Alan Reynolds wrote a new book I mentioned a few months ago (Income and Wealth). This week, I belatedly discovered one of his papers, published in 2001 (The Fiscal-Monetary Policy Mix), which is an excellent read for anyone like me who’s interested in the relationship between deficits and interest rates, inflation, etc. In short, there wasn't any discernable relationship then—and the intervening years haven't changed that conclusion. Quite a contrast from what we hear about deficits in the mainstream media, isn’t it?
Here’s one of the passages that made me chuckle; it’s about the people (“fiscalists”) who falsely invoke the deficit as the cause of just about everything that happens:
Fiscal theorists feel no obligation to accept any evidence as refutation of their theories, because fiscal theories can always be created or revised to explain anything that might happen. If the economy slumps, that is because budget deficits crowd out investment. If the economy booms, that is because budget deficits stimulate demand. If the dollar goes up, that is because budget deficits attract foreign investment. If the dollar goes down, that is because budget deficits create fears of inflation. If inflation goes up, that is because budget deficits are inflationary. If inflation goes down, that is because budget deficits are not large enough. The fiscalist answer is always the same; only the questions change.
Print it out, take it to your easy chair, and have a fun read that will include a few chuckles. Here’s the link again.
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