Bush, Lucas, and Friedman

[Zagadka]

I want to discuss this Bushisms:

Adam, as you know, my position is, is that the dollar will seek its level based upon – based upon market forces and based upon whether or not our country can rein in spending, can recover, can revitalize our manufacturing base. And so the dollar will seek its appropriate level based upon market forces.

I remember telling people that where I came from, at least the economic book that I believe in say, if you’ve got tough times in your economy, you got to let people keep more of their own money.

Am I reading these (attempts at) statements correctly, in that Bush is basically proposing monetarism? It certainly seems in following with his belief that government spending is bad and simply giving people more money will make the economy balance out on its own. Now, neverminding that one of the concepts of economics is that people begin hoarding money in a recession, isn’t this a generally bad idea? I don’t seem to recall it working terribly well for Britain in the '80s. O_o

Secondly, how does this current recession compare to, say, that of the early '80s? I was more worried about Voltron than Reagan during that period, so my memory is a tad hazy. I recognize and, in fact, insist that the job gain statistics for the past decade have to be all but throw out the window, due to the effect of the PC/Internet industries being truly born and growing, and the current recession being the aftereffect - all normal (and expected) economic cycles. All that I do really know of the period is that Reagan slashed taxes going into office, resulting in an increase in unemployment, and corrected around '83 with government spending and adding money to circulation, followed by a slow increase in taxes until '87 when unemployment bottomed out and I had a fireman birthday cake. So, I realize that it is hard to compare the two cases (especially in regards to employment rate), but how does this apply to Bush’s tax cuts and Kerry’s crusade against them?

[hawthorne]

I don’t think either of the statements have anything to do with monetarism. The first is about exchange rate policy, the second is about taxes and fiscal policy. Monetarism was* about adopting a target rate of growth for a particular monetary aggregate as a way of controlling inflation. I suppose in many people’s minds “monetarism” became a shorthand way of referring to right-wing governments’ general approach to dealing with the simultaneous high inflation and unemployment that many economies experienced in the 1970s and 80s. This involved dealing with inflation first and having tight fiscal policy in order to squeeze inflationary expectations. This does not really resemble the current US policy, which features very loose monetary policy and almost unbelievably loose fiscal policy.
*I say “was” because nobody believes it any more. Views of the transmission mechanism have changed - these days controlling inflation is regarded as something achieved through controlling broad credit conditions through the use of interest rates rather than quantities of any specific monetary aggregate.

[Sam_Stone]

All that I do really know of the period is that Reagan slashed taxes going into office, resulting in an increase in unemployment

Whoa. How do you figure that cutting taxes cost jobs? You really need to cite or explain that.

More reasonably, the recession in the early 1980’s was due to a correction. The correction in this case was the attempt to get rampant inflation under control. This process was started under Jimmy Carter, when he appointed Paul Volcker to the Fed. Volcker instituted a tight money policy and ratcheted up interest rates. The combination created the recession, which caused the job losses. But it was a necessary correction, and Carter gets credit for starting it, and Reagan for following it through. The recession broke the back of ‘stagflation’ and put conditions in place for a healthier economy.

The tax cuts actually HELPED the short-term situation by leaving more private money in circulation.

So, I realize that it is hard to compare the two cases (especially in regards to employment rate), but how does this apply to Bush’s tax cuts and Kerry’s crusade against them?

I see no connection at all, other than that you can argue that both Reagan and Bush were engaged in classic Keynesian pump-priming as a result of dealing with a recession. Neither president caused the recession - they were handed recessions, and used deficit spending to minimize them.

Now, you can argue the merits of Keynesianism. There are very good arguments against it - one is that government never goes the other way - in true Keynesianism, you’d borrow money during recessions to minimize their impact, and then pay it back during the ‘good times’. So you’d trade off a deeper bottom for slightly slower growth later, smoothing out the effects of the business cycle. The problem is that government never wants to be fiscally responsible in good times. California is the ultimate example of that - during the tech boom when money was flowing hand over fist, rather than pay down debt the government went on an insane spending spree. Then the economy contracted again, leaving them in a mess.

Another argument against Keynesianism is that it interferes with the natural functioning of the market. Sometimes it’s good to have a short, deep recession. It’s a natural correction that should not be messed with.

But perhaps the best argument is that government is simply too slow. And if you’re too slow at this game, you can make it far worse because by the time you act to ‘stimulate’ the economy it’s already doing fine, so you just make the peaks higher and the valleys even deeper - it’s like acting in phase with a signal instead of out of phase.

That may have happened this time. The recession ended long before Bush’s tax cuts went into effect. So the result may have been additional stimulus on top of an already improving economy. That may create yet another bubble of sorts - 8.2% economic growth in the last quarter of 2003 seems somewhat excessive from that standpoint.

Of course, none of that has to do with Kerry’s criticisms, for the most part because I think Kerry’s criticisms strike me as being incoherent. He’s for tax cuts (just not on the rich), and he’s against corporate welfare (except for the long list of new corporate tax breaks he favors), and he’s for a balanced budget (except that he wants to cut taxes and increase spending).

Perhaps if you described his criticisms in detail we could debate them.