September 20, 2012 at 2:24 pm #17117gmorinParticipant
Although I lived through the 90’s and do not recall them being a particularly overly prosperous period for myself or those around me, it is typically used as the progressive’s counter example to the prosperous Reagan years wherein taxes were raised, the budget balanced AND we had growing economy. I’m not buying that argument, however from an Austrian perspective I do not see an obvious flaw in the rhetoric. I know the government had to have been pumping money in somewhere but where was it going? Was the putative prosperity of the 90’s completely a stock bubble driven by Fed money pumping? But how did they pump the money in if the money creation is predicated on buying government debt if for at least a few years there was no new debt to buy since we were in a surplus?
Or is the answer that the prosperity had nothing to do with government policy in the 90’s insofar as Reagan “fixed” the Carter years by allowing interest rates to rise naturally which encouraged savings which encouraged more people to save which then drove interest rates down which then shortly thereafter fostered the growth of the 80’s. Then in the 90’s all those lenders were now being paid back and spending their money in the 90’s driving a natural consumption period and Clinton just got credit for it. Interest rates rose in the 90s as there was more spending and less savings and the Fed could piggy back a bit more cash injection on top of that to lower interest rates slightly from where they would be naturally and that little bit was enough to goose the stock market and set of the dot com bubble… but by then everyone had spent all their savings and were ready to go back into savings mode for the 00’s but that was sidetracked with the housing bubble forcing rates down even lower.
Anyway, that’s my theory (that Clinton did nothing but take credit for what was occurring naturally – of course that is hard to argue with someone as it just sounds like speculation… I mean I say “correlation” they say “causation” but how can I definitively prove non-causation? ). I’m looking for Jeff’s input here but of course welcome any and all input. ThanksSeptember 21, 2012 at 8:26 pm #17118jmherbenerParticipant
The most important statistic about the federal budget’s impact on the economy is its size relative to the economy. If the federal government is taking a smaller portion of society’s resources, then more are left in private hands to be used efficiently.
Under Clinton, the federal budget as a percent of GDP fell steadily from around 23% in 1992 to around 18% in 2000. That’s more than a 20% reduction.
Under Reagan, it rose from 22% in 1980 to 24% in 1983 and then fell to 21% in 1988. Overall, it fell 5%. Under Bush I, it rose from 21% in 1988 to around 23% in 1992. A rise of nearly 10% in just four years.
Clinton was clearly the fiscal conservative even compared to the overrated Reagan.
Part of the explanation for the greater prosperity of the 1980s and first half of the 1990s (before the dot com boom and bust) was the reestablishment of a workable international monetary system based on the dollar after the debacle of the 1970s. Under this system international trade finally reached the level of world integration that had been attained under the classical gold standard before 1914.
The monetary inflation and credit expansion of the Fed found outlets around the world during this time, which permitted American companies to earn profits (and stock markets to soar) while price inflation at home was kept in check. This started to unravel first with Japan in the early 1990s and then southeast Asian countries in the middle part of the decade. After that the boom was felt here at home in the dot com debacle.
Of course, you’re right that people are naturally engaged in economic progress through the market economy, which continues to raise our standards of living even with government’s depredations. It’s not bad enough that politicians rob us of the prosperity we could have enjoyed, they insist on taking credit for the prosperity left to us that we ourselves are producing.September 30, 2012 at 6:45 pm #17119gmorinParticipant
Jeff, could you elaborate a bit on your remark “The monetary inflation and credit expansion of the Fed found outlets around the world during this time, which permitted American companies to earn profits (and stock markets to soar) while price inflation at home was kept in check”
If I understand, it sounds like you are saying basically the fed created money but it shipped it all overseas so we did not see the result of the inflation here? Is that correct, if so how did they do that? If I had to guess I’d say maybe that the Fed was buying government debt of foreign governments? So those countries now had all these dollars and it permitted them to print up their own fiat and exchange it with themselves – because the US dollar is the world reserve the only way they can inflate their own currency is if we inflate ours? Correct? So all that government spending overseas drove buying of American goods during the 80s and 90s… ? but I thought our trade deficit got bigger during that time frame… or is that really irrelevant in that although the gap got bigger the overall amount of goods and services flowing grew substantially as well? Sorry for all the questions, just trying to build a thumbnail sketch of what the fed was doing to quickly debunk the Clinton apologists.October 1, 2012 at 11:19 am #17120jmherbenerParticipant
The monetary inflation and credit expansion was directed to capital projects overseas. American companies expanded investment projects in foreign countries. Foreign central banks then held dollars as reserve against their own currencies, which they inflated setting off monetary inflation and credit expansion in Thailand, Malaysia, and other East Asian countries. By the mid-1990s, nearly 70% of Federal Reserve Notes were held overseas. (Our merchandise trade deficit, a net inflow of goods into America, is balanced by a capital account surplus, a net outflow of dollars and dollar claims to assets from America.)
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