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One phrase perhaps best summarizes the origins, consequences, and legacies of the economic policy environment of the 1990s: tax cuts. The passion for tax cuts as a kind of “Holy Grail” of a “new classical” economics was so intense that even the major political parties, towards the end of Ronald Reagan's second presidential term, could find little about which to disagree on that score. All that was left was political pandering to targeted constituencies. For the Republicans, that meant emphasizing the usefulness of tax reduction for upper-income groups and the broadening of the argument to include proposals for reductions in the prevailing levy on capital gains; for the Democrats, the riposte was to focus on what was beguilingly labeled “middle-class tax relief.” Both parties flirted with radical suggestions to eliminate the entire structure of income taxation itself – usually toying with half-baked ideas concerning the implementation of a single- (or “flat-”) rate income tax or a national sales (or “value added”) tax. With genuine justification, an observer new to the scene might have concluded, during the 1988 presidential campaign especially, that John Maynard Keynes (not to mention his like-minded colleagues and students) had never published a word. Like most nostrums, tax reduction created more problems than it solved. Federal spending, whether engrossed by military initiatives such as those undertaken during the Reagan presidency, or propelled by transfer payment programs long on the books, rose in both absolute terms and on a per capita basis throughout the 1980s and early 1990s. [ABSTRACT FROM AUTHOR]

I argue here that the 1990s should be seen as a postwar decade. This description helps to explain some characteristics of the decade and suggests some lessons for today. Charles Feinstein, Gianni Toniolo and I published a paper a decade ago (1994) along similar lines, focusing on three postwar decades. We looked ahead at the 1990s and asserted that it would be a postwar decade like those after the two world wars, coming as it did after the end of the Cold War. The question was whether it would resemble the prosperous aftermath of the Second World War or the parlous aftermath of the First. The 1990s have now passed into history, and I can answer some of the questions we posed a decade ago in anticipation. I cannot yet answer them all. The 1990s had aspects of both the 1920s and the 1950s; it is hard to say unambiguously that it looked like one or the other. In three important ways, however, the 1990s recapitulate the 1920s in the United States: the unsustainable boom in stock prices, international capital flows, and income distribution. This similarity is worrisome, but not enough to predict the future. Even though the 1930s began with many unresolved problems, the Great Depression was not inevitable; it resulted from the mismanagement of these problems. The question for today is how well policymakers can deal with the problems we can foresee today. [ABSTRACT FROM AUTHOR]