Posted by
Andrews on Saturday, March 07, 2009 5:27:58 PM
Like many who do not study economics seriously,
Michael Barone likes to believe much of economic activity is irrational. In fact he cites that ultimate champion of the irrational, Keynes, in support of this position. However, as with most who argue for irrationality, Barone shows instead that man is quite rational, the analysts simply don't understand what they are seeing.
Barone's example is the 1993 tax increase which he predicted to cause economic slowdown. When it instead preceded economic growth, Barone argued that it was the choice of a "tricky" number that worked, allowing people to irrationally see the increase as smaller than it was.
No, the truth is that people were rational, Barone simply forgot one factor. During the Reagan years we had seen relatively limited inflation. Ever since Reagan's 1982-83 recession the government had kept inflation mostly in check. Bush had begun to inflate again, but not that rapidly. Clinton, on the other hand, with his efforts to keep interest low and the economy humming along, managed to begin truly ballooning up the money supply.
And as with most inflations, the early stages produced a massive activity which many, including Barone, mistook for sound economic growth. (Forgetting the dot-com bust and the housing bubble, Barone argues that the economy was strong following the Clinton tax increases.) So, of course the tax increases did not cause a slump, they did not cause any real decline in income at all. Inflation was already putting tons of worthless money in everyone's hands, taking away a bit more of that worthless cash did no harm. If anything, Clinton's tax increases may have managed to slow down the inflationary excesses very slightly, by pulling excessive cash off the market and back into government coffers.
Still, the truth is, whether 3.9 or 4.0, the tax increase would have caused a drag on the economy under normal circumstances. It was not individual irrationality that kept the market moving, but the feverish activity of inflationary times.
All of which goes to show why we should not listen too closely for economic advice form those who admit they know very little about economics. Even when those ignoramuses are nominally economic experts, such as Lord Keynes.