The End of the Line

As the old joke about economics examinations has it, the questions do not change – only the answers do. Students in the late 1960s and early 1970s got top marks by grasping that it was a sacred calling of their discipline to guide the economy in ways that avoided the huge costs associated with recessions and high unemployment. This was best done through the aggressive application of strong policies, especially government deficits, to assure adequate demand. A generation later, matters were very different. By the 1990s, even at the so-called “saltwater” institutions on the US coasts where Keynesians were ascendant, students now learnt that business cycles were not a hugely important matter. Any output lost during troughs would be made up during booms and, in any case, the “great moderation” that began in the mid-1980s meant that such fluctuations as took place were not very severe. Credibility and transparency took precedence over the mitigation of recessions; above all, policy makers sought to ensure that they themselves were not sources of inflation or economic instability. And it became fashionable to suppose that the route to accelerated growth was likely to involve paying down debt, as practised by the Clinton administration in the US and a number of European countries, rather than fiscal expansion.