Today the ever-mendacious Wall Street Journal editorial page contains a contribution from Brian Wesbury arguing that U.S. interest rates are too low, and that the Federal Reserve should raise them:
WSJ.com - A Split Fed?: ...Further interest-rate cuts in the U.S. will only serve to inflate the demand side. And as we learned in the 1970s, once out of the bottle, the inflation genie is not so easy to put back. It's the supply side of the economy that needs help, not the demand side. Tax cuts and other incentives to increase the reward for taking risks in this highly uncertain environment would help much more than further interest rates cuts. Fed policy is not always the best therapy. This time, the fault does not lie with the Fed.
Yet--no surprise--the Wall Street Journal editorial page is playing hide the ball. It doesn't tell its readers that over the past year the growth of aggregate supply has been extraordinarily impressive: given what's happened to productivity and given the normal correlations of productivity with unemployment, the best guess of the productive power of the U.S. economy--the supply side--potential output--is that it has grown by 7.0% in the past four quarters. By contrast, total spending--aggregate demand--has grown by 3.0% in the past four quarters.
Now, I wouldn't mind if aggregate supply growth were even faster. But it beggars belief that the WSJ editorial page is trying to convince Americans that the Federal Reserve should take no steps to increase aggregate demand because demand is already outrunning supply. Do they think that their readers are too stupid to notice that supply is expanding much faster than demand--that the gap between potential output and aggregate effective demand today is four full percentage points highter than it was a year ago? Do they think that their readers are too stupid to notice that today's economy is not more high-pressure and inflation-prone but slacker and deflation-prone than the economy of a year ago--that with a potential labor force one to one and a half percent higher than a year ago, it is a bad thing that Americans today are working 2.5 percent fewer hours than they were a year ago?
Posted by DeLong at November 04, 2002 11:01 AM | Trackback"Do they think that their readers are too stupid to notice that [various obvious things]"
The answer is tax cuts. No matter what the question. No matter what the underlying facts.
Posted by: richard on November 4, 2002 11:28 AMTax cuts are the answer, every answer. Tax cuts for the rich and richer and richest.
Posted by: on November 4, 2002 11:54 AMDo they think their readers are too stupid...? (2X)
Yes and yes, they do. Furthermore, there is much confirmatory evidence that they know their core audience quite well.
Posted by: don freeman on November 4, 2002 11:57 AMThere are 2 intents. First, to convince voters before election day that the economy is on the mend thanks to the tax cuts already enacted. Second, to make the case for further tax cuts since then the economy would be even stronger.
The pretense must be maintained that the tax cuts already enacted were designed for the middle class and will have a more potent effect once they are made permanent. Then, we can be sure that the tens of millions of dollars middle class workers will make are not going to be slashed by the dread death tax.
Posted by: on November 4, 2002 12:23 PMIs there any way that I could get the whole article without paying the $80 subscription fee?
Julian Elson
Posted by: Julian Elson on November 4, 2002 12:40 PMOne should never underestimate the extent to which pundits are convinced (i.e. convince themselves) of their own deceptive arguments. Further, WSJ readers are in general looking for arguments to serve others in support of supply-side policies. They're more than ready to pay $80 for that. Otherwise they would be subscribing to the FT or would wait for a day to read their comments and analysis section...
Posted by: Jean-Philippe Stijns on November 4, 2002 01:09 PMI believe it was also Mr Westbury that was quoted on the Dow Jones newswire saying things about the high likelihood of a Republican sweep tomorrow. Ask a partisan to write in a partisan way and you probably won't be disappointed. Wasn't he a Bush #1 appointee?
Posted by: KHARRIS on November 4, 2002 01:09 PMI think you can get the WSJ editorials without
paying (although you can't pay less than they are
usually worth). Instead of using the WSJ link,
use http://www.opinionjournal.com. You have to
register, but you don't have to pay.
The rest of the paper is worth paying for though.
Posted by: matthew wilbert on November 4, 2002 05:26 PMNow this is just plain silly. Lots of the supply-side types (say, Kudlow) are very worried about deflation and are always calling for "stimulative" rate cuts as well as their usual tax proposals. Lots of them use commodity prices as proxies for targeting the price level (it's the old goldbug thing, sanitized a bit). The WSJ does not have a party line on whether monetary policy should be looser or tighter, although they tend to prefer a strong dollar (and have this obsessive attachment to fixed exchange rates), which pushes them toward tightening a bit. But it is not accurate to say that they are lying by printing a piece that is just one of many conflicting views they have published.
On the substance of the matter, I've always been suspicious of the kind of output-gap analysis that Brad loves, but then again I'm not a macro guy. (It always seemed like they were making it up as they went along in terms of the direction of causality.) Be that as it may, I thought it was pretty clear that consumption hasn't been that bad and it was investment demand that was low. Wouldn't an increase in investment constitute an increase in supply (capacity), and wouldn't that exacerbate the "gap" that is supposed to be worrying us? Investment is a double-edged sword--it increases supply as well as demand. It seems to me that the current growth in capital productivitiy is simply the result of firms improving their capacity utilization of capital at the same time that they are holding the line on hiring new workers. When that peters out, we'll probably see the beginnings of increased hiring and additional investment, but it may take a while. But I'm not ready to go the wall for that interpretation.
Posted by: steven postrel on November 5, 2002 03:59 PM