October 12, 2004

HOW'D HE SNEAK THROUGH?:

Nobel laureate calls for steeper tax cuts in US (AFP, 10/11/04)

Edward Prescott, who picked up the Nobel Prize for Economics, said President George W. Bush's tax rate cuts were "pretty small" and should have been bigger.

"What Bush has done has been not very big, it's pretty small," Prescott told CNBC financial news television.

"Tax rates were not cut enough," he said.

Lower tax rates provided an incentive to work, Prescott said.

Prescott and Norwegian Finn Kydland won the 2004 Nobel Economics Prize for research into the forces behind business cycles.


Interesting that his work is on the business cycle and that since the Reagan tax cuts, Volcker hikes, and breaking of PATCO in the early 1980s the business cycle has basically disappeared in America, with over twenty years of uninterrupted growth.

Posted by Orrin Judd at October 12, 2004 2:36 PM
Comments

America in the 19th century had far lower taxes, weak unions, and few bothersome environmental or workplace safety regulations, and they still had business cycles.

Posted by: Michael Herdegen at October 12, 2004 3:19 PM

No Fed.

Posted by: oj at October 12, 2004 4:16 PM

Since the business cycle is an inflation-driven phenomenon, and since the Fed has done a pretty good job of restraining currency expansion since 1980 -- Ronald Reagan basically threatened to eliminate the Fed if it started to spin the printing presses again -- it was logical that the cycle should have attenuated. However, it could return to its full and awful power under the reign of an Administration that felt that inflation was the answer to the mounting federal debt.

When your currency is irredeemable in specie, Weimar Germany, post-revolutionary France, and Peronist Argentina are never far away.

Posted by: Francis W. Porretto at October 12, 2004 5:24 PM

So now we have an economist, who specializes in economic policy and won the Nobel Prize, who says that Bush's tax cuts were TOO SMALL. There is now nobody with equal stature and specialization who takes the other side.

Posted by: Bret at October 12, 2004 5:49 PM

Mr. Porretto,

Inflation is only one of many factors in the business cycle. For example, inflation was quite stable and low for several years prior to the Great Depression. From the BLS, (http://data.bls.gov/servlet/SurveyOutputServelet), the CPI (with 1982 = 100 ) for 1925 to 1932 is 17.5, 17.7, 17.4, 17.1, 17.1, 16.7, 15.2, 13.7.

Also, note that Weimar Germany and Peronist Argetina had debt in someone else's currency, and we are very, very far away from being in that situation, since we borrow in our own.

Posted by: Bret at October 12, 2004 6:01 PM

oj:

Thought you didn't like the Fed ?

Fighting the wrong enemy, and all that ?

Posted by: Michael Herdegen at October 12, 2004 6:54 PM

Michael:

They're wrong about inflation now, but even that has its benefits. You can't heighten your credibility as an inflation fighter any higher than fighting it during a deflation.

Posted by: oj at October 12, 2004 7:20 PM

Bret:

Your own numbers show the problem, we were deflating.

Posted by: oj at October 12, 2004 7:22 PM

Right. Inflation didn't cause the business cycle "pullback" of the Great Depression. Inflation has a very indirect influence on the business cycle. It somewhat amplifies natural fluctuations in money velocity which introduces some instability, especially at higher rates of inflation. In theory, a perfectly informed Fed could counteract that instability.

Deflation leads to a collapse in velocity (people stuff cash in their mattress) and can be tricky to recover from as Hoover and FDR found out (or should have found out if they had tried the right things).

Posted by: Bret at October 12, 2004 7:33 PM

Bret:

Actually both inflation and some deflations (though interestingly not all) can have catastrophic psychological effects on populations. It's no coincidence that Hitler followed the hyperinflation that undermined Germans confidence in their future or that Reagan ended fifty years of conservatives in the wilderness on the back of drastic inflation.

Posted by: oj at October 12, 2004 7:50 PM

OJ,

Germany's hyperinflation was a symptom, not a cause of anything. Germany had enormous debt in other countries' currencies. There was no plausible economic possibility of their economy being able to survive in that scenario. Economic collapse was inevitable. That it happened to take the form of hyperinflation is immaterial. It was the impossible economic situation, not the hyperinflation in and of itself, and that helped open the door for the Nazis.

I'm also skeptical that inflation is what swept Reagan to power, but that is at least plausible. I personally think demographic trends and the fact that Carter was awful is what swept Reagan and his revolution to power.

Posted by: Bret at October 12, 2004 8:07 PM

No one cares about debt, but strong enough inflation or deflation mean that what you believe to have a certain value at the moment really doesn't.

Here's a good author on it:

http://216.239.41.104/custom?q=cache:9xtoEIqSKV0J:cowles.econ.yale.edu/P/cd/d11a/d1115.pdf+

Posted by: oj at October 12, 2004 8:23 PM

"I'm also skeptical that inflation is what swept Reagan to power, but that is at least plausible. I personally think demographic trends and the fact that Carter was awful is what swept Reagan and his revolution to power."

I was there. It wasn't just inflation of course. There was also chronic unemployment and recession combined with sky high interest rates rates all in one toxic stew. I would be remiss not to mention the Iran Hostage crisis.

Inflation was not the disease. It was a symptom. and Reagan was the cure.

Posted by: Robert Schwartz at October 13, 2004 12:12 AM

I miss him. I cried buckets. I won't for anyone else.

Posted by: Sandy P at October 13, 2004 12:21 AM

OJ,

Thanks for the link to the Yale article. Unfortunately, by the time I get my thoughts together regarding it, this comment thread will be long gone.

One clarification on my previous comment. When I wrote "Germany's hyperinflation was a symptom, not a cause of anything," by "anything" I meant that it wasn't the cause of any economic problems (anything economic). On the other hand, the hyperinflation, as a sympton of the economic situation, was really in the Germans' faces and would have had some level of influence of political matters, such as Hitler's rise to power.

Posted by: Bret at October 13, 2004 2:15 AM

Bret:

Yet it's notable that other nations shared debt and growth problems without becoming radicalized. Hyper-inflation--in Weimar and in other cases--seems to trigger crises.

Posted by: oj at October 13, 2004 8:20 AM

Which other hyper-inflations caused radicalization other than Weimar? Brazil, Argentina, and Peru come to mind, none of which ended up particularly radical, did they?

Posted by: Bret at October 13, 2004 11:06 AM

Peronism, military government, Maoism...

Posted by: oj at October 13, 2004 12:20 PM

And ineffective military government, at that. They are still paying the price.

Brazil is doing much better, because Lula has realized that if he governed as the union boss he was 15-20 years ago, he wouldn't last long (as Clinton said in 1993, "those $%&&*#@ bond traders!). His main temptation now is bellicose anti-Americanism, to which he will probably submit.

Peru is a complete mess.

Posted by: jim hamlen at October 13, 2004 2:33 PM
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