In a couple of comments to this post, EconoSpeak reader wellbasicly at first questioned whether the 1993 return to fiscal sanity actually promoted long-term growth and then posed this question:
for instance it is incontrovertible that interest rates did not go down
Our graph shows that interest rates moved up and down during the 1992 to 2000 period but it also shows that the interest rate was 5.24% when Clinton was leaving office as compared to 6.77% when Bush41 was leaving. So to the simple question posed, the answer is yes. Now matters like cause and effect are a little more difficult.
Much of the ups and downs likely relate to Federal Reserve’s actions and their view of how the macroeconomy was stacking up with respect to full employment. For example, the FED was allowing interest rates to fall during 1992 as the economy was weak. Why the FED slammed on the monetary brakes in 1994 was beyond me because the recovery had yet to get us anywhere near full employment.
But mercifully, the FED did allow interest rates to basically fall during the next four years even as economic growth was quite strong. I suspect the return to fiscal sanity convinced the FED that we could encourage more investment demand as at least the government was trying to boost national savings for a change.
Alas, the experiment with fiscal sanity and more national savings departed the White House along with the Clinton economic team. Then again, this decade started off with an insufficiency of aggregate demand that was stubborn to reverse itself for several years.
10 comments:
I'm looking at your graph with a huge spike UP when the tax increase was passed. And I see a line downwards from the Republican sweep of 1994, as well as Clinton's 1997 tax CUT.
You cannot seriously believe that Clinton's 93 tax increase saved the economy even along the charitable lines I described.
If you do you should be recommending a tax increase now, instead of a stimulus spending package.
(I'm not just trying to get at you, I admire you for putting arguable stuff up here. But if you are really a liberal, I hope you consider the other side for the sake of your colleagues who might advise candidates.)
It is certainly plausible that the drop in the 10 year interest rate over this time period was confidence led. In 1990 the bond market was pricing in 'deficits as far as the eye can see' with an upward trend line. Which in simple supply and demand terms meant more projected supply over the term of the bond in question. More perceived future supply, less current demand leading to a lower price and a higher yield/interest rate.
On the other hand by 1993 Bond Investors and the investor class generally were able to see signs that the Clinton administration would clamp down on future supply by reversing the debt trend line. The textbook result should have been greater initial demand for the 10 year driving price up and yield/interest rate down. Which in fact we saw taken the Clinton terms as a whole.
A confidence based explanation may seem too simple, but at least I am not injecting 'dark matter' into the equation. In lending the key variable in gauging credit-worthiness is Debt to Income (DTI) people who have good and improving DTI get loans at better rates. That is just elementary credit scoring.
what about _real_ interest rates?
Econoclast asks a good question ableit one that is difficult to measure without a series on expected inflation. The underlying premise used here is that the change in the real rate approximates the change in the nominal rate. Unless expected inflation fell, this seems reasonable.
Wellbasically on the other hand is just being a bit of a twit. First he notes the rise in 1994 rates, which I addressed by nothing that the FED went s bit nuts in 1994 (Kash has made this argument before over at Angrybear). Does anyone seriously believe fiscal restraint raises interest rates? And of course, I don't use language such as "saved the economy". This was never the argument.
I also think that real rates should be discussed. I don't think that any knowledge of "expected" inflation is needed, just use the actual rate at the time.
Bond markets are very good at adjusting for actual inflation. Even if the nominal and real rates tend to move in the same direction there is no reason not to use the more meaningful measure when making comparisons - especially comparisons which are seen as ideologically motivated.
I take your explanation for the 93 spike in rates. Clinton raised taxes which slowed the economy. That resulted in higher gold prices which Greenspan took as an indication of inflation. He raised rates but in the world of the floating dollar, weak growth often results in more inflation.
In any case, Clinton was powerless to fight Greenspan doing further damage to the economy, because Greenspan gave him cover.
When the myth of the magic 93 tax increases was written down as a Democratic triumph as big as the WPA, a rewriting of the laws of economics, then Greenspan and the Fed were given the license to oppose and abuse economic growth and freely flout political rejection.
Today Bernanke and Greenspan combined to raise the unemployment rate. THEY MEANT TO DO IT. Where is the criticism from the Democrats?
"Does anyone seriously believe fiscal restraint raises interest rates?"
Lots of people including your liberal Keynesian colleagues believe that raising taxes retards the economy. A supply-oriented economist would recognize that higher taxes mean higher risk to lenders, which very obviously leads to higher interest rates.
WB is still saying fiscal restraint is inflationary? His evidence is gold prices? Is WB trying to replace Kudlow over a the National Review?
What would convince you.
WB? Convince me of what? That you are behaving like a troll? I'm convinced!
You've called me three names so far and you're the one who's running the site. It's important to me that a Democrat be elected. Thanks for not helping!
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