implications for the federal budget deficit. Here, changes have been both revolutionary and momentous. At the beginning, large budget deficits were viewed as dangerous if not immoral. By the end, they were viewed as mother’s milk.

The administrations of George W. Bush, Barack Obama, Donald Trump and Joe Biden each boosted the federal deficit by amounts that would have been unthinkable to Dwight Eisenhower or even to John F. Kennedy. Notice that the post-2000 list of budget busters is non-partisan; it includes two Democrats and two Republicans. The true break with prior history came with Ronald Reagan in 1981. But just as with views on monetary versus fiscal policy, the evolution of thought on budget deficits was far from linear.

Central bank independence. One final theme of this book has received far less public attention: attitudes toward central bank independence. These days, the independence of the central bank is taken for granted as one of the main — and most obvious — pillars of best monetary policy practice. Hardly anyone questions its wisdom. But that was far from the case in 1961.

Who Sits in First Chair, Fiscal Policy or Monetary Policy?

Who should take the lead in formulating and executing stabilization policy, the central bank or the fiscal authorities? The choice matters for any number of reasons. Some involve effects on major macroeconomic variables such as interest rates, exchange rates and asset prices. For example, while looser fiscal policy generally raises interest rates, looser monetary policy generally lowers them. Other considerations are allocative. For example, easier money favors the homebuilding and automobile industries, while income tax cuts promote general consumer spending. The distributional effects of the two varieties of stabilization policy also differ. Monetary policy generally has its biggest effects, for good or ill, on asset holders. Fiscal policies can be tailored to favor the rich or the poor, as the politicians please. U.S. history holds examples of each.

So, whether a nation relies more on fiscal policy or more on monetary policy is consequential. Prior to 1961, the answer to this question was clear, at least in the United States: neither one. Yes, there had been fiscal changes before 1961, sometimes large ones with profound effects on aggregate demand (e.g., wartime spending and subsequent demobilizations). But those policies were not deliberately aimed at speeding up or slowing down the economy.

It is also worth remembering that the U.S. government’s official commitment to achieving “conditions under which there will be afforded useful employment for those able, willing and seeking to work” dates only to the Employment Act of 1946, and that landmark act concentrated on fiscal, not monetary, policy. It created, for example, a new Council of Economic Advisers in the White House, and it required an annual Economic Report of the President. But the act did not alter the Federal Reserve in any way or require it to report on the economy. Times have certainly changed. Economy watchers now dote on the Fed and don’t read the Economic Report of the President.

Kennedy’s 1962 speech, his subsequent advocacy of a tax cut, and the tax cut’s eventual passage in 1964 constituted a major break with prior history. It was the first time America deliberately used discretionary fiscal policy to move aggregate demand, and Kennedy advocated it despite a budget deficit. The widely trumpeted success of the Kennedy- Johnson tax cuts helped secure Lyndon Johnson’s landslide victory in 1964, elevated the stature of fiscal policy and turned Council of Economic Advisers Chair Walter Heller into a national celebrity. Monetary policy was relegated to second fiddle.

The accolades thrown at the Kennedy- Johnson tax cuts also enhanced the prestige of Keynesian economics, though only fleetingly as it turned out. Keynesian theory was basically symmetric, and consistent with that, the Heller and Okun Council of Economic Advisers urged Johnson to raise taxes (or cut spending) to fight an overheating economy. Johnson, a master politician, naturally resisted, and Congress resisted even longer. So, the 1968 tax surcharge came far too late to stop inflation. That failure had two important consequences. In the realm of ideas, monetarism made deep inroads by falsely claiming that Keynesianism was inherently inflationary. In the realm of policy, the 1968 surtax marked basically the first and last time discretionary fiscal policy would be used to cool the U.S. economy. Keynesianism turned out to be symmetric in theory but asymmetric in practice.

The long-delayed tax cut also dragged the Federal Reserve into the center of the battle against inflation. And that brought its chair, William McChesney Martin, into direct conflict with President Johnson, who toyed with the idea of firing Martin (but could not). As fiscal policy turned sharply expansionary to prosecute the Vietnam War, Martin felt it was the Fed’s duty to lean against the inflationary wind. This episode marked the first major clash between tight monetary policy and loose fiscal policy, but not the last.

Any such conflict disappeared when President Richard Nixon installed his old chum, Arthur Burns, at the helm of the Fed in 1970. No one had to ask which branch of stabilization policy was dominant because the two acted in concert, starting with highly expansionary fiscal and monetary policies designed to get Nixon reelected in 1972 and followed by major fiscal and monetary tightenings once the desired political result had been achieved. It is tempting to say that fiscal policy dominated monetary policy in those years, but it is probably more accurate to say that Nixon dominated both.

Shortly thereafter, stagflation hit the United States and other nations, first with food and energy shocks in 1972-74 and later with energy shocks in 1979-80. Both fiscal and monetary policy thus faced a strange new dilemma. Should policymakers tighten to fight soaring inflation or ease to combat rising unemployment? Since no one knew the right answer, the question of who was in charge went moot.

In fact, policy became erratic. President Gerald Ford first called for a tax increase to combat inflation in 1974, but then reversed himself and persuaded Congress to cut taxes in 1975 to fight the deep recession. The Fed vacillated between turning expansionary to give the economy a boost or contractionary to slow inflation down. However, as public revulsion with inflation grew in the 1970s, the focus of monetary policy clearly shifted away from mitigating recessions and toward reducing inflation. Especially once Paul Volcker became the Fed’s chair, monetary policy took the lead. Fiscal policy was not just relegated to the back seat; it was not even invited along for the ride.

Fiscal policy made a strong comeback, however, under President Ronald Reagan. Although the outrageous supply-side claims of the Reaganites were proven false, the standard demand-side effects of the Reagan tax cuts were both evident and large. By 1984, the American people were enjoying the convivial combination of rapid growth and lower inflation. The idea that fiscal policy could be ignored fared about as well as Reagan’s opponent in the landslide 1984 election.

The dominant fiscal concern did, however, change dramatically within Reagan’s eight years, from stimulating the economy to reducing the budget deficit. If aggregate demand was to be managed, the job would be left to the Federal Reserve, not to Congress, which according to the Washington wisdom of the day needed to concentrate on reducing the deficit. Happily, Volcker started the job and Alan Greenspan finished it. In fact, the Fed might have achieved a perfect soft landing in 1990 were it not for Saddam Hussein and the sharp oil price shock. One striking fact of the period was that no one in authority even mentioned fiscal stimulus as a possible remedy for the mini-recession of 1990-91.

Fiscal policy made another big comeback, however, under President Bill Clinton, albeit with a major twist. Worried about the deficit, Clinton staked his administration on what economists normally think of as contractionary fiscal policy: raising taxes and cutting spending. Naturally, Clinton did not advertise his economic program as a way to slow down the economy. Rather, he trumpeted the virtues of deficit reduction that, he claimed, would somehow create jobs. How, exactly, this was supposed to happen was never clear. But in a political environment in which budget deficits had become an obsession, good things were supposed to flow from reducing the deficit.

Clinton understood very well that whether his deficit reduction gamble would succeed or fail hung on the behavior of the Federal Reserve under its very Republican chair, Alan Greenspan. Perhaps even more frightening, it hung on the reactions of a bunch of bond traders in New York, London and Tokyo.

Both delivered, sort of. The Federal Open Market Committee (FOMC) held the federal funds rate at just 3 percent — about zero in real terms — for about a year. Greenspan turned out to be the consummate fine-tuner. The Fed’s first rate hike in years had to come on February 4, 1994, and it had to be 25 basis points [one-quarter a percentage point], not the 50 basis points that the majority of the FOMC preferred. Such exquisite fine-tuning continued throughout Greenspan’s long tenure as Fed chief. Walter Heller may have been unable to fine-tune the economy, and Charles Schultze may have been disinclined to try. But Alan Greenspan did both.

The U.S. economy performed splendidly under the Clinton-Greenspan policy mix of easy money and tight budgets. Business investment rose as a share of GDP, inflation remained low and tens of millions of new jobs were created. What most surprised mainstream economists was that the sizable fiscal contraction (without any monetary easing) seemed not to slow the economy at all. Rather, it precipitated a strong bond market rally that overwhelmed the fiscal contraction. Now, that was something new.

The Clinton boom was lengthened and strengthened by Greenspan’s subsequent gamble with monetary policy. As the economy soared and the unemployment rate fell to levels not seen in decades, Greenspan saw that inflation was not rising. Why not? He hypothesized that rapid productivity growth from New Economy innovations was pushing potential GDP up faster than people realized. It was a hunch at first, but the data subsequently vindicated his iconoclastic view. Due largely to this “great call,” the Fed let the good times roll into the late 1990s, and inflation stayed put at around 3 percent. Taken together, the perfect soft landing in 1994-95, the expert fine-tuning, and the great call of 1996-99 elevated Greenspan to near godlike status. He was riding high. So was the Federal Reserve and monetary policy. Who needed fiscal policy?

A fair question. But fiscal policy came back anyway with the election of George W. Bush in 2000. Bush campaigned on a large Reaganesque tax cut, which Congress subsequently passed. During the congressional debate in 2001, Greenspan tarnished his gold-plated reputation by seeming to endorse the Bush tax cuts. His thinly disguised advocacy not only crossed the line between monetary and fiscal policy but also struck many people as way too political for the Federal Reserve. Democrats were naturally displeased. But Greenspan’s endorsement of the Bush tax cuts probably didn’t hurt his chances for reappointment by Bush in 2004.

When Ben Bernanke replaced Alan Greenspan in February 2006, the U.S. economy was performing well. But this didn’t last. As what became the worldwide financial crisis surfaced and then worsened in 2007, the FOMC began cutting interest rates in September 2007, slowly at first but later aggressively. Finally, in December 2008 the Bernanke Fed hit rock bottom at a federal funds rate range of zero to 25 basis points, its version of the effective lower bound. All told, the drop in the funds rate from September 2007 to December 2008 was almost 525 basis points (5.25 percentage points). In a word, monetary policy took the lead in fighting the recession (and the financial panic) in both timing and magnitude. Fiscal policy once again played second fiddle. But this time it did play: the Bush administration managed to get a modest tax cut through Congress, roughly 1 percent of GDP.

The relative roles of fiscal and monetary policy changed once again and dramatically when Barack Obama arrived at the White House. Within a month, the new president (barely) pushed a large fiscal stimulus package — about 5 percent of GDP — through a recalcitrant Congress. But fiscal policy was not back in the driver’s seat for long. Most of the Obama administration’s subsequent efforts to combat the recession were stymied by Congress, especially after Democrats lost control of the House in the 2010 midterm elections. Monetary policy once again became the only game in town, despite Fed Chair Bernanke practically begging Congress for help. Pulling the economy out of the Great Recession was a big job, and Bernanke was worried that the Fed could not do it alone.

That last thought was a relatively new one for the Fed and for many macroeconomists at the time. In most previous recessions, several of which were caused by tight monetary policy, the central bank thought it could perform the entire job by itself, basically by cutting interest rates. Fiscal policy was thought to be too tied up in political knots to be of much help. But in the deep recession of 2007-9, the Fed found itself confronting what it had previously thought of as a Japanese problem: the “zero” lower bound on nominal interest rates. Even a wide array of unconventional monetary policies seemed insufficient to pull the economy out of the ditch. Rather than ask whether it was better to rely on monetary or fiscal policy to boost demand, Bernanke concluded that the right answer was both. It was a thought that Alan Greenspan and Paul Volcker may never have entertained.

However, fiscal stabilization policy effectively shut down after the 2009 stimulus. In fact, it turned contractionary for most of the years 2011, 2012 and 2013. Partly because the inability to push interest rates down further reduced the potency of monetary policy and partly because fiscal policy turned pro-cyclical, the recovery from the June 2009 trough was agonizingly slow. Payroll employment did not return to its January 2008 peak until May 2014.

Both the macroeconomy and monetary policy went pretty quiet from then until the pandemic hit in early 2020. But fiscal policy did not. President Trump pushed through large cuts in personal and corporate taxes in December 2017 even though the economy was humming along, showing no signs of needing stimulus. The Trump tax cuts reminded many economists of Lyndon Johnson’s Vietnam episode, dropping more fiscal kindling into an already hot economy. But just as in 1965, fiscal policy in 2017 was dictated by politics, not economics.

Many economists feared higher inflation from excess demand, as had happened after 1965. But it didn’t happen this time. Inflation remained roughly flat at slightly below the Fed’s 2 percent target even as the unemployment rate tracked down to a 50-year low in September 2019. A few months later, the Covid-19 pandemic turned the lights off on the economic data — and almost turned off the economy.

As economic activity cratered in March, April and May 2020, what Ben Bernanke had argued a decade earlier became patently obvious: ending the vicious recession would require maximum effort from both monetary and fiscal policy. Fortunately, both Congress and the Fed delivered.

The FOMC moved first, dropping interest rates to the floor, stating that they would remain there “until it is confident that the economy has weathered recent events,” and announcing a wide variety of emergency lending and liquidity facilities, many backed by the Treasury. Those actions and words quickly calmed the turbulent financial waters.

Congress passed the massive Coronavirus Aid, Relief and Economic Security (CARES) Act on March 27, followed it with another large relief package in December 2020 and then capped off roughly $5 trillion in total fiscal support with President Biden’s huge American Relief Plan in March 2021. Amazingly, personal disposable income actually rose despite the economic devastation.

It was, of course, the pressure of events, not any new developments in the world of ideas, that elevated both monetary and fiscal policy to Defcon One in 2020-21. No one worried then about whether monetary or fiscal policy should sit in first chair. Nor did many people worry — at least at first — about the possible ill-effects of hyper-loose monetary policy or mammoth budget deficits.

Looking back over 60 years, the proverbial arc of history bent slightly toward monetary policy. Both economists and policymakers looked more toward the Fed than toward Congress in 2021 than in 1961. But that trend was minor compared to the notable cycles, the spinning wheels. Fiscal policy was on top in the 1960s, Richard Nixon dominated both in the early 1970s, and Paul Volcker didn’t seek fiscal help in conquering inflation in the 1980s. The Reagan and Clinton administrations thrust fiscal policy into the spotlight again, albeit in starkly different ways. Reagan slashed taxes and ballooned the deficit; Clinton seemed to grow the economy by shrinking the deficit. Through most of the 1984-2008 period, fiscal policy was preoccupied by the budget deficit and left the stabilization job to the Fed. But this monopoly position became untenable when the financial crisis and then the pandemic recession exceeded the central bank’s ability to stimulate the economy. Major assists from fiscal policy were needed.

The Rise and Fall and Rise and … of Keynesian Economics

Most of the ups and downs of fiscal versus monetary policy in the real world over these 60 years reflected the press of events. But some reflected the ups and downs of Keynesian ideas, at least where fiscal policy was concerned. Monetary policy, in contrast, was always Keynesian in the practical sense of turning expansionary when the economy slumped and contractionary when inflation rose. The Fed’s monetarist experiment of 1979-82 was in some sense the exception that proved the rule: it ended because the economy needed “Keynesian” stimulus.

Keynesianism first came to dominate Washington thinking in the Kennedy administration and quickly scored a major policy victory with the Kennedy-Johnson tax cuts. However, the sands soon shifted away in both the intellectual and policy arenas.

In the intellectual arena, the shoots of what would subsequently blossom into monetarism started to sprout with Friedman and Schwartz’s monumental work. Monetarism continued to ascend during the 1960s on Friedman’s persuasiveness and on a wave of rising inflation, which monetarists successfully blamed on Keynesian policies. Inflation gave monetarism another boost when a series of supply shocks struck the United States and other countries in the 1970s and early 1980s. It was ironic: inflation actually soared for reasons unrelated to the money supply, but monetarists and other foes of Keynesianism successfully blamed Keynesianism again.

In the policy arena, the long delay in passing the 1968 tax surcharge and its apparent failure to curb inflation had two major effects. First, it tarnished the soft glow of Keynesianism. Second, it suggested that fiscal policy might be usable only to boost demand, not to rein it in. Contractionary policy to fight inflation fighting would have to be left to the Fed.

The stagflation of the 1970s also opened the door to another intellectual challenge to Keynesian theory: “new classical” economics. That academic approach was and still is often termed the “rational expectations revolution,” but that’s a misnomer. What gave new classical models their startlingly anti-Keynesian implications was not the assumption of rational expectations but rather the obviously false assumption that all markets clear quickly. In this imaginary world, monetary policy could affect output or employment only if it surprised economic agents, a tall order under rational expectations.

New classical economics, with this “policy ineffectiveness” result, conquered vast swaths of academia in the 1970s and 1980s, but it never developed much of a following among central bankers or among the many PhD economists who worked for them. After all, the doctrine said they were all wasting their time. Neither Arthur Burns nor Paul Volcker, the two Fed chairs for most of that period, ever believed in monetary policy ineffectiveness. More important, central bankers all over the world saw that both inflation and real economies were crushed by Margaret Thatcher’s excruciatingly tight money in the United Kingdom and by Volcker’s excruciatingly tight money in the United States. No real effects?

As Keynesianism declined in intellectual circles, monetarism rose in policy circles, culminating in the Fed’s alleged conversion to monetarism in 1979. Monetarists felt vindicated. But Keynesians winced, having absorbed William Poole’s (1970) lesson: wild fluctuations in money demand would likely lead to wild gyrations in both money growth (displeasing monetarists) and interest rates (displeasing everyone). Both happened, dealing a body blow to monetarism.

Nonetheless, Keynesian ideas were still under siege in the academy when Ronald Reagan demonstrated both the power and appeal of Keynesian tax cuts in the real world, though he called them “supply side” tax cuts, instead. Ironically, this episode marked the last gasp for fiscal policy as a macro stabilizer for quite a while. Rather, the large chronic deficits left behind by Reaganomics made reducing the yawning budget deficit the new focus of fiscal policy. What might be called the anti-Keynesian era began with repealing most of the Reagan business tax cuts in 1982, went through several false starts (e.g., Gramm-Rudman-Hollings) in the mid-1980s, and became the focus of President George H. W. Bush’s fiscal policy, culminating in the landmark 1990 budget agreement.

All that was prologue to the Clinton presidency, which focused like a laser beam (a favorite Clintonism) on reducing the federal budget deficit. The success of Clintonomics fostered some thoroughly anti-Keynesian thoughts, such as negative fiscal multipliers. You can create jobs by reducing the budget deficit? This anti-Keynesian view of the world would come back to haunt policymakers in the Obama years.

But did U.S. prosperity under Clinton really prove Keynes wrong? No. Clinton’s deficit reduction program was heavily backloaded; there was little budget cutting in the near term. So, perhaps the correct lesson was that fiscal policy can stimulate the economy today by credibly promising deficit reduction in the future. The likely mechanism works through the term structure of interest rates: the promise of lower short rates in the future, if believed, should reduce long rates today. High credibility, not a negative fiscal multiplier, is the key to making this trick work.

When George W. Bush and Al Gore battled for the presidency in 2000, the major economic policy debate was over what to do with the federal government’s mounting surpluses. Bush wanted a supply-side tax cut. Gore wanted to pay down the national debt. Neither camp’s rhetoric sounded Keynesian. Thus, during the entire period from 1982 to 2001, most economists who thought about stabilization policy thought first, second and third about monetary policy.

While that was happening in the policy world, Keynesians in the academy were busy fighting off monetarism, supply-side economics, new classical economics and even socalled real business cycle theory, a curious doctrine that viewed recessions as instances of negative productivity growth. But academic fashions began to turn back toward Keynesianism in the late 1990s as proponents of new classical economics began to admit that macro markets do not clear instantly. Rather, prices and wages are “sticky,” as Keynesians had always insisted, and such stickiness leads to Keynesian policy implications even under rational expectations.

Just as there are no atheists in foxholes, even policymakers who profess hostility to Keynesianism in principle tend to turn Keynesian in practice when a recession strikes. This is exactly what happened in 2001. George W. Bush found a new rationale for his supplyside tax cuts: the economy needed fiscal stimulus. The Fed, for its part, slashed the federal funds rate even though Alan Greenspan never (to my knowledge) called himself a Keynesian. The outcomes would not have been much different if monetary and fiscal policy had been run by James Tobin and Walter Heller.

But this was just a small preview of what was to come. As the global financial crisis brought on the Great Recession of 2007-9, policymakers all over the world turned very Keynesian very quickly. In a series of hastily arranged summit meetings in 2008 and 2009, leaders of the world’s major countries pledged to pursue Keynesian policies, though without invoking Lord Keynes’s name.

Though hailed at the time as marvelous examples of international cooperation, those summits were actually foxhole behavior writ large. Since virtually every nation faced the same problem — a shortage of aggregate demand — virtually every nation pursued its own national interest by boosting aggregate demand. The world went Keynesian by necessity. Oddly enough, “communist” China led the way with a massive fiscal stimulus in the neighborhood of 10 percent of GDP. The United States followed with about 5 percent of GDP at the start of the Obama presidency.

Once again, however, the romance did not last. In the United States, the Republicandominated Congress quickly reverted to fretting about the budget deficit, and fiscal policy turned contractionary during the years 2011- 13 over the objections of both President Obama and Fed Chair Bernanke. In fact, Congress nearly drove the economy over a steep fiscal cliff in 2013.

When Donald Trump assumed the presidency in January 2017, it was déjà vu all over again. His income tax cuts resembled George W. Bush’s in magnitude and structure, but there were a few noteworthy differences. Trump’s tax cuts came at a time of low unemployment, whereas in 2001 the economy needed stimulus. Bush’s tax cuts originated amid growing budget surpluses, while Trump’s were piled atop an already-large budget deficit. Finally, Trump’s supply-side rhetoric far surpassed anything the Bush team ever dared claim. If you took Trump at his word, the tax cuts would propel annual GDP growth into the 5-6 percent range, reduce the budget deficit, and then produce surpluses large enough to pay down the national debt. Of course, no serious economist believed those claims. I wonder if the Trump White House did.

Regardless, the 2017 tax cuts left the federal budget far out of balance when the pandemic struck early in 2020. At that point, just as in 2008-9, it was all Keynesian hands on deck all over the world, with nobody caring much about labels. The Fed cut interest rates to the bone in March 2020. By the end of that month, Congress had passed the monumental CARES Act, and more fiscal relief would come in December 2020 and then again in March 2021. Overall, the massive fiscal response to Covid reminded some people of the mobilization to fight World War II. So did the rising national debt.

Looking back over 60 years of fiscal policy, attitudes in 2021 were certainly more Keynesian than they had been in 1961. But the road was both bumpy and political. Defining Keynesian policy as belief in using fiscal policy to influence aggregate demand, I would classify American presidents into three baskets. Kennedy, Johnson, Nixon, Ford, Carter, Obama and Biden were all basically Keynesians, both in principle and in practice. Reagan, Bush II and Trump shunned the Keynesian label but acted Keynesian in practice. The only fiscal episodes that can be characterized as truly anti-Keynesian occurred under Bush I and Clinton, when the policy focus was squarely on reducing the deficit no matter what.

Monetary policy leaders from William McChesney Martin through Jerome Powell are easier to classify. With the possible exceptions of Bernanke and Janet Yellen, none of them wanted to be called Keynesians. But they all sought to manage aggregate demand along Keynesian lines. What’s in a name?

Do Budget Deficits Matter?

Attitudes toward the federal budget deficit and the national debt changed dramatically over the 60 years covered in this volume. Indeed, they changed several times.

President Eisenhower would have thought the question “Do deficits matter?” silly. To him and many others in the 1950s (and since), deficits were fiscally imprudent, morally repugnant, a burden on our children and grandchildren and, if you listened to any of his economic advisers, also raised interest rates and crowded out private investment. Deficits were thought to be inflationary even if they were not monetized by the Fed, although it was not clear exactly how. Keynesianism, not incidentally, got a black eye because it seemed to countenance, perhaps even to advocate, budget deficits.

The Kennedy and Johnson administration marked the first big break from this tradition, as taxes were cut despite a preexisting deficit. As the 1960s progressed, the accusation that budget deficits were inflationary even without money creation faded away, perhaps under the intellectual pressure of monetarism. (Inflation is always and everywhere a monetary phenomenon.) A different accusation replaced it: deficits burdened future generations by crowding out investment. That burden, however, did not deter Richard Nixon from running large deficits to assist his reelection efforts in 1972. No ideologue he.

Jimmy Carter, whose presidency followed the Nixon-Ford years, took deficits more seriously, perhaps even as a moral outrage. (Carter was a stern moralist.) The federal deficit nevertheless hung around 2.5 percent of GDP throughout his term. Ironically, that “large” deficit was one of the points on which candidate Reagan pummeled Carter in the 1980 campaign.

Ironically, indeed. Early in the Reagan presidency, the budget deficit exploded from 2.5 percent of GDP in fiscal 1981 to nearly 6 percent of GDP in fiscal 1983, at the time the largest, relative to GDP, since World War II. Yet the balanced budget ideology remained alive even as fiscal policy was pushing actual budget deficits to new heights. You want consistency? Supply-siders squared the circle by claiming that the Reagan program would balance the budget within four years.

That didn’t happen, of course, and reducing the budget deficit became the preoccupation of fiscal policy for the next 15 years or so. The pay-as-you-go system that had been agreed to by President George H. W. Bush and the Democrats in 1990 can be thought of as requiring budget balance at the margin, because any deficit-increasing policy had to be accompanied by equal and opposite deficit- reducing policies. Indeed, the rhetorical attraction of a balanced budget was so strong in the 1990s that both Bill Clinton and Al Gore routinely referred to budget surpluses as “balanced budgets.” Arithmetic be damned.

That background makes it all the more astonishing that President George W. Bush returned the nation to large budget deficits so quickly and so easily. Congress terminated pay-as-you-go. The tax cuts of 2001 and 2003 were not paid for. The wars in Afghanistan and Iraq were not paid for. Even a big new entitlement program, the Medicare prescription drug benefit, was not paid for. All this quickly transformed the federal budget position from a surplus of 1.2 percent of GDP in fiscal 2001 into a deficit of 3.3 percent in fiscal 2003. No more Eisenhower Republicans.

By this time, a clear political pattern had emerged: Republicans railed against budget deficits when a Democrat was in the White House but accepted them willingly, even eagerly, when a Republican was in the White House, especially if the deficits stemmed from tax cuts for the wealthy. In retrospect, the Reagan episode was not a deviation from the norms of the party that once stood for fiscal discipline. Rather, it marked the start of a new normal, interrupted by Bush I and Clinton.

Barack Obama took office in January 2009 at approximately the bottom of the Great Recession. His new administration managed to push through a large deficit-increasing stimulus bill with negligible Republican help. But after that, the fiscal stimulus door slammed shut again. Increasing the deficit further was out of the question politically. That frugal attitude condemned the United States to contractionary fiscal policy for most of the remainder of the Obama administration. But it did not survive the election of the next Republican president.

The large tax cuts that Trump pushed through Congress in 2017 were, once again, not paid for. And I wonder how many members of Congress actually believed the outlandish claims by the president and his secretary of the treasury that yet another supply- side miracle would rescue the budget from revenue losses. After all, the promised supply-side miracles of 1981 and 2001 had not happened.

When the pandemic struck in early 2020, no one in either party fretted much about the budget deficit, which was already 4.6 percent of GDP in fiscal 2019. The nation mobilized fiscal policy for war on the coronavirus, only the federal government had sufficient borrowing capacity, and the Treasury paid extremely low interest rates to borrow. Furthermore and important, the Federal Reserve purchased a large share of the newly issued Treasury debt, dropped interest rates to the floor, and vowed to keep them there. It was all hands on deck to minimize the damage that Covid-19 was wreaking on the economy, even if that meant epic deficits, substantially monetized.

The relaxed and seemingly bipartisan attitude toward deficits didn’t last, however. As funds from the CARES Act (March 2020) started to peter out, a fiercely partisan debate emerged over the advisability and size of any follow-up relief package. With tax cuts no longer commanding center stage, congressional Republicans bridled at the large budget deficit, which hit a mind-blowing 15 percent of GDP in fiscal 2020. Nonetheless, Congress eventually agreed on a new relief bill, which passed with large bipartisan majorities in December 2020. President Trump even groused that the relief checks were too small.

Enter President Joe Biden. With majorities in both Houses of Congress, albeit razor-thin ones, Biden was able to pass another huge budget-busting Covid relief bill in March 2021, including another round of relief checks. Tellingly, the votes in both chambers were entirely partisan, forcing Vice President Harris to break a 50-50 tie in the Senate. Republicans objected on many grounds, one of which was the explosion of the national debt, which hit 96 percent of GDP by the end of fiscal 2021. The nation had come full circle, from a balanced budget in fiscal 1960 to a deficit of over 12 percent of GDP in 2021.

Against this backdrop, Biden and the Democrats had trouble pushing through more spending. A bipartisan infrastructure bill amounting to over $1 trillion did pass in 2021, but it at least carried a fig leaf of being paid for.

The Rise (Without a Fall) of Central Bank Independence

One of the starkest and yet least remarkedupon changes in the monetary-fiscal realm since 1961 has been the prevailing attitude toward central bank independence (CBI). The value of CBI has been axiomatic to economists for decades. More important, most of the world’s democratic governments apparently agree; they have granted their central banks a remarkable degree of independence, either de jure or de facto. But many economists I’ve talked to are surprised to learn that the doctrine of CBI was not widely accepted in the 1960s and 1970s, not even in the United States, where the Federal Reserve’s independence stood out as unusual by world standards.

Even some prominent economists questioned the wisdom of CBI. Two economic giants of the left and the right, James Tobin and Milton Friedman respectively, disagreed on almost everything. But they nonetheless agreed that the Fed should not be independent. Even Fed Chair Martin thought of the Federal Reserve as part of the economic team.

Attitudes toward CBI were starkly different by 2021. But that evolution of ideas did not happen overnight. The low point for CBI in the United States probably came under Nixon and Arthur Burns, when the president thought he could and should heavily influence monetary policy and the Fed chair seemed to acquiesce.

A few years later, with Paul Volcker leading the Fed, the situation changed dramatically. Jimmy Carter knew that Volcker would be staunchly independent, but he gave his new Fed chief free rein to fight inflation anyway. Volcker grabbed the reins like a man on a mission, asserted the Fed’s independence, and relentlessly pursued an aggressive anti-inflation policy that caused a deep recession. The virtues of CBI have rarely been questioned since then, at least not in the United States.

Yet in the 1980s, if you looked around the world, independent central banks were still the exception, not the rule. The Federal Reserve, the Deutsche Bundesbank and the Swiss National Bank stood nearly alone. The inflationary experience of the 1970s and 1980s helped change all that. Yes, Margaret Thatcher had conquered Britain’s high inflation from 10 Downing Street without an independent central bank. But most other nations, led (intellectually) by New Zealand, saw more promise in the Volcker/Bundesbank examples: make your central bank independent and give it a mandate to reduce inflation. The United Kingdom subsequently adopted that norm, too.

When the Treaty of Maastricht [limiting national monetary and fiscal freedom] was drafted and approved by European governments in 1992, it seemed only natural to make CBI a condition for membership in the currency union. And when the European Central Bank opened for business in 1999, it was the most independent central bank in the world, having essentially no government to which to report. Since then, despite occasional grumblings about the “democracy deficit” posed by the ECB’s extreme independence, there have been no serious threats to that independence, which after all is inscribed in a multinational treaty.

The final two chapters of the story of Fed independence were strikingly different from the earlier ones. They also pose questions for the future.

In fighting the mega-crises of 2007-9 and 2020-21, the Fed, like other central banks, found itself cooperating with the Treasury in unusual ways. Some critics saw such close cooperation as tantamount to subordinating the central bank to the Treasury. For example, Allan Meltzer opined that “Chairman Ben Bernanke seemed willing to sacrifice much of the independence that Paul Volcker restored in the 1980s. He worked closely with the Treasury and yielded to pressures from the chairs of the House and Senate Banking Committee and others in Congress.” Other than the phrase “worked closely with the Treasury,” Bernanke disagreed completely. Was the Treasury or the Fed in first chair?

It is worth noting that the Fed’s enormous display of power in 2008-9 led Congress to consider several ways to clip its wings in the Dodd-Frank Act of 2010. But the Bernanke Fed successfully fended off almost every proposal to curtail its powers and emerged from the debate with more authority than when it went in. So, who was subordinated to whom?

The more recent episode was mostly wound down when this book went to press. When Congress, the Treasury and the Federal Reserve geared up to fight the Covid-19 crisis in 2020, the Fed was pushed into a wide variety of unusual measures. Some of the central bank’s assignments were traditional: turn monetary policy highly expansionary and safeguard financial stability. But Congress and the Treasury also called upon the Fed to promulgate some lending facilities that were far from normal. One example was the illfated Main Street Lending Program, which the Fed was ill-equipped to execute. Another was backstopping loans that banks made to small businesses under the Paycheck Protection Program, most of which were not expected to be repaid.

As Chair Jerome Powell never tired of pointing out at the time, the Fed is in the business of “lending, not spending”; it doesn’t expect to take losses on its loans. So, Congress squared the circle by having the Small Business Administration absorb any losses from Paycheck Protection Program loans. Nonetheless, the program’s never-to-be-repaid loans were a pretty unusual entry on the Fed’s balance sheet.

That said, the Fed did not push back hard against assuming these new responsibilities under the unusual and exigent circumstances of 2020. So, as long as the post-Covid-19 world does not deviate importantly from what came before, central bank independence seems likely to survive the pandemic.