Monday, August 16, 2010

Book Review (#13 of 2010)

Hard Heads Soft Hearts: Tough-Minded Economics for a Just Society by Alan S. Blinder.
This book from 1987 was recommended to me a couple times by a grad school professor of mine. Blinder is writing at the end of Reagan's presidency and is reflecting back on the good and bad economic policies that emerged from that era. Blinder is a Democrat.

"Hard-headed" policies are those that promote efficiency-- greater economic growth and higher utility for society overall. "Soft-hearted" policies are ones that deal more with equity-- dividing up the economic pie more equally. Economists and policy makers struggle to promote both efficiency and equity, and Blinder illustrates several examples where the two can meet in the middle.

He is highly critical of the supply-side arguments that won the day in 1981, and also critical of conservatives' attempts to rid the world of all forms of Keynesian thinking. He does a good job of showing that the schools of thought in economics are not so black-and-white easy to define and are constantly evolving. Modern "New" Keynesian economists have incorporated the virtues of the Lucas critique and rational expectations into their models. New Monetarists have abandoned many of the core beliefs held by Phelps and Friedman in light of the 1980s experience. And conservatives in both the rational expectations and monetarist schools of the early 1980s were highly critical of the supply-siders' claims that tax cuts could pay for themselves. The vast majority of Keynesians never believed that "money doesn't matter," and have common ground with monetarists on that important point. While you still have your hyper-rationalists, hyper-Keynesians, and hyper-monetarists, the majority of the macroeconomics profession is in the "neoclassical synthesis" that's found in the middle.

Chapter 5 deals with the history of tax reform from 1985-1986. Reagan's Treasury Department submitted a proposal to radically change the tax code-- including a plan that looks similar to the John McCain campaign plan of taxing employer-provided insurance as a benefit and giving vouchers or tax credits to people to purchase their own health insurance. That plan was butchered by Congress and special interests, but then somewhat salvaged by the Senate Finance Committee led by Bob Packer and Bill Bradley to be (almost) really sensible tax reform including a PAYGO rule.

Blinder holds up the 1986 tax reform as an example where sometimes sound economics can trump insider greed and lobbying. Blinder also gives some basic economic suggestions for dealing with pollution-- like an emissions tax, a cap-and-trade system and other ideas that are now part of the vernacular, and makes the strong case for free trade.

It's important to remember that even liberal economists like Blinder stand against harmful policies like rent controls, minimum wage laws, trade barriers (Blinder has recently retreated on his position here, though), subsidies and other policies typically touted by more left-leaning politicians. That often gets forgotten in all of the debate and vitriol-- economists still have a lot of common ground.

In all, I give this book 3.5 stars out of 5. It's almost as relevant to today as it was in 1987.

1 comment:

Greatmoose said...

Hey Justin! How are things? Been trying to catch up blogging and whatnot, so I thought I'd drop by. Hey, I got a financial question on my blog, could you lend some insight? THanks a heap!