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Puppets and Masters

J. Bradford DeLong

July 1, 1999

A Review of Lawrence Lindsey (1999), Economic Puppetmasters: Lessons from the Halls of Power (Washington, DC: AEI: 0844740810).

This is a book about four movers and shakers in today's global economy: Alan Greenspan, Eisuke Sakakibara, Helmut Kohl, and George Soros. Lindsey does a very good job of describing what they do--what their jobs are--who they are, and how they think. His capsule descriptions of how they view the world are broad-brush descriptions, lacking details and subtlety, but are amazingly accurate for all that. Alan Greenspan is the contrarian, Eisuke Sakakibara is the mandarin, Helmut Kohl is the historian, and George Soros is the speculator.

But the book is more than just about these four individuals. It is a book about the institutions that they boss and serve: America's Federal Reserve (that Alan Greenspan heads), Japan's Ministry of Finance (where Sakakibara is the senior civil servant), the West German government (that Helmut Kohl stood at the top of for more than two decades), and the world of the speculative hedge funds (of which George Soros with his Quantum Fund is the most visible and public example). And this is where the value-added in the book truly lies. For no single individual, no matter how talented, can function without a staff. And no single individual whose mindset is out of sympathy with that of the staff or the environment can get much of anything done.

Lindsey's summaries of the institutional histories and of the typical patterns of thought of the Federal Reserve, the Japanese Ministry of Finance, and the other institutional locations are--I think--the best part of the book. These are matters that are almost never covered in the press. Journalists would much rather discuss the personalities of Secretary of the Treasury Robert Rubin and Secretary of State Madeleine Albright than the cultures and orientations of the people who staff the bureaucracies they head--the Treasury believing that it is engaged in a positive-sum game of maximizing international economic integration, while State believes that it is in a zero-sum negotiation of exchanging favor for favor. And these cultures are very important.

Moreover, to the extent that it is not culture but individuals that matter, it is groups of individuals: groups of people who think more-or-less alike and work together. Journalists like to speak of the "Rubin Treasury." But it would be much more accurate to speak of the "Rubin-Summers-Froman-Lipton-Geitner-Wilcox-Truman-Sandberg-and a bunch of others" Treasury. Arcs of policy grow and shrink gradually over time, as the consensus least common denominator of agreement among senior policymakers armed with arguments by their staffs gradually shifts. So tracking the thoughts of the institutions rather than the off-the-cuff thoughts of individuals is very important.

The heads of such organizations are in positions in which action is much easier if taken along than across the grain because of the orientations and beliefs of those who surround them. Neverthless, they are not the puppets of their institutions. And they have powerful opportunities to surround themselves with like-minded people.

Thus my first quarrel with Lindsey's book: throughout it there is a tone of policy pessimism--that even powerful people are very tightly constrained by institutions and history, that strings are being pulled elsewhere by the system, and that the High Politicans spend most of their time frantically trying to pretend that they are leading the parade.

This certainly was not my experience in government. For example, the 1993 deficit reduction program was not dictated by history or institutional patterns but was instead an act of political will, guided by what turned out to be (we hope) correct economic theory--so far, so good. The amount of policy reform and change that can be achieved is limited, and the work is hard, but high officials are not tied down like Gulliver captured by the Lilliputians.

I found myself wondering whether Lindsey might have been generalizing from his own experience in the Bush administration, where there was little room for economic policy. But it was not the fault of the "system" that the strings were held tightly. Bush policy was tied down by its own actions--it was overstrong against itself--crippled by high bureaucrats who did not trust their staffs, rash convention-speech promises, and a lack of interest in economic policy at the very top of the administration. It seems to me that it was the exception not the rule.

I have a second quarrel--more a quibble--with Lindsey's book: his analyses would be more convincing (and, I believe, more correct) if he would be less attached to defending the hard-to-defend economic policy record of the Reagan administration. As it is, his discussion of "supply shocks" muddles the concept by confusing true positive or negative shifts in potential output or the price level with changes in expected inflation. He thus attributes to the Reagan administration things that could only be done (and were done) by the Federal Reserve--as if you were to thank your plumber because the overhead light in the living room now works. The Volcker Fed's decision to press for disinflation even in the face of Reagan's overexpansionary fiscal policy was a gutsy move, and it is not fair to rob them of credit for the successful decline in expected inflation that was its principal positive result.

But let that pass. For there is a third, more important, quarrel that I have...

Throughout Lindsey's book there is an undertone of pessimism. Lindsey anxiously looks back to the Great Depression, when policymakers armed with inadequate economic theories and constrained by institutions, ideologies, and politics created the worst macroeconomic disaster ever. He draws gloomy analogies between 1929 and 1999. There is, however, one very important difference between 1929 and 1999 that Lindsey does not note: we in 1999 remember what happened after 1929. And that difference is a key difference: that we remember history means that we cannot be necessarily condemned to repeat it. We can--and do--take steps to head off a 1929-style macroeconomic disaster. Thus I am much more optimistic about the future than Lindsey is.

But these three points of disagreement that I have with the book do not mean that it is a bad book. It is quite a good book: it offers a form of institutional analysis and description that is hard to get anywhere else, and that is very important to understand if you are to understand how our economy works today.

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Professor of Economics J. Bradford DeLong, 601 Evans Hall, #3880
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