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April 20, 2005
It's not 1999 (or 1981)
PGL examines Bruce Bartlett.
While I agree with his concern, I don’t agree with Bruce’s analogy to the FED tightening during 1999-2000 for two reasons. One is simply that labor markets were tight five years ago and they are not currently. The second reason goes to the discussion at the end of Bruce’s op-ed – that being the “twin deficits” issue. The better analogy would be to compare the current situation to that during 1981 when labor markets were not tight but the FED was concerned with excessive long-term fiscal stimulus.
Absolutely correct on the first part.
On the second part, I differ a bit. 1981 might not be the best comparison either. While the point about the labor market is correct, the current account was in surplus in 1981. The budget was in deficit. In 1999 and 2000, the opposite was true. Today, both are in deficit. That's a pretty big difference right there.
Another difference is that in 1981 the Fed spiked the real funds rate up to almost 10% to wring the last vestiges of the 1970s inflation out of the economy. I really don't see that being in the cards.
I think 1994-95 is a better analogy. (I know, I know, you're not surprised, are you?) The twin deficits had reasserted themselves briefly. The labor market certainly was not tight--unemployment rates were comparable to today's. Employment growth was returning to normal after a jobless recovery (it's unclear that employment growth in the present environment is quite back to normal--it seems to be taking a little longer this time). The strike against inflation by the Fed was preemptive, rather than closing the barn door after the cows got out.
One difference was that tax receipts were trending upwards in prior years (thanks to George H.W. Bush). This has not been the case in the last few years. However, that picture is starting to turn around--not fast enough for some, but turning around nonetheless.
POSTSCRIPT: I forgot to point out that Bartlett finishes his column with:
Hopefully, this can all be managed smoothly and without either a recession or a market break. But it will take great skill and a lot of luck to avoid both.
I couldn't agree more.
UPDATE: PGL and Bartlett spar in the comments at Angry Bear. Worth reading.
Posted by William Polley at April 20, 2005 01:45 PM
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The current account was not in deficit - YET. But you have to concede that this awful macro-mix led to a very strong dollar and ...
Posted by: pgl at April 20, 2005 02:31 PM
"The current account was not in deficit - YET. But you have to concede that this awful macro-mix led to a very strong dollar and ..."
Of course, I will concede that. But I don't hear anyone saying that the "measured" increases that the Fed has been pursuing, even if they continue for another several months, are going to push real rates to the 1981 levels that could reverse these outflows enough to cause the dollar to reach mid '80s levels.
And if we are experiencing a slight slowdown (didn't we call that a "growth recession" back in the '90s?) the increases in rates will pause as needed.
Unless... and you might agree with me on this, there is a supply shock (oil) and serious possibility of stagflation (as opposed to a "whiff" of stagflation as Krugman called it in his last essay). In that case, you and I (and Krugman) would probably say in chorus that all bets are off, right?
Posted by: William Polley at April 20, 2005 05:36 PM