Why didn't the Reagan Tax cuts in the 80's NOT cause inflation?
That's why I didn't vote for Reagan back then. I thought his deep tax cuts and heavier defense spending would cause huge deficits. We got the deficits alright, but instead of inflation rising, it actually FELL. This is perplexing, and later I attributed it what Milton Friedman was saying. Deficits do not cause inflation. Inflation is always a monetary phenomenon.
Therefore, as long the Fed kept the monetary policy non-inflationary, inflation would be kept in check. And so it was. Contrast that with today, with high deficit spending and higher inflation during the Biden years. Now you've got higher deficits, and you DO have higher inflation. One may infer from that that the inflation increased due to higher deficits, but the 80's experience should tell you otherwise.
Monetary policy goes with fiscal policy. If there's too much money and not enough production, then inflation may rise. Therefore, monetary policy was out of whack. But fiscal policy could still be out of whack. In the Reagan years, there was a fiscal policy that encouraged economic growth. The only growth policy in the Biden years was the growth of government. Therefore, in order to tame inflation, interest rates had to go higher. Fed policy usually lags condtions by nine months or more. Looser monetary policy won't cause inflation as long as growth policies are in effect.
So that's my best guess going forward. Trump will push for economic growth. There will be a containment of government growth, if current indications continue as they are. But it won't happen overnight.
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