The Fiscal Revolution in America

by Herbert Stein

This classic study chronicles the revolution in fiscal policy that occurred in the United States between the administrations of Herbert Hoover and John F. Kennedy. Unforeseen by any economist or school of economists, this period witnessed the doctrine of balancing the budget give way to the principle of managing government expenditures and taxes to ensure stability and growth. With his characteristic wit and authority, the author vividly relates how the thinking and decisions of the leading participants interacted with changing conditions, objectives, and experience to produce this major change of policy. Kenneth Boulding said that this is the "kind of book that is all too rare" - "well-written and beautifully documented." In addition to the complete text of the original 1969 edition, this volume includes a new introduction by the author covering the past twenty years (studied in greater detail in his Presidential Economics: The Making of Economic Policy from Roosevelt to Reagan and Beyond).

Genres: Economics

550 pages, Paperback

First published April 28, 1969

Reviews

[Frank Stein · Rating 4 out of 5]

A book that shows how the Keynesian revolution captured American government, in real-time.

This book is not about the intellectual battles behind Keynesianism, though those do make some appearance. What Herbert Stein shows is that much of the theory of countercyclical spending and recessionary public works projects was widespread in the politics of the 1920s, even among semi-conservative folks like Herbert Hoover and John J. Raskob, and most of the New Deal's countercyclical policies were created without any input from Keynes or Keynesians. The real thing that changed then between the early twenties and 1938's spending boom and subsequent ones were the political circumstances and economic constraints in which leaders acted. The changes were numerous. By 1938 deficits were still bemoaned by all but large debts seemed to not be as devastating as many in the business community had once believed, and thus larger ones didn't necessarily impair business confidence. Monetary policy was loose and the United States had an abundance of gold, which meant the government didn't have to worry about it fleeing the country in case of prolonged deficits. Bond markets were larger and more liquid and thus could take increased borrowing without higher interest rates. Interest groups dependent on deficit financing had grown up to create a political class more interested increased spending. Large programs of public spending had been drafted and were "on the shelf" thanks to the work of New Deal bureaucrats, while before few, including Roosevelt, believed that there were enough viable public works projects to spend money on. On the whole, all of this made deficit financing in economic downturns seem like an easy conclusion, and political leaders responded to these shifts in environment by shifting with the winds. A similar change in countercyclical policy occurred between then and the 1948, 1954, and 1964 tax cuts. By that point taxes affected more Americans and thus cutting them would put more money in people's pockets; large government expenditures left less room for expansion; the problem of the "invisibility" of tax cut benefits had been ameliorated thanks to the immediate response in "withholding" changes (the government had begun withholding directly from paychecks in 1942, which means people saw weekly changes in cuts or raises as opposed to having to wait for next year to pay); and the slowness of divided or stalemated government made tax cuts a "quicker" solution to sudden cyclical changes than spending policy. The policies and politicians thus again shifted with the times.

Overall, Stein charts the travails of "compensatory budgets," as they were called, from the New Deal through the Eisenhower administration to the Tax Cut of 1964, which seemed to be both their culmination and their high-water mark. Stein's somewhat agnostic about how all these policies have fared in practice, and with admirable equanimity always notes that these theories, as well as opposing ones, depend on empirical facts on the ground, and that these may change. This book is thus a stiff remainder that all ideological struggles take place amidst real practices, and that sometimes theories mold to fit the times rather than vice versa.