The Making of Economic Policy

As late as the mid-1970s there was a "tacit consensus" in macroeconomics. In spite of the controversies that always raged, the participants shared some basic underlying premises. Business cycles were socially undesirable and needed to be tamed; the postwar business cycle was substantially less severe than in prior times; wage and price inflexibility was a source of instability; money and the financial system mattered; and normative policy analysis was the proper way to evaluate alternative prescriptions. By the mid-1980s, all these elements of the tacit consensus came under sharp attack. Real business cycle theory suggested that economic fluctations could be socially desirable and money did not matter. Historical revisionism questioned the dampening of business fluctations in the postwar era. Some economists suggested that wage and price inflexibility actually promoted economic stability. Finally, positive models of the political process were championed at the expense of traditional normative analysis.
This book explores these challenges to the tacit consensus in areas ranging from economic history, dynamic theory, time-series econometrics, game theoretic analyses of policy, and congressional politics. In each of these areas, it first reviews the current debate and then provides new analysis and new perspectives on the controversies. The book takes a critical look at recent views and marshalls appropriate empirical evidence to address competing claims. The tacit consensus can survive the challenges. The book is written for scholars in macroeconomics, economic history, and political economy as well as graduate students and other scholars interested in a broad perspective on recent developments in the macroeconomics of stabilization policy. An attempt has been made to reduce the mathematical demands on the reader as much as possible in order to reach this wide audience.