Re: OT Political ad

On Wed, 5 Mar 2008 15:56:41 -0800 (PST), BadgerBC
<neilrichardson3819@xxxxxxxxx> wrote:



On Mar 5, 10:18 am, McDuck <wallyDELETEMEMcD...@xxxxxxxxxxx> wrote:
On Wed, 5 Mar 2008 06:39:36 -0800 (PST), BadgerBC

<neilrichardson3...@xxxxxxxxx> wrote:

First, it
was preceded by Volcker's contraction of the money supply (Perhaps
that might have something to do with the fact that fixed rate regime
no longer existed?).

No, Volker (Carter's appointment, by the way) refused to monetize the
Reagan deficits.

The prime rate went up and down wildly between 11.4% and 21.5% in
*1979*. THAT was the shock therapy. And the volatility continued
into the first two years as the Volcker and Treas were exchanging
shots. What is the impact of such volatility in an uncertain market
that had just seen the crude price go from 15 to 40 in 1979?


His goal was to eliminate inflation (over "natural"
inflation of around 2%), which IMHO was a great policy.
And Reagan
threw the country into a pretty deep recession (depression here in
Michigan) by adopting a fiscal policy in conflict with that monetary
policy. Really, really stupid.



You're going to have to start explaining to me how this happened.
Which is it? Did the shock therapy work against the inflation or
not? I agree Volcker and the GOP were at extreme odds as he had
mentioned in interviews and certainly there had been sharp words
exchanged. If the fiscal DIDN'T work, then explain to me how the
inflation declined from 11.3 and 13.5 in 1979 and 1980 to 10.3 and 6.2
in 1981 and 1982. I think we both agree on the intermediate reason
for 1981-82. Then how is possible that inflation went lower in
1983-1985 (3.2/4.3/3.6)? Shouldn't the fiscal policy have raised the
inflationary pressures as the fed was lowering the rate as well? In
all your explanations you don't even acknowledge the most fundamental
shifts that had impacted the US economy. These were exogenous factors
that had a greater impact on the American economy

You are asking a lot of me, in a ng where most of the members really
don't want to read this stuff. Perhaps I've been a bit conclusory, but
I did not mean to be dismissive or anything like that. Plus, some of
the stuff you ask about is beyond my technical competence.

My view on the Volker period, without looking anything up, is that
Volker accepted the basic Friedman view that inflation was best
controlled by limiting the money supply, rather than by monkeying with
interest rates. He also took the view, that I do not see all that much
in the literature but which I was enamoured of, that inflation (and
the prospect thereof) introduces a great deal of unnecessary risk and
thus has a v. negative effect on growth. so, volker went about
controlling money supply. and then Reagan came in, with his tax cuts,
and created huge Federal deficits and the prospect of even bigger
ones. The effect was to increase the money supply (a natural result of
debt), and that caused Volker to tighten the money supply.

And these levers are crude. As you noted, the US cannot itself control
money supply. We affect it, but to get the effect we want, we have to
do a lot more than would be needed if we actually had control, as lots
of stuff occurs in response. The result was that Volker, in attempting
to shrink money supply, had to do much more than he would have had to
do if fiscal policy had remained neutral. and the impact on interest
rates was much greater, in part due to the expectations created by the
deficits as far as the eye could see.

Anyway, that is my basic take on the situation. In 1982, Dole and
others pressed to roll back a lot of the 1981 tax cuts (those adopted
but not yet in effect) and that change reduced inflationary
expectations for long-term debt and the recession (for which I blame
Reagan, but blame whomever you wish) also caused short-term interest
rates to fall. I've not tried to track stuff exactly, and I'm not sure
that is possible.

In any event, it is not too helpful to look at interest rtes without
also looking at the inflation rate. As you know, the "real" interest
rate, within some range of reason, is the nominal rate minus the
inflation rate. As inflation came under control, the nominal interest
rate dropped as expected. But real interest rates were higher in
Reagan's first term than during Carter's term.




But, after wenwent into a deep recession, we than had high
unemployment and unused plant, so the Keynian stimulus worked (and
Reagan won in 1984).


Which was the greater cause of recession? The reduction of money
supply or the 100billion dollar deficit? And why did the inflation
rate actually go down? Do you see the contradiction here? If you
weight the Reagan deficit of 1981-82 more heavily then you should be
able to explain why there wasn't high inflation (hence acknowledging
the fact that exogenous factors play a far greater role which has been
my point all along in this tortured thread anyway. And you've yet to
answer any of my points when I brought them up regarding 1990-91).
And that's Keynes' point when he had insisted on fixed rate regime
with capital control when he had made the argument to Harry Dexter
White in Bretton Woods. In the floating regime there is no
precision. Even when you have extreme central bank coordination
(e.g., the Plaza Accord) the market's capital mobility exerts
countervailing pressure that is ever increasing in weight and
velocity. The ability to "dirty float" has been decreasing
dramatically since the 1990s


I did my best above to answer you on inflation, etc. Just a word on
Bretton Woods. first, I am not making Keynes into a saint. I thik he
was brilliant, and his followers were v. smart as well, but nothing
from the 1940s turned out to be exactly right, just as almost nothing
of Milton Friedman turned out to be exactly right. I think it is
pretty safe to say that the monetorists underestimated the role of
aggregate demand, and the Keynesians underestimated the importance of
the money supply. I've read a fair amount about the alleged causes of
the Great Depression. I find the Friedman account to be unconvincing
and polemical, but I'm also convinced that the Depression would have
been far, far less severe if the Feds had been quick to increase the
money supply in the face of all those bank failures. Monetoray policy
is not the only useful tool in the bag, and some of its gains also can
be achieved through traditional Keynsian manipulation of aggregate
demand. Still, it is a v. useful tool, more useful that the Keynesians
realized, and it has some explanatory power. And, when grossly
misused, it can cause lots of problems.

Okay, Bretton Woods. I'm using that as metaphor because I've not read
much about the actual conference. It seemed to me to be premised on
having a hegamonic currency. Otherwise, fixed rates strike me as
almost as stupid as the gold standard (only good b/c of lack of
discipline in doing anything more sensible).

The pegging of the dollar to gold was really a pegging of other
currencies to the dollar, with gold as the fig leaf. As other
economies recovered from the war, it was natural that the value of
their currencies would change relative to the dollar. And the BW
system did not really allow it. So, we saw a situation where a $32
could buy an once of gold b/c that is what the bankers decided, when
the free market was saying that gold had a value of $150 or whatever.
Nutty system, to be sure. But it made the dollar hugely overvalued,
since having a dollar meant you could buy gold really, really cheaply.

Well, that meant those with dollars could buy stuff cheap, including
French factories and French cheese. De Gaule was right to want to
upset the system, and, to be fair, he did a great service to American
workers, since no American worker could produce stuff for foreign sale
with the dollar so overvalued. So, we ended upin the 1960s with huge
trade deficits, for a county that in the 1950s was an export king.

So, was Nixon right to close the gold window in 1971? Yes, absolutely
in my view.

I'm not able to evaluate all of the economic shocks of the 1970s. But
Nixon caused his inflation problem in part by refusing to extend the
tax surcharge that Johnson had belatedly imposed. Johnson, to reduce
opposition to the war, had opted for guns and butter, as the
economists like to say. But he eventually was persuaded that he was
building up inflationary pressures by running up deficits. Nixon, when
he came in, rejected that advice. He cut the tax surcharge, cut
business taxes, and tried to control the resulting inflationary
pressures with price controls. Ford tried to do it with WIN buttons
(whip inflation now). Neither was successful. Doing the obvious (to
monetarists) --- directly controlling the money supply, was a hard
option b/c of the short-term pain.

The shocks were a problem b/c the higher price for oil meant that, in
real terms, prices for other stuff had to go down (or else inflation
would result). So, keeping the supply of money in line with the growth
in the supply of goods meant price cuts, which meant wage cuts, profit
cuts, etc. Hard stuff. So, the political course was to hide these cuts
with inflation. By the time Carter figured out what had to be done,
and acted to do it, it was too late for him. He got the pain but not
the benefit. But if Carter had won in 1980, we would have seen a
fairly soft landing in 1981, or so I believe.

<snip>


"There are three systematic conclusions we can draw about the Perot
candidacy. First, the issue that worked for him was the deficit.
Second, he took more votes from Bush than Clinton. Third, those
voters he took were from a group expected to favor Bush heavily over
Clinton: men. Beyond this, Perot's appeal seemed to have little
systematic component."

I think you have misread the study. Unless Alvarez-Nagler are idiots,
they will not conclude differently from their basic finding ("The
results are that 49.5% of the Perot voters would have voted for Bush;
50.5% would have voted for Clinton.). There is a bit of a paradox
here. Perot's vote split, but splitting was good for Bush because
otherwise he was losing even worse to Clinton.

Still, Alvarez-Nagler are your experts, so I'll not make claims about
them except to say that if my interpretation is wrong, then they have
a really messed up study in which the finding do not support the
conclusion.
.

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