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November 19, 2007

What Happened?

Speaking of Stiglitz's article in Vanity Fair, his scoring of the last few decades is about as concise a summary of the liberal's take on recent economic history as I've seen:

The Clinton years were not an economic Nirvana; as chairman of the president’s Council of Economic Advisers during part of this time, I’m all too aware of mistakes and lost opportunities. The global-trade agreements we pushed through were often unfair to developing countries. We should have invested more in infrastructure, tightened regulation of the securities markets, and taken additional steps to promote energy conservation. We fell short because of politics and lack of money—and also, frankly, because special interests sometimes shaped the agenda more than they should have. But these boom years were the first time since Jimmy Carter that the deficit was under control. And they were the first time since the 1970s that incomes at the bottom grew faster than those at the top—a benchmark worth celebrating.

By the time George W. Bush was sworn in, parts of this bright picture had begun to dim. The tech boom was over. The nasdaq fell 15 percent in the single month of April 2000, and no one knew for sure what effect the collapse of the Internet bubble would have on the real economy. It was a moment ripe for Keynesian economics, a time to prime the pump by spending more money on education, technology, and infrastructure—all of which America desperately needed, and still does, but which the Clinton administration had postponed in its relentless drive to eliminate the deficit. Bill Clinton had left President Bush in an ideal position to pursue such policies. Remember the presidential debates in 2000 between Al Gore and George Bush, and how the two men argued over how to spend America’s anticipated $2.2 trillion budget surplus? The country could well have afforded to ramp up domestic investment in key areas. In fact, doing so would have staved off recession in the short run while spurring growth in the long run.

But the Bush administration had its own ideas.

Stiglitz, as you might imagine, goes on to detail what those were, and why they might have fallen short of the optimal policy path open to the country. But then, you wouldn't want to read such spurious slanders of this administration's wise economic management, would you?

November 19, 2007 in Economics | Permalink


We should be more skeptical of claims of Keynesian stimulus. After all, Bush's tax cuts were also a Keynesian stimulus; they even had sunset dates as any follower of Keynes would endorse. Obviously, Bush's reasons for doing what he did were different, but the tax cuts themselves were supposed to counteract the business cycle and then expire, just as Keynes would have wanted.

The Clinton economy, in contrast, wasn't fed by artificial stimuli, but by a boom in investment that resulted from reductions in government borrowing. That's a lot better-- and more responsible-- way to manage an economy.

I don't mind arguments that we need spending on infrastructure because the infrastructure is broken. But let's stop the talk of running deficits to stimulate the economy. It's a bad idea, as Bush has actually proven.

Posted by: Dilan Esper | Nov 19, 2007 3:58:59 PM

Dilan Esper,

I probably shouldn't be disagreeing with you considering you know far more than I do, but

* weren't the "sunset clauses" in the tax cuts disingenuous? after all, any vote by any Democrat not to continue the cut would be considered a politically suicidal "tax increase" ...

* if Bush's tax cuts were "Keynesian" so were Reagan's. Nu? Is trickle down economics Keynesian now? I should think a Keynesian would have targeted tax cuts differently ...

* what caused that boom in investment again? I'd argue it was a bunch o' boomers afraid that if they didn't invest enough money for retirement, they'd have to eat dog food when the social security crisis(TM) began ... and I would argue that this glut of investment wasn't very benign. when it first started in the 1980s, the push by fund managers hoping to gather and reinvest dividends on the behalf of boomers led to an obsession with corporate profits which fueled economically disastrous rounds of layoffs. Later on, the influx of capital into the stock market (as opposed to into banks which could have loaned the money where capital was actually needed) inflated the tech bubble as there was so much demand for investment vehicles the market (nu? the stock market is a market like any other) started meeting that demand with more and more marginal supplies of investment vehicles ...

we're still suffering from this last one as everything, including mortgages, gets monitized and sold as investments (rather than the bank taking your money and putting it in Joe Sixpack's house a la It's a Wondeful Life): while a bank can always say "well, if ya can't pay the balloon payment, better you pay us back at interest beyond the rate of inflation so we still earn some money than you default and we get a house who's value is poised to fall", if the bank has sold that to investors who've paid money based on the rate of return promised in the balloon payment, someone is bound to loose money somewhere when the borrower has to either renegotiate (and with whom?) or defaults (unless people are lying when they say "you should feel sorry for the lenders -- defaults hurt them more than they hurt the people who default").

Posted by: DAS | Nov 19, 2007 4:12:26 PM

"After all, Bush's tax cuts were also a Keynesian stimulus; they even had sunset dates as any follower of Keynes would endorse."

Cutting taxes for the very rich is not a Keynesian policy in any meaningful sense of the words.

Posted by: ajay | Nov 20, 2007 10:12:29 AM

ajay points to an important issue. Lots of people like to muddy what a Keynesian action really is. It's not just adding to the amount of money in the economy, because it's well understood that part of recessions is a trapping of credit within banking institutions as they pull back from risk. Thus, giving money to rich people (through tax cuts) which they then invest is not an effective Keynesian stimulus, because the money largely gets trapped in the safe-investment credit trap.

Posted by: Meh | Nov 20, 2007 4:53:01 PM

The key word in Stiglitz's discussion of spending under Bush is "investment." Bush did ramp up domestic spending dramaticly. You have to go back to the Lyndon B. Johnson years to find a comparable run up in spending.

A difference between Johnson and Bush is that LBJ and his supporters were prepared to defend his "Great Society" programs. When Bush supporters are asked to justify Bush's spending, they dodge the issue. I don't know how to measure this, but it seems likely that most of the spending increases (like most of the tax cuts) went into the pockets of wealthy people, as a reward for providing campaign contributions. As ajay and Meh say, spending that goes mostly to wealthy people does not provide much Keynesian stimulus.

Posted by: Kenneth Almquist | Nov 22, 2007 3:46:00 PM

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