One article I found in my search as to why a financial reporter might claim that supply-siders support tight money is this one by James Tobin, written shortly before he died. In the article Tobin characterized supply side economics as being nothing but fiscal stimulus in masquerade, keeping inflation in check with higher than average interest rates. While in contrast, Clinton’s policies were the opposite, tight fiscal policy with low interest rates – monetary policy offsetting demand side effects from fiscal tightening.

About Clinton’s policies, under the subheading of “THE MACRO POLICY MIX: DID GREENSPAN MAKE FISCAL POLICY OBSOLETE?” Tobin states (emphasis added):

In 1992-93 a number of economists of both political persuasions agreed, both before and after the 1992 election, that the economy needed temporary fiscal stimulus. Two former Kennedy advisers, Professors Solow and Tobin, argued this case at a transition economic policy discussion with President-elect Clinton at Little Rock.

But on the insistent advice of his new Treasury Secretary, Robert Rubin, President Clinton and his Democratic Congress rejected this proposal in favor of immediate tight fiscal discipline. Greenspan and his Fed then followed a monetary policy easy enough to offset the negative Demand-side effects of the tight budget. Sometimes Clinton, Gore, and Rubin seemed to attribute the great prosperity and growth of the nineties entirely to their fiscal policy. But Greenspan was their indispensable ally. The tight-budget-easy-money mix was the key.

It is possibly a revisionist history, but it is at least refreshing that a prominent Keynesian admitted that there are alternatives to big government spending with a huge imprint on the character of the economy, and that shrinking government spending and its imprint on the economy is not the end of the world but rather part of the recipe for happy times. Too bad many of that persuasion aren’t now interested in how Tobin characterized Clinton’s policies once we clear the issue of liquidity traps out of the way; which I think has been done by Market Monetarists with very compelling evidence that liquidity traps do not exist and that Tobin was wrong about Japan. There was never any need for fiscal stimulus or for big government coming to the rescue in the Great Recession and there is little to fear from the so called “Fiscal Cliff” if the Fed is doing its job.

About GW Bush and tight money:

I don’t believe there was a preference for tight money, as in tight money because of a belief that everyone is better off in a deflationary environment or that it is necessity for supply side economics to be effective.  And I don’t agree with Tobin’s characterization of supply side economics with respect to monetary policy.

I believe that the tight money environment of the 2000s had more to do with profligate government spending, ballooning size of government and the Fed’s reaction toward it. In some of the Fed minutes from 2003 onward are discussions about the need for fiscal tightening, but it wasn’t happening and they did not know when it might occur, if ever. They were concerned about the impact on inflation and talked about waiting long enough for fiscal authorities to do what they needed to do.

With some recollection of the political atmosphere at the time, the pitch of public debate about deficits and spending was starting to rise, and reasonably so. GW and Republicans made LBJ look like Scrooge. There was no hint of supply side economics there, except for tax cuts masquerading as supply side economics. No, sir; it was big government as far as the eye could see. The combination of tax cuts, big spending and big government is not supply side economics – it’s Bushonomics and a big mess. Supply side economics, to the extent it was ever implemented, died the death of a rag-baby as soon as GW darkened the door of the Whitehouse. Calamities like Sarbanes-Oxley show just how interested in supply side economics Republicans really were during the GW Bush administration and that is only one example in which to point.

In the end, however, the tight money problem, the economic collapse and fear of the Fiscal Cliff are all entirely due to Federal Reserve mismanagement of monetary policy. If we take the words of Tobin and adjust them for new information about liquidity traps, there is no other conclusion one could make that makes sense.

We want tight fiscal policy and monetary policy that stabilizes NGDP – and we need them NOW.

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