"There is always a philosophy for lack of courage."—Albert Camus

Monday, November 29, 2004

More Economic "Analysis" from the 1980s

Alan---courteous man that he is---has neglected to tell the full tale of amusement from the early 1980s in terms of the economic debate of the time. (I was a senior staff economist at the Council of Economic Advisers at the time, and so I know.) The $64 question of the day was why interest rates were high and the dollar strong. Don Regan, the Treasury Secretary and one of Wall Street's finest, argued that interest rates were high because of persistent inflation expectations. But if that were true, the dollar should have been weak, not strong. So Regan argued simultaneously---without missing a beat---that the dollar was strong because of large capital inflows from overseas (the flip side of the current account deficit); but if that were true, interest rates should have been low.

It was obvious to all of us little people (OK, ignore my waistline) that Ronald Reagan---steadfast in the counterinflation fight and firmly in favor of reductions in marginal tax rates---had created economic conditions in which rising investment demand drove up real interest rates and created a current account deficit, both of which outcomes were highly salutary. That the Beltway geniuses and the conventional wisdom soothsayers were blind to such simple realities was amusing.

No comments: