CHAPTER TWELVE: GOVERNMENT STABILIZATION POLICIES
● While the understanding of macroeconomic variables is important, macroeconomics properly speaking is about government macro-management of a money oriented economy.
● Macroeconomic policy represents a set of fiscal and monetary policy by which government attempts:
● to reduce fluctuations in the economy, that is, prevent inflation and recessioncumunemployment from getting out of hand;and to minimize their impact on consumers.
● Macroeconomics continues to be controversial because it has been added to the traditional ideological conservative versus liberal political debate over the proper role of government in a market economy.
● Pro-market economists and conservative politicians (mostly Republicans) prefer little intervention because, in their view, government involvement, like most things government, is never effective.
● Macroeconomists, political economists, and liberal politicians (mostly Liberal Democrats) opt for more government involvement because they believe government intervention, like most things liberal, is both necessary and effective.
Questions is: So who is right?
● While something could be said for both sides, the old suggestion that the market with only minimal or no government intervention would remain robust and stable over a protracted period of time has no historical record to back it up.
● Capitalist economies have never demonstrated the ability to operate at full employment within stable prices.
● The historical record shows that the U.S. economy has by itself not demonstrated the capability of staying away from either inflation or recession.
● On the other hand, government attempts at macro management of the economy is now generally accepted, even if the details are still controversial
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● Government is the only institution with the size and power to intervene to keep the economy stable.
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● Government macro-management of the economy has become part of the U.S. economy; and every government since Franklin D. Roosevelt has found it necessary to intervene in the economy.
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● Government macro-management has some bragging rights: The long and deep recessions or depression of the 1930s has not reoccurred since the inception of government intervention in the mid-1930s.
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● •Meaning that government intervention which was meant to be periodic, a temporary "fine-tuning" measure, has become institutionalized so that at anytime since the Great Depression, the US economy like that of all other market oriented economies has been under one or the other form of government macro economic policy.
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● But there is a cost to everything: The downside of permanent government macro-management of money economies is that it attempts to take credit whenever the market is strong and stable, (something often denied for political reasons) but unable to shake of the blame whenever the economy goes soft and unstable.
Question: What are the instruments for macro-managing the economy?
● Monetary policy: uses the monetary measures of the discount rate, the reserve requirement and open market operations to control the level of money supply and hence, the level of economic activity.
● Fiscal policy: manipulating government expenditure and tax policy to control the money supply.
● Supply-side economics: the negation of both fiscal and monetary policy; reducing government expenditure, taxes, and regulation on the private sector and hence, increasing private sector discretion in controlling the level of supply.
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MONETARY POLICY
● Monetary policy operates on the assumption of a direct link between three things: (a) the demand for money, (b) the level of the money supply or liquidity, and (c) the level of economic activity.
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● Money has three functions: as a measure of the relative value of goods and services; as store of value (jewels, homes, cars), and as a means of exchange.
● The demand for money refers to consumers' preference for immediate consumption (exchange now) over exchange in the future (savings or storing of money values for consumption in the future).
● The higher the demand for money, the higher is the level of liquidity, and the higher is the level of economic activity.
● So monetary policy is essentially a set of contrasting incentives the government waves at consumers to induce them to either increase or decrease the demand for money and hence the level of liquidity.
● To fight recession, government will encourage consumers to increase their demand for money in order to increase current consumption.
● To fight inflation, government will adopt policies that discourage consumers' demand for money and immediate consumption; in order words, to postpone consumption into the future.
Question: What is the Federal Reserve System's role in macro-managing the economy?
● The Federal Reserve System is the central bank of the United States and the institution through which government carries out its monetary policy.
● The banking system is a critical part of US political economy, where government and the private banking system cooperate to ensure the economic health of the country.
● Not all commercial banks are members of the Federal Reserve System, but most are.
● The government can act through the banks because their chief commodity, money, is nothing but the debt of commercial banks and government. Money is essentially government IOUs. (More on this shortly).
● The Federal Reserve System is designed for maximum independence from other branches of government, especially, the executive presidency, in order to suggest the independence of monetary policy from political controls, especially of the sitting president.
● The Federal Reserve Board of Governors:or the Fed, the core of the Federal Reserve, consists of seven appointees of the president confirmed by the Senate, and is most directly responsible for setting individual bank reserve requirements, as well as the final discount rate.
● The 12 Presidents of the Federal Reserve District Banks is collectively responsible for establishing and recommending to the Fed the discount rate. (More on this later).
● The Federal Reserve Open Market Committee, made up of 7 Fed representatives and 5 Federal Reserve District Bank presidents, has exclusive responsibility for determining when to sell or buy government bonds and how much is necessary to fight recession or inflation.
● The Federal Reserve Advisory Council, a 12 member advisory council which together with the Consumer Advisory Council and theThrift Institutions Advisory Council advises the fed on its macro-management responsibilities.
● The Twelve Federal Reserve District Bankseach representing one of the 12 banking districts in the country and responsible for all banking activities within the districts, including:
● (a) the coinage and distribution of the country's currency;
● (b) the operation of a nationwide payments network,
● (c) supervising and regulating member banks and financial holding companies;
● (d) issuing, servicing, and redeeming Treasury securities or bonds;
● (e) conducting nationwide auctions of Treasury securities;
● (f) daily monitoring of federal tax receipts;
● (g) meeting every two weeks to recommend to the Fed, the discount rate.
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● 25 Federal Reserve Branch Banks created over time to aid in the ever expanding banking and monetary responsibilities of the Federal Reserve District Banks.
● Member Banks of the Federal Reserve System are commercial banking institutions that form the vital link between individual US citizens and residents and the Federal Reserve System. Members banks are required by law to subscribe to stock with their Federal Reserve Regional Bank in amount equal to three percent of their total capital and surplus.
● Consumers, the millions of individual persons and institutions brought into the monetary system as customers of commercial banks, as borrowers of money, and generally as uses of government commercial debt (also called money).
● The effectiveness of Fed monetary policies depends greatly on how successfully these policy alter consumers' demand for moneyhabits; and in turn, on how much confidence consumers have in the fed's monetary policy as well as the money it issues.
The Logic of Banking
● The Role of Consumers: The banking system is a system built on the trust and confidence of the public that its hard earned money when deposited with banks will retain their value over time as well as earn some interest; thus the decision to consume now or consume in the future will not be a false empty choice. This trust is based on four considerations:
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● a rational weighing of personal current versus future consumptive needs and the projected future trends in prices;
● current versus future interest rates; whichever is higher will determine consumers' demand for money;
● consumers' confidence in the banking system to deliver on its promises;
● consumers' confidence in the stability of the economy as a whole.
● The Role of Commercial Banks: Their primary task and objective is to retain the confidence of their depositors by being in position to honor their withdrawal demandsat all times.
● This they do by maintaining a fraction of their total deposits or liabilities as reserves with the Federal Reserve District Banks.
● The Role of the Federal Reserve System: The Fed determines the amount of commercial banks' total deposits they must keep as reserves in order to maintain the public's confidence in the banking system.
● Commercial banks and other financial depositories submit to the Fed because their interest of maintaining a steady value of money coincides with, indeed, is exactly the same as the interest of the Fed, as the monetary branch of government, to ensure that at anytime the money supply is exactly equal to the actual total value of goods and services, in order words, to ensure zero inflation.
● In return, commercial banks and other financial depositories benefit from the insurance backing of the financial power of government, that is, the entire economic power of United States. That is powerful insurance.
Changing the Reserve Requirement
● Reserve Requirements refer to the percentages of total checkable deposits of commercial banks and other financial depositories required by the Fed to be kept in reserves.
● Because reserves determine the overall volume of loans a commercial bank can make, the Fed can manipulate the money supply by changing the reserve requirements of its membership commercial banks.
● These reserves, some of which is kept as access with the Federal District Banks, vary depending on (a) the Fed's assessment of the financial viability and performance of each individual bank.
● The Fed can also manipulate the reserve requirement for many banks at the same time depending on (b) the general health of the economy, and hence, (c) the overall monetary policy objectives of the Fed.
● To fight recessions (insufficient money supply), the Fed will lower reserve requirement. A low reserve rate, means more of checkable deposits can be loaned out. (Remember, banking is based on confidence).
● To fight inflation (too much liquidity), the Fed will increase the reserve requirement, drastically cutting down on the amount of a bank's total deposits it could lend out to the public.
● Because reserve requirements are set to reflect not so much the size but the performance of each respective bank, it is potentially a powerful instrument in the hands of the Fed for controlling its member banks.
● However, it is such an explosive instrument, the Fed hardly tinkers with it, and will do so more as a way of playing constraints on the lending practices of commercial banks whose poor performance the Fed believes partially responsible for a larger economic problem.
Changing the Discount Rate
● The Federal funds Rate is the interest charged for overnight loans by commercial banks to one another; it varies and because it is an emergency loan, it could be very high.
● The Discount or Window Rate is the interest charged on Federal Reserve District Bank loans to its member commercial banks, which in turn determines the interest rate commercial banks, brokerage banks, credit card banks, etc. charge their customers.
● Because reserves are a ratio of total deposits, changes in the total value of reserves has multiple effects on the lending capacity of banks. If reserves to loanable funds are in 1:15 ratio, borrowing to increase the $value of reserves by, say, $10,000 means the borrowing commercial bank can increase its loans by $150,000. ($10,000 x 15).
● To fight recession, the Fed will lower the discount rate. The lower the cost of borrowing from the Fed, the cheaper and more attractive it is to increase one's reserve, and the greater a bank's capacity to increase lending and, hence, increase the money supply.
● To fight inflation, the Fed will increase the discount rate, and may refuse to give loans to certain risky or insolvent banks, calledtight monetary policy. The higher the cost of borrowing from the Fed, the less the incentive to increase reserves through borrowing, and so the lesser the total amount of deposits available for loans.
● In addition to this direct impact on liquidity, the prevailing interest rate affects banks' lending habits in another way.
● Just as consumers must choose between consumption now or consumption in the future; commercial banks must choose between holding actual liquidity or holding money assets (and there by, locking up their value).
● That means the higher the prevailing interest rate, the greater the benefit to banks to hold assets (lock up their value) instead of liquidity, meaning the Fed wants banks to practice tight monetary policy. For instance, increase saving withdrawal notification period from 24 hours to five days; call back risky loans, deny loans to all but the most efficient companies with proven performance records etc.
Open Market Operations
● Open Market Operations (OMOs) refer to the buying and selling of government bonds or securities, government promissory notes to pay what it borrows plus interest on a future date.
● OMOs are useful for financing government debt; but they are known mainly for their effectiveness in controlling the money supply.
● OMOs constitute the most effect of the three monetary instruments for controlling the money supply and this for a number of reasons:
● they are popular with commercial banks who can convert them directly into reserves with the Fed to increase their lending power;
● as government guaranteed debt, their interest rates tend to be high relative to interest on other forms of financial investment, and so are popular with the public;
● they are easily tradable, giving their holders financial flexibility not easily associated with most forms of commercial debt.
● because OMOs work on the reserve side of the banking system, directly increasing or decreasing commercial banks' reserves with the Fed, they represent the quickest means of impacting the money supply in a significant way.
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● To boost the economy out of a recession, the Fed will buy existing government IOUs. Commercial banks which pay directly for these IOUs will see their reserves with the Fed increased in an amount equal to their total purchase, increasing their lending power by a corresponding ratio.
● To fight inflation, the Fed will sell IOUs, thereby reducing the money supply in two ways: directly in the amount the public pays for the IOUs, and more important, plus the additional amount banks are forced to contract the money supply. (Remember: whatever value is taken from reserves, that amount multiplied by the existing reserve ratio must be taken out of circulation).
Critique of Monetary Policy
On the Plus Side
● Monetary policy has become a constant part of the day to day operation of most money economies in general and the US economy in particular.
● Monetary policy has a direct and more immediate impact than fiscal policy.
● Monetary policy is especially effective in fighting inflation, because interest rates have affect a wide range of goods and services in any money economy; and OMOs have significant impact in reducing liquidity.
● Because monetary is run by bureaucrats and not directly by politicians, it has over the years attained some level of neutrality from political influence and, unlike fiscal policy, its pain is not easily directed at the ruling regime.
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● Monetary policy is seen as voluntary. Unlike fiscal policy that affects us all, the effects of monetary policy are seen as selectively imposed on only those who choose to voluntary borrow money, buy big-ticket items while interest rates are high.
On the Negative Side
● The effects of monetary policy are rather restricted.
● In a recession noted for its economic inertia, banks are not particularly attracted to borrow from the Fed huge amounts of money they cannot pass-on to consumers in the form of loans. No matter how low interest rates are, entrepreneurs would borrow money only within an expanding economic atmosphere when they are sure to make profits.
● OMOs are generally ineffective in a recession during which time (a) money is tight (not the same as tight monetary policy), and (b) the few unemployed that need help the most have no income nor logical interest to purchase IOUs.
● During the peculiar economic phenomenon called stagflation (e.g., 1969-1979) when high inflation co-exists with pockets of significant recession, the hands of the fed are tied as any monetary move would aggravate the situation facing one of these two sectors.
● The huge US national debt puts several constraints on monetary policy: real interest rates have to be high enough to induce foreign banks to be willing to continue financing the US debt. That takes away the Fed's ability to reduce rates should the economy enter into recession.
● On the other hand, each time the Fed increases interest rates to ward off expected inflation, it increases the amount of the GDP that is paid to foreigners in debt payment.
● Additionally, high interest rates pushes the value of the dollar higher, making imports into the US attractive to foreign producers, while exporting from the US becomes relative more expensive it puts US exporters at a disadvantage.
FISCAL POLICY
Keynesianism is particularly known for its recommendation to use fiscal policy to stabilize the economy.
Government fiscal policy is essentially the manipulation of demand.
But why government? What is the assumed market failure here that justifies government fiscal policy intervention?
Because in a money economy, A’s income comes from B’s expenditure, there is tremendous pressure (advertising) on consumers to consume-now and so the rate of savings is generally very low. Meaning that the private sector does not save up enough capital to boost the economy out of a recession let alone a depression.
● Because of government’s unique power to create money and to borrow from citizens, foreigners and itself, fiscal policy is essentially about the manipulation of government spending to boost the economy out of a slump or to decrease the money supply whenever inflation threatens.
● The two instruments of fiscal policy are government spending and taxes, and in that order of magnitude.
● To energize the economy when it is in a slump, government will increase its spending, if needs be, create new money or more likely incur deficits (called deficit financing) and cut taxes putting more discretionary money in the pockets of consumers.
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● To fight off a pending inflation or one already under way, government will cut its own spending (or allow budget surplus to accrue), and increase taxes.
● Nondiscretionary fiscal policy is fiscal policy aimed at the economy as a whole including all industries and social groups.
● Progressive taxation which links higher income to higher taxes is designed to automatically kick in to slow down the after-tax income as the economy expands and income increases, and so reduce the money supply to avoid inflation.
● Discretionary fiscal policy is fiscal policy aimed at redistributing income as the best way to ensure economic stability.
A Critique of Fiscal Policy
● Fiscal policy is seen as political, partisan and hence, controversial.
● Much of the controversy over macroeconomics in general has come to center particularly on increasing government spending to boost the economy when it is sluggish.
● Keynesian economists, political economists and liberal democrats belief increasing government spending is both necessary and good for the economy.
● They take their cue from Keynes according to whom the private market system has a tendency to allow a big gap to development between private savings and capital investment (Apparently, he did not live long to see the current rush to save on the stock market.) Only government with its ability to create or borrow huge sums of money can fill this gap.
● Neoclassical economists, and conservative Republicans tend to dislike fiscal policy, thinking the economy left alone can correct itself.
● Besides, they argue, government, like any good household consumer, should not spend more than it takes in in revenue.
On the Plus Side
● The Huge Size of the Public sector: Fiscal policy has a greater overall impact on the economy than monetary policy. Because government orders about 30-35% of the GDP, manipulating this segment of the GDP is bound to have tremendous impact on the overall economy.
● Keynes' defense of deficit financing: While deficit financing means government is spending money it does not have, infusion into the economy of huge government funds sets of a positive spiral of spending-called the multiplier effect-which is powerful enough to lift the whole economy out of a recession.
On the Negative Side
● Source of Presidential Power Over the years, fiscal policy has become a power grabbing mechanism used by all US presidents since Roosevelt to increase the power of the executive branch at the expense of Congress.
● Over time, especially since the enactment of the Full Employment Act of 946 making the ensuring of full employment and a robust economy the responsibility of the president, there has emerged an extensive set of economic institutions under the executive branch of government for conducting the macromanagement task of the president. The Council of Economic Advisers, the Office of Management and Budget, the Department of the Treasury, and the Federal Reserve Board, come to be known as the economic subpresidency.
● In its bit to grab some of that limelight, Congress has been forced into creating its of set of economic institutions-the Joint Economic Committee of Congress, the Congressional Budget Office, the Ways and Means Committee--resulting in a lot of duplication, waste, and political stalemate.
● Institutionalization of fiscal policy Because it confers so much power on the executive presidency, fiscal policy, which Keynes meant to be a fine-tuning mechanism, has become a permanent component of all market economies complete with its own study-political economics--and losing its periodic interventionist flexibility that made the original Keynesian idea so appealing.
● Rigidity or prices and wages; Keynes' notion of fine tuning assumes a flexibility in both prices and wages that allows them to adjust according to the current state of the economy, that is, increase with a strong economy, and decline when the economy is sluggish.
● But prices generally and wages in particular have never shown flexibility downward. The power of trade unions and monopoly practices have kept prices and wages always ahead of their actual use value and contributions to the economy, respectively.
● The rigidities of the federal budget: The need to periodically adjust the level of government spending is also made particularly by rigidities in the federal budget, about 90% of which is fixed and untouchable.
● Deficit financing, especially during the Reagan administration, is generally held responsible for starting the huge runaway national debt which at its peak in early 1992 stood at $5.5 billion.
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● Private sector counteractive measures: Fiscal policy measures are made inadequate by counteractive measures corporations and private business have over the years learned to adopt to shelter themselves from their intended effects.
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● The politics of fiscal policy: Unlike monetary policy which is seen as politically neutral, fiscal policy is seen as the a toll each president designs to serve the political objectives of his regime.
● It is equally not free from the quid pro quodealings by which Congressional representatives sell their votes to the highest bitter among competing corporate lobbyists.
● The crowding-out effect of government borrowing: Large scale government borrowing from private banks not only leaves little for the small guys to borrow, but it also pushes interest rates so high they are beyond the reach of most small companies.
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● Fiscal policy and time lags: Like all political bills, fiscal policy is made most ineffective by the long legislative and political process it must go through. As a result, its effective impact on the economy may not be felt until the particular danger it is supposed to prevent may well have passed.
● External impact on fiscal policy: The level to which any market economy could isolate itself and be controlled exclusively by its own domestic fiscal policies has increasingly been reduced by growing interdependence among nation states. E.G.:
● The financing of current huge national debt by foreign banks forces the dollar to appreciate against most other currencies, making US exports expensive relative to foreign imports, which leads to ever increasing trade deficits.
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● Huge government debt pushes interest rates higher; high interest rates attract a huge inflow of foreign capital seeking to take advantage of it, but against the double digit inflation of the 1969-71 stagflation period, such a huge inflow of money does not lead to more production but simply adds to an already over-expanded money supply.
● The huge amount of daily international financial flows, much of which is denominated in US dollars, means a huge presence of US dollars outside US borders and out of the control of both the Fed and the effective containment by fiscal policy.
SUPPLY-SIDE ECONOMICS
Question: What factors contributed to end the successful macroeconomic revolution of the immediate postwar years?
● Two factors that contributed to the US economic boom of the 1950s and 1960s had by the early 1970s been seriously undermined:
● At home the huge post-war demand had ended;
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● On the external front, Japan and Western Europe had completed their post-war recovery, closing the gap which the United States enjoyed as a result of its war related advantages.
● The existence of huge volume of the US dollar in the external market meant monetary policy was no longer able to effectively control the US money supply.
● The ineffectiveness of macroeconomics against the stagflation of the 1970s was taunted by pro-market conservatives as reflecting the complete failure of government economic management or Keynesianism as a whole.
● The intellectual war against government activism found a resounding support in an equally powerful political anti-government movement spurred on by several government mishaps: the Vietnam fiasco, the Watergate scandal, and an anti-environmentalist counter-culture.
Question: What is supply-side economics?
● Supply-side economics is a catch phrase that captures a set of pro-market policies that seeks to restrain government economic activism in the belief that the market and not government is the best allocator of resources.
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● To the extend that supply-side economics has come to be associated with general anti-government philosophy, it has become a simple means of conceptualizing what conservatives and pro-market economists think are the sources of government-induced economic decline.
As a remedy, supply side economists call for:
● Cutting Taxes to generate savings, investment, and new jobs because every new level of production generates income sufficient to purchase whatever is produced.
● Supply-siders take their view from Say's Lawwhich argues that supply generates its own demand.
● Cutting marginal taxes: Supply siders are particularly offended by marginal tax rates, higher tax rates levied on income beyond a certain minimum threshold because they think it discourages achievement and penalizes the most successful.
● Reducing government regulations which, according to the conservative Chicago School, undermines the global competitiveness of US firms because efficiency is related to size.
Question: What is Reaganomics?
● Reaganomics is the catch-phrase for the supply-side economic reforms embarked upon by President Reagan to carry through his conservative economic agenda.
● De-regulation: Reagan's regulatory reform was mainly directed at removing environmental regulations of the 1970s and 1980s.
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● Cutting government spending to eliminate the growing phenomenon of many Americans becoming dependent on government, a mind-set that weakens the American family structure.
● Tax Cuts: Five different forms of tax cuts in an attempt to eliminate budget deficits ordeficit financing. (See. p. 100).
● The expected fall in government revenue due to tax cuts would be replaced as the resulting rapidly expanding economy generates new jobs and adds to the number of tax payers.
A Critique of Reaganomics
● The economic record of the 1980s remains controversial on several fronts;
● On economic growth: Reagan tax cut policy of the early 1980s help to boost economic productivity in the 1981-83 period.
● But while some growth did occur, it was no where near the spectacular levels one has come to associate with supply side promises.
● Starting with Black Monday-the stock market clash of October 19, 1987 when it lost 22.5% of its value, the economy went through a severe recession-the worse since the Great Depression.
● On avoiding budget deficits Reagan ended his term in office with more national debt than he inherited, indeed, substantially more.
● On deficit financing: Without the expected growth in government revenue, Reagan was forced to resort to government borrowing to finance his 40% increase in defense spending, precisely the opposite to supply-side thinking.
● As a result, national debt tripled, thus defeating his objective of bringing the deficit to zero.
● On Reaganomics and the rigidities of the federal budget: Given that over 71% of the federal budget is fixed, all of Reagan's government spending cuts came from the narrow portion of the federal budget spent on social programs, thus disproportionately affecting the poor.
● Reaganomics runs into Washington politics: The Congressional coalition that passed his bold program, conservative republicans, supply-side Republicans, and conservative Southern Boll Weevil Democrats, had broken down as each tried to exempt from the Reagan budget tax cuts projects pertinent to their districts.
● The Reagan plan sent mixed signals: Reagan's tax cuts were increasing the money supply precisely at a time when the Fed's tight monetary policies were seeking to reduce the money supply.
● For the sake of political expediency, Reagan's government spending cuts exempted social security and Medicare, something which disappointed the extreme right of his coalition.
● New developments killed deregulation: Reagan introduced efficiency to replace market size as the controlling measure in evaluating mergers and takeover activity, encouraging lots of business mergers, which came, as expected with thousands of jib cuts.
● Reagan's deregulation drive resulted in many regulations being taken down, the most notable would include the Civil Aeronautics Board and several environmental regulations.
● Reagan also stood up to the power of the trade unions, ordering the summary dismissal of striking airline controllers who dared defy his ultimatum to return to work.
● But by the end of the 1980s, Reagan was forced to accept a whole string of new regulations as a result of:
● the S&L scandal,
● fights in the cable industry,
● negative effects from earlier deregulation of the airline industry.
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● Supply-Side and the Competitive 1980s:Several factors about the state of the US economy throughout the 1980s worked against supply-side economics:
● Producers will expand their business, not simply because they receive tax cuts, but only when a favorable business climate prevails in which they can make profits.
● But the 1980s was a decade in which productivity exceeded demand, meaning there was not a lot of room for expanding business.
● It was also a decade in which new technologies, including computers and telecommunications, increased the efficiency of US industries, enabling them to sustain high productivity while laying off thousands of low skilled workers.
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● It was also a decade for off-shore assembling whereby American entrepreneurs produced goods with offshore cheap labor for importation into the lucrative US market.
● Economic growth co-existing with increased insecurity: Reaganomics has come to be remembered for widening the economic gap between the rich and poor, the latter which seemed to be at the receiving end of everything negative about supply-side economics generally and the particular manner in which President Reagan carried them out.
● Tax cuts benefited mostly the rich who pay most of the taxes in the first place;
● government borrowing also benefited the rich who own government bonds;
● Reagan's government spending cuts fell disproportionately on the poor.
● As a result, the misery index-the measurement of inflation cum unemployment-reached its postwar high by the late 1980s.
Resumption of macroeconomics under the Clinton Administration
● The failure of the supply-side economic experiment of the 1980s gave room to the resumption of macroeconomic engineering during the Clinton administration.
● And the US economy responded, making the 1990s the longest period of sustained economic expansion in US economic history, and did so without the expected increase in inflation.
Question: What does that say about the relative usefulness of supply-side economics and macroeconomics?
● To some degree, both could be said to be theoretically sound, but each can only be useful if pursued under the right conditions, which, unlike with the supply-side experiment of the 1980s, must exclude all contrary policies.