September 13, 2004

NEVERMIND JAPAN (via Robert Schwartz):

Not Perfect, but a Recovery All the Same (BEN STEIN, 9/13/04, NY Times)

[T]he administration of the supposedly conservative Bush 43 has executed probably the most extreme and successful use of Keynesian contracyclical economic policy ever, dwarfing that of Franklin D. Roosevelt or John F. Kennedy.

Bush 43's immense tax cuts and deficits pretty much stopped a gathering recession dead in its tracks. The mechanism would be interesting to understand, if such understanding is possible.

We know far less about economics than the entry-level economics student is allowed to realize, but it is beginning to look as if much-maligned Keynesianism may be in for rehabilitation.

We may also try to understand why substantial budget deficits generated by Bush 43's antirecessionary tax cuts did not lead to any meaningful inflation. This goes against some major economic theories and is a bit of a mystery.

In the same vein, we may wonder why the substantial budget deficits did not drive up interest rates. This is even more interesting because the budget deficits were accompanied by staggering foreign trade, or current account, deficits. These might have been expected to lead to a huge decline in the value of the dollar, even larger than its 20 percent drop in the last couple of years against the euro, accompanied by higher interest rates and inflation.

This should have led to far greater American exports and a closer approach to equilibrium in trade accounts. But none of these things happened. What did happen is a substantial, though not perfect, recovery from the economic weakness that began when Bill Clinton was president. The mystery here is why, given the state of the economy, it is still often described in the news media as shaky or by speakers at the Democratic National Convention as miserable.

The facts, though, are impressive.

You'd think that after the budget surplus triggered higher rates and a recession while the deficit brought lower rates and recovery--this coming after the Reagan deficits ushered in a quarter century long far--there'd be no one left to argue that deficits and interest rates are related.

Posted by Orrin Judd at September 13, 2004 8:35 AM

The Wall Street Journal occasionally runs a chart showing line for deficits and interest for a twenty or thirty year period. Each line trends independently of the other; there is no relationship.

Posted by: Fred Jacobsen (San Fran) at September 13, 2004 8:49 AM

One of the reasons that macroeconomics can never be a predictive science is that the economy is like a sink with a hundred drains and a hundred faucets, each controlled independently. Those who sit and obsess over one drain (deficits, let's say) or one faucet (monetary policy, for example) are always going to be predicting either floods or drought but will only be right coincidentally.

Posted by: David Cohen at September 13, 2004 9:42 AM

Beware of post hoc, ergo propter hoc.

Posted by: Jeff Guinn at September 13, 2004 12:06 PM