Long and Variable Lags

SYNOPSIS: Is 2000s economic slump Bush's fault or Clinton's? Was the 1990s boom due to Clinton's policies or Reagan's?

Two years into the Bush administration, things don't look too good for the real economy, and they look absolutely terrible for the budget. The Clinton years now seem like economic Eden. But ardent Bush supporters - someday we'll need a psychologist (other than Charles Krauthammer) to explain why those supporters are quite so ardent, why they ascribe virtues to the man that he manifestly does not possess - have a ready explanation. All the bad stuff happening now is a lagged effect of bad policies in the Clinton years; all the good stuff that happened in the Clinton years was a lagged effect of Reagan's policies.

Now there are lags in economic policy. But how long, exactly? In the last few days I received a bunch of mail attacking my criticism of Bush's new round of tax cuts; most of the letters were along these lines: "Look at history: Reagan cut taxes, everyone predicted disaster, but the budget moved into surplus instead."

Maybe this is beating a dead horse - but can we talk about the lags involved? Reagan cut taxes in fiscal 1982. The budget did eventually move into surplus - in fiscal 1998. (That's a consolidated surplus, including Social Security. The United States had a significant off-budget surplus, that is, not including Social Security, in exactly one year - fiscal 2000.)

If we're allowed to give credit for good events to policies 16 years earlier, history needs to be rewritten in interesting ways. The high point of the Reagan years was the 1982-4 "morning in America" recovery - but clearly that wasn't Reagan's doing, it was validation for the policies of Lyndon Johnson. (See, he was right not to raise taxes to pay for the Vietnam War.) For that matter, the great postwar boom validated the policies of Herbert Hoover: he liquidated the farmers. liquidated the workers, purged the rottennness, and the economy thrived.

Strange to say, however, early in 2002 - when strong first quarter growth led many people (but not me) to imagine that a powerful recovery had begun - the credit for the imagined good news went entirely to Bush. (Bush II, that is, not Bush I.) I wonder why?

Originally published on the Official Paul Krugman Site, 2.18.03